Construction: Performing Contracts Honestly

This article was originally published written for and published by the Alberta Construction Magazine.

By Tim Mavko

Canada’s Supreme Court has changed how we should perform contracts. For decades, it was a fundamental rule of Canadian law that there was no duty to perform contracts in good faith. The only question was whether a contract conferred a right or imposed an obligation, not why or how a party chose to enjoy that right or perform that obligation. Put another way, the law didn’t care one whit whether someone had a good reason for doing what the contract allowed him to do or what the effect was on the other side when he did it. All that mattered was whether the contract said he could or should do it.

The law was clear, supported by dozens of prior decisions going back decades: there is no duty to perform a contract in good faith.

We only have to look at the decision of Alberta’s Court of Appeal in Bhasin v Hrynew (2013 ABCA 98) to see how entrenched that rule was. In that case, a contract automatically renewed every three years unless one side or the other gave timely notice to terminate. Well, after a number of renewals one party called it quits. It told the other side that when the term next came up, the contract would not be renewed. Unfortunately, this destroyed the other side’s business. Worse yet, it gave a big boost to the victim’s competitor, who was also doing business with the same group.

The victim sued. He alleged that the party who terminated withheld information and acted in bad faith when it decided not to renew. He further complained that the other side was in cahoots with his competitor, who together had conspired against him. The trial was lengthy and there was considerable evidence of the shenanigans of the defendants. (It turned out that the other side and the competitor were working together; the competitor in the end hired the victim’s employees and captured his business.)

But despite evidence of wrongdoing three judges of the Court of Appeal unanimously dismissed the claim. The law was clear, supported by dozens of prior decisions going back decades: there is no duty to perform a contract in good faith. As long as the contract gave the right to terminate, which was exercised according to the contract’s terms, that was enough.

But then the case went to the Surpreme Court of Canada (Bhasin v Hrynew 2014 SCC 71) and things changed.

The Supreme Court recognized for the first time, “an organizing principle of good faith that parties generally must perform their contractual obligations honestly and reasonably, not capriciously or arbitrarily.” From this flows a duty to honestly perform a contract. Under this new duty, a contracting party must watch out for the legitimate interests of the other side, which at the very least means that the contract should not be used in bad faith as a weapon to bludgeon the other side.

That case did not include the construction project, but we can trace a straight line from the Supreme Court’s remarkable decision to termination provisions in many construction contracts. It’s common for construction contracts to allow the parties to terminate. Sometimes it’s for convenience. Often it’s allowed for default. Usually there are strict requirements for giving notice, paying debts and taking other steps. In the past, when a party complained, the court examined the contract to determine if the terms were met. But now, in addition to asking whether a party had the right to terminate, the law asks whether he did it honestly.

The implications are huge. The right to terminate is but one right parties might grant each other in their construction contracts. There are countless others. The right to add, delete or change scope. The right to accelerate, delay or suspend work. The right to demand, share or withhold information. Payment. Warranties. Indemnities. The list goes on. And for each right a contract confers on one side, there is a corresponding obligation imposed on the other. And so now when someone exercises a right, or performs an obligation, there are the further questions of “Why?” and “How?” Was it done honestly? Was there sufficient regard for the interests of the other party?

So we now have a duty to perform contracts honestly. What we don’t know is the length, breadth or depth of that duty. In the coming months and years, a slew of legal battles will be fought over this question. Some will be won. Others will be lost. A few will be epic. Along the way courts will, case by case, judgement by judgement, map the boundaries of what it means to perform a contract, honestly.

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.