Honesty Is Best In Contractual Obligations

In a recent precedent-setting decision released by the Supreme Court of Canada, the Court recognized a new duty, the duty of “honest performance” in contractual obligations. Pursuant to this new duty, “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract.” Essentially, the Court is recognizing that failure to disclose a material fact will violate the positive duty of honest performance. Active dishonesty continues to be offside.

The Court also recognized for the first time that there is a “general organizing principle” of good faith contractual performance. Pursuant to this principle, parties generally must perform their contractual duties honestly and reasonably. The Court was careful to note that this principle must be applied in a manner that is consistent with the common law of contracts, including the freedom of parties to act in their own self-interest.

This new duty of honest performance applies to all contracts. While parties to a contract cannot contract out of “honest performance,” the Court will allow parties to define the parameters for satisfying the content and standards for satisfying the duty of honest performance in a written agreement.

What does this mean for Entrepreneurs?

This decision will have far-reaching implications for contracting parties. Parties will need to consider whether they are discharging the new duty of “honest performance” when performing a contract. If certain conduct could be construed as actively dishonest or misleading, business owners should avoid pursuing it unless they are prepared for the risk of litigation. Many folks operate under the principle of “when in doubt sue!” Certainly our American neighbours have adopted this principle in records numbers.

While the decision was an attempt to provide some certainty and predictability, this landmark case leaves a number of open questions such as: How will the new duty of honest performance be measured? What are its “minimum core requirements”? How will damages be assessed? Will other new duties be recognized under the newly recognized organizing principle of good faith performance? How will the decision be applied to pre-contractual dealings like negotiations?

This case reminds of the Jim Carrey movie, “Liar Liar.” In that movie, Jim Carrey was an accomplished litigator who promised his son that he would tell the truth and discontinue fibbing. He basically couldn’t lie. While that won him huge kudos and respect from his son, it left his litigation career in shambles. While the Court has not imposed a positive duty of full disclosure, it has definitely endorsed honest performance in all contractual relations.

Always consult an experienced legal professional to ensure that your contractual activities and negotiations satisfy this new duty imposed by the Supreme Court of Canada.

With this in mind, C2K Law Corporation provides timely legal advice in relation to all types of corporate/commercial and business law matters. We strive to deliver an affordable, value-added service to suit your individual needs. We recognize that you are concerned about the costs of legal services. We do our best to provide a low cost value added service by leveraging technology and reducing overhead expenses passing the savings on to you. We use our entrepreneurship in our creative problem-solving approach, which enables us to take immediate and decisive action.

*The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.