Obligation of Good Faith in Contracting

By Kent Burnham

The Supreme Court of Canada changed the legal landscape for contracts in the decision of Bhasin v. Hrynew, [2014] SCC 71. This decision created a new common law obligation of good faith that applies to all commercial contracts.

It imposes an obligation on parties to a contract to perform their contractual duties honestly and reasonably, and it further imposes a requirement not to lie or otherwise mislead the other party about matters directly linked to the performance of the contract. It is important to note that the duty of good faith does not require a person to put the interests of other parties before their own, nor does it require a duty of loyalty, but it cannot be contracted out. In other words, you cannot make a term in your construction contract where there is no duty of good faith.

This will have implications on contractual interpretation when disputes arise.

Special attention should be paid to contracts that do not define the scope of work to be done. Issues of undefined scope where the owner may be considered less sophisticated will be analyzed in the rubric of good faith rather than a strict contractual analysis. Previously, if it wasn’t provided for in the contract, it was not included. Now, however, if the contract would otherwise indicate to an unsophisticated party that the project would be built for a certain price, it may well impose an obligation to do all the work that was implied on the face of the contract and not just what was specifically named.

In this regard, we are seeing more contracts that spell out specifically what is not included. Similarly, hiding the use of materials that are less expensive than specified — while still considered structurally adequate — is a breach of the duty of good faith and would result in damages.

Homeowners who enter into build contracts will likewise be impressed with the duties of good faith and may be liable for making insufficient arrangements for things such as financing arrangements, refusing to sign change orders, or paying for extras.

The duty of good faith goes both ways. It will require carefully prepared contracts and attention to detail. Further, it will require that details given about the building contract in order to get the job, or about the scope of the project in order to attract bidders be reasonable and accurate and that exceptions or omissions from the project being contracted for be spelled out clearly.

On the other hand, it may also give teeth to collection efforts against defaulting owners. A breach of a duty of good faith may well be sufficient to pierce the corporate veil to get at an individual where the company is contracting for the build.

Careful contractors will review and follow the terms of their contracts and be careful not to engage in conduct or representations that may be misleading. Failure to do so could result in significant liability. Obligation of Good Faith in Contracting

Kent Burnham is a partner at Nixon Wenger LLP in Vernon, B.C and is the head of the Civil Litigation practice group. Kent practises a wide range of civil litigation with an emphasis on construction, contract, employment, and land disputes.

This article first appeared in the Fall 2016 issue of SICA's Construction Review Magazine. To read the entire magazine click here.

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