#7 New Contract Law - Honesty

#7 New Contract Law - Honesty
Posted on December 14, 2015 | Allan Cutler | Written on December 14, 2015

Author's Note:

Author's Note:

The purpose of these blogs is to inform the reader of major procurement issues while focusing on the public sector. Public sector procurement is very complex. To understand procurement in-depth requires detailed study and extensive experience.

Although I am not a lawyer, as a procurement expert and negotiator it is necessary for me to keep up with developments in the legal framework of contracting. Recently, I was at a legal symposium where a new development in Canada law was explained. The following analysis does not attempt to be a legal document. Rather, it is my understanding of this new development in Canadian law. Numerous quotes are presented, all of which come from the Supreme Court judgment.

In 2014 there was a Supreme Court Ruling (Bahasin v. Hrynew) in which the key issues on appeal were two questions. “Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? And, if so, did either of the respondents breach that duty?”

I do not intend to discuss the case. More important from a business perspective are the implications and ramifications for future contracts. The answer from the Supreme Court to the above two questions was positive. “Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations.”

Part of this decision was based on the difference with Quebec law (civil, not common law) and jurisdictions in the United States. As stated, “…the current law is out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading parties of common law Canada – Quebec and the United States.”

The Supreme Court stated that there are two steps that are needed to improve the common law situation. “The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract…” This was followed by the statement, “The second is to recognize…there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.”

The Court then continued to state that taking these two steps would result in the following. “Doing so will place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.”

So where do we go from here and what is the impact? For most of us, there will be no change. In particular, public sector procurement is highly predicated on integrity (honesty) so there should be little difference. Private industry, for the most part, also operates on the same principle. What we need to do is to recognize the change and its meaning.

A factor that may affect negotiation is the statement, “The organizing principle of good faith…..contracting party should have appropriate regard for the legitimate contractual interests of the contracting party.”  The Court recognized that ‘appropriate regard’ will vary based on context. This allows for contracting parties to look out for their own interests first. Under this ruling, they do not have to jeopardize their interests in favour of the other party.  What it does mean is that a party cannot approach or work on a business transaction in bad faith.

The Court summarized its position in rendering its judgment. “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.” Silence would still seem to be permissible.

Think about what has just been stated. This is a major change in how some people and entities approach a business relationship or negotiation. You cannot mislead or lie. A few years ago, I taught ethical procurement to members of SMCA (Supply Chain Management Association) when it was called PMAC (Procurement Management Association of Canada). When asked if they would lie or mislead, an overwhelming majority stated that if that was what was necessary and they were told to, they would.

This new duty of honesty performance is “…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.”  This means that a party operating in other than good faith is in violation of this duty. It also means that it is embedded in and forms part of all contractual relations. In other words, you cannot ignore it or exclude it.

Continuing the Court also wrote, “…breach of the duty of honest contractual performance does not require the defendant to intend that the false statement be relied on and breach of it supports a claim for damages…”  In other words, a statement can be made that in a contractual negotiation that is not germane or necessary for the resulting contract but it can still be a breach of a contract.

At this point of time the new duty under the law has not been tested to determine its limits. For example, are half-truths considered dishonesty or just lies (falsehoods)?  If a document was prepared and later on changes happen that make part of the document false, is there an obligation to update the document? And finally, how will damages for breach be determined?

The end result is for everyone involved in contractual situations, including negotiation, to be cautious. In the case of a breach, it is necessary that the evidence be relevant and admissible. Therefore, it is now even more important to document and keep records in case of ‘misunderstandings’.

With over 35 years of procurement experience, Allan Cutler consults with and assists firms in preparing proposals in response to competitive RFP. He understands procurement documents and negotiating with the public sector. He teaches public sector procurement at Algonquin College. Knowing what it takes to create winning teams and built long-term partnerships that drive success, he also teaches and consults in professional and organizational ethics.

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With over 35 years of procurement experience, Allan Cutler consults with and assists firms in preparing proposals in response to competitive RFP. He understands procurement documents and negotiating with the public... More