Is a Person Within a Contract Required to Correct the Mistaken Beliefs of Others Within the Contract?

Recently the Supreme Court Confirmed That Whereas Parties to Contracts Hold a Duty of Honesty Within the Performance of Such Contracts and That Such Honesty Includes the Requirement to Avoid Knowingly Allowing a Misunderstanding to Occur By Half-Truth, Omission, and Even Silence.

Understanding the Duty of Honesty Within Contractual Relations

Contract Document As per the recent case as heard and decided upon by the Supreme Court, the law now contains a ruling stating that dishonest statements made within the course of contractual relations may give rise to liability where a party to a contract deceives by untruth, by half-truths, by silence, or even by failing to correct, and thereby allow, a misunderstanding.

The Law

As per the case of Bhasin v. Hrynew, [2014] 3 S.C.R. 494, the Supreme Court established, or confirmed, a contractual duty of good faith or honesty within the performance of a contract.  Essentially, it was articulated that truth within contractual relations is required when negotiating a contract so as to avoid tortiously deceiving others within the negotiations; but such truth and honesty are also required when performing the contract.  Furthermore, per the subsequent Supreme Court case of C.M. Callow Inc. v. Zollinger, 2020 SCC 45 is was decided that the duty of good faith or honesty requires more than just refraining form untruth and includes a duty to avoid partly true statements that mislead including a duty to avoid silence, meaning a failure to correct or clarify, the misunderstanding of a party to a contract.  Specifically, in these cases, 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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