Recent Developments In The Canadian Law Of Contract

In 2014, the Supreme Court of Canada rendered two decisions relating to the law of contract. Parties doing business in Canada should be aware of these decisions because they have significantly changed how contracts are to be performed and how contracts are to be interpreted in Canada.

In terms of performance, the unanimous Bhasin v. Hrynew, 2014 SCC 71, decision identified good faith as an "organizing principle" of the law of contract and created a new duty of honest contractual performance into Canadian contract law.

The law before Bhasin, for most Canadian contracts, was that there was no general duty to perform contracts in good faith (except in narrow cases, for example, in contracts of insurance). As such, Bhasin represents an important change in how parties are expected by Canadian courts to perform their contractual duties.

In terms of contractual interpretation, the unanimous Sattva v. Capital Corp. v. Creston Moly Corp., 2014 SCC 53, decision both clarified and fundamentally changed how Canadian courts interpret contracts. As we will see, Sattva has broadened both the scope and the availability of the use of the surrounding circumstances in contract interpretation.

This article explores these changes and the potential that they might have to increase uncertainty and complexity in commercial contractual disputes in Canada and the limitations that could be argued to apply to contain that complexity and uncertainty.

Good Faith and Honest Performance

The Bhasin decision involved a dispute related to a "commercial dealership arrangement" governing an education savings plan business. During the course of their dealings, one of the parties lied to the other when it came time to exercise a contractual renewal clause. In doing so, one party effectively expropriated the other party's business, and turned it over to his competitor at the time of contract renewal.

Bhasin was heard by the Supreme Court of Canada as an appeal from an earlier decision of the Court of Appeal of Alberta. Bhasin v. Hrynew, 2013 ABCA 98. There, the Court of Appeal of Alberta disposed of the matter on the basis of what it identified as "fundamental propositions of law" with "much authority" for each. Id. at para. 27. In particular, the Court of Appeal of Alberta explained that "there is no duty to perform most contracts in good faith." Id. at para. 27.

On appeal, the Supreme Court of Canada used Bhasin as an opportunity to make two fairly broad statements about good faith in commercial contractual dealings. First, the Court identified that there was, in general, an "organizing principle of good faith" underlying contractual performance. Bhasin, 2014 SCC 71, at para. 63. Second, the Court identified a "general duty of honest contractual performance" as being a specific example of a manifestation of that general duty of good faith. Id. at para. 72.

Good Faith as an "Organizing Principle"

Writing for the Court, Justice Cromwell explained that an "organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived," rather than a "free-standing rule." Bhasin, 2014 SCC 71, at para. 64. As such, there is still no general duty of good faith in Canadian contracts, but rather a principle which

...manifests itself through the existing doctrines about the types of situations... in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance.

Id. at para. 66.

The Court identified those "existing doctrines" where a duty of good faith "manifest[s] itself" as including:

Contracts expressly requiring cooperation of the parties to achieve their objects; Contracts involving the exercise of contractual discretion; Situations where a contractual power is used to evade a contractual duty; Contracts in the employment context in the narrow sense that the manner of termination must be done in good faith; Contracts in the insurance context; and Contracts in the tendering/procurement context. Bhasin, 2014 SCC 71, at paras. 49 to 56.

While "this list is not closed," Justice Cromwell explained that "generally, claims of good faith will not succeed if they do not fall within these existing doctrines." Id. at para. 66.

Justice Cromwell did, however, leave the door open to the development of other areas in which the principle of good faith might manifest itself. He held that "the application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting." Bhasin, 2014 SCC 71, at para. 66.

The duty of honest performance, created by the Supreme Court of Canada in Bhasin, was one of these particular situations in which the law was "found to be wanting."

The Duty of Honest Performance

The Supreme Court of Canada created the duty of honest performance as one of the manifestations of the organizing principle of good faith. This duty of honest performance represents a significant change to the law of contract in Canada.

The duty of honest performance is not an implied term, but rather "a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance." Bhasin, 2014 SCC 71, at para. 74. As such, it applies to all contracts, and parties are not free to exclude it from their contracts, though they can modify it to some extent depending on the context. Id. at paras. 75, 78.

The Court very broadly explained the duty of honest performance, as follows:

1. It "means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract";

2. It does "not impose a duty of loyalty or of disclosure" or "require a party to forego advantages flowing from the contract"; and

3. It is a "simple requirement not to lie or mislead the other party about one's contractual performance."

Bhasin, 2014 SCC 71, at para. 73.

The "precise content of honest performance will vary with context. Id. at para. 77. This leaves open the question of how such a duty will apply to any given situation. However, the Court's general observations about the duty suggest that it is limited to not "actively misleading or deceiving the other contracting party in relation to performance of the contract." Id. at para. 87.

Accordingly, this new contractual duty of good faith has essentially imported the tort of deceit into the law of contract, with only a few subtle differences. The Supreme Court of Canada recognized the "similarities with the existing law in relation to civil fraud" but observed that there were some slight differences so that the contractual duty of honest performance is "not subsumed" by the existing law of tort. Bhasin, 2014 SCC 71, at para. 88.

In particular, breach of the duty of honest performance does not require a party to establish the intent to have the other party rely on the fraudulent statements as is required by the tort. Further, the measure of damages in contract differs from the measures of damages in tort. Id. at para. 88.

In any event, the creation of a duty of honest performance represents a significant change to the manner in which contracts are to be performed in Canada. It has created a new duty, which can be breached, even though such a duty is not a term of the contract itself. Parties must be aware of this new duty of honest performance, which imposes obligations relating to performance beyond the terms of a contract itself.

Contractual Interpretation

Bhasin is not the only significant change to the law of contract in 2014; the Supreme Court of Canada also dealt with contractual interpretation in Sattva.

Contractual Interpretation Before Sattva

Contractual interpretation even before Sattva was an exercise in determining intent. What differs after Sattva is the enhanced role in which the extrinsic factual matrix— the surrounding circumstances—has to play in the interpretive process.

The leading Canadian case on contractual interpretation before Sattva was...