When does good faith and honesty start when it comes to contracts?
Well, the first thing that you have to have is a contract.
So, that means that the two new doctrines pronounced as changes to the common law do not apply during negotiations.
Here are some comments from the Supreme Court of Canada (2014) in Bhasin v. Hrynew:
- There is an organizing principle of good faith that parties generally must perform their contractual duties honestly
- and reasonably and not capriciously or arbitrarily…..
- The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract,
- a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.
- While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship,
- it does not require acting to serve those interests in all cases.
- It merely requires that a party not seek to undermine those interests in bad faith.
- This general principle has strong conceptual differences from the much higher obligations of a fiduciary.
- Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party
- or a duty to put the interests of the other contracting party first.
And, going further the Court said:
“The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self‑interest.”
What we are looking at, is the doctrines of good faith and honesty coming into play once we actually have a contract. Before that, self-interests and the freedom to contract were in play.
It should indeed be noted that deception and dishonesty in negotiations leading to a contract can amount to misrepresentation, both negligent and fraudulent. It is only innocent misrepresentations which escape liability.
Both the law of contracts and the law of torts provide remedies for misrepresentations. That issue is already covered in the existing law. The new law is really just directed to the performance of the contract and in that regard, both honesty and good faith now apply.
In the real estate context, these new doctrines apply to Buyer Representation Agreements, Customer Service Agreements, Listing Agreements and Commission Agreements. In some cases, that is the agency contracts, we will already have fiduciary duties, but naturally those duties only flow one way.
This change in the law will underscore the role of the other party in their agreements with real estate agents and brokerages.
Brian Madigan LL.B., Broker