Monday, 29 October 2018

Supreme Court Establishes a Duty of Honesty

In Bhasin v. Hrynew, 2014 SCC 71 (CanLII), the Supreme Court recognized a new duty of honesty in contract law, which applies to collective agreements.

The duty of honesty stems from the well-known contractual principle of good faith, a requirement that each party to an agreement to have “appropriate regard” for the interests of the other party. The duty of honesty is exactly what it sounds like – a duty that requires each contracting party to deal honestly with the other in their performance of the contract. The duty of honesty is not a fiduciary duty, which imposes a duty of loyalty to the contracting parties. The Court made this clear at para 86 of the decision:

The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.

Under the duty of honesty, each party remains free to act in their own self-interest. This means that each party can seek any advantage that may come from the contract, so long as they don’t lie (or intentionally mislead) the other party in managing the contract or its negotiation.

This decision moves the law incrementally forward. The Court summarized the principles, at para 93, as follows:

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

Though incremental, the duty of honesty is broadly significant in the sense that it alters the landscape of contractual law in Canada. For instance, it used to be that the requirement for good faith was confined to labour, employment, insurance, franchise and tendering matters. Not so any longer. The duty of honesty is a general doctrine, which means that it now applies to every type of contract, and to every party to the contract, in the country. Parties are able to limit the scope of the duty of honesty by negotiating the degree of honesty required, but the duty will remain and the parties cannot contract out of it completely.

Final Thought

As there is already a well-established duty of good faith in the arbitral case law, this new duty will not change much in the way unions negotiate. It is important to note, however, that the duty underscores the importance of clear communication in negotiating agreements. The employer and the union must each be careful not to intentionally mislead the other party to the negotiation. A party who intentionally misleads the other may find themselves liable in civil damages.



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