Does Being Truthful Within a Contractual Relationship Require a Person to Correct Misunderstandings Held By Another Person?

The Supreme Court Has Ruled That Parties to Contracts Must Be Honest During the Performance of the Contracts and That Such Honesty Includes the Duty to Avoid Telling Lies But Also to Avoid Half-Truth, Omissions, or Remaining Silent, In Ways That Enable a Misunderstanding.

Understanding the Duty of Honesty Within Contractual Relations

Contract Document A recent case that was reviewed as an Appeal to the Supreme Court confirms that the law requires parties to a contract to avoid acting dishonestly within the course of a contractual relationship and that the duty of honesty requires avoidance of misleading by untruth, half-truth, silence or omission, and even the failure to correct a misunderstanding.

The Law

In the precedent setting case of Bhasin v. Hrynew, [2014] 3 S.C.R. 494, the Supreme Court stated that a duty of good faith or honesty exists when performing a contract.  Essentially, the Supreme Court confirmed that while truth is required when negotiating a contract so as to avoid acting in deceit, a similar duty of truth and honesty is also required following negotiations while the established contract is being performed.  Subsequently, per C.M. Callow Inc. v. Zollinger, 2020 SCC 45 the Supreme Court stated that the duty requires more than refraining form untruths and also includes a duty to refrain from silently allowing a misunderstanding to occur and thus a duty to correct misunderstandings.  Specifically, in Bhasin and C.M. Callow the Supreme Court said:

[73]  In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith: see Swan and Adamski, at § 8.135; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 78; Belobaba; Greenberg v. Meffert (1985), 1985 CanLII 1975 (ON CA), 50 O.R. (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 69. For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts: Wallace, at para. 98; Honda Canada, at para. 58.

[74]  There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at paras. 15-19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.

[89]  I recognize that in cases where there is no outright lie present, like the case before us, it is not always obvious whether a party “knowingly misled” its counterparty. Yet, Baycrest is wrong to suggest that nothing stands between the outright lie and silence. Elsewhere, as in the law of misrepresentation, for instance, one encounters examples of courts determining whether a misrepresentation was present, regardless of whether there was some direct lie (see A. Swan, “The Obligation to Perform in Good Faith: Comment on Bhasin v. Hrynew” (2015), 56 Can. Bus. L.J. 395, at p. 402). As Professor Waddams has written, “[a]n incomplete statement may be as misleading as a false one, and such half-truths have frequently been treated as legally significant misrepresentations.” Ultimately, he wrote, “it is open to the court to hold that the concealment of the material facts can, when taken with general statements, true in themselves but incomplete, turn those statements into misrepresentations” (The Law of Contracts (7th ed. 2017), at No. 441). Similarly, where a party makes a statement it believes to be true, but later circumstances affect the truth of that earlier statement, courts have found, in various contexts, that the party has an obligation to correct the misrepresentation (see Xerex Exploration Ltd. v. Petro-Canada, 2005 ABCA 224, 47 Alta. L.R. (4th) 6, at para. 58; see also C. Mummé, “Bhasin v. Hrynew: A New Era for Good Faith in Canadian Employment Law, or Just Tinkering at the Margins?” (2016), 32 Intl J. Comp. Lab. L. & Ind. Rel. 117, at p. 123).

[90]  These examples encourage the view that the requirements of honesty in performance can, and often do, go further than prohibiting outright lies. Indeed, the concept of “misleading” one’s counterparty — the term invoked separately by Cromwell J. — will in some circumstances capture forms of silence or omissions. One can mislead through action, for example, by saying something directly to its counterparty, or through inaction, by failing to correct a misapprehension caused by one’s own misleading conduct. To me these are close cousins in the catalogue of deceptive contractual practices (see, e.g., Yam Seng Pte Ltd. v. International Trade Corp. Ltd., [2013] E.W.H.C. 111, [2013] 1 All E.R. (Comm.) 1321 (Q.B.), at para. 141).

As per Bhasin, truthfulness within perfomance of contracts was made a clear requirement; and now, with the C.M. Callow decision, the Supreme Court confirms that such truthfulness requires more than just refraining from telling a lie but also includes conduct that knowingly misleads another party such as conduct that involves half-truth, omission, or silence.

Summary Comment

The duty of honesty within the performance of contracts involves the requirement to refrain from misleading others within the contractual relationship.


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