Lying in business will be a lot more expensive after a Supreme Court of Canada ruling that establishes a ground-breaking new doctrine in contract law.

“The tide has come in,” said veteran Toronto litigator Paul Pape, who frequently represents shareholders and other parties against businesses in class-action lawsuits. “If you lie, it’s going to cost you now.”

In a unanimous ruling, a panel of seven Supreme Court justices rewrote centuries-old common law to clarify bewildering Canadian case law about the legal duty of businesses to act in good faith with companies and people with whom they have contracts. Some areas of contractual law, such as employment, franchise and insurance agreements, already require a duty of good faith, but no such standard exists in the broader arena of commercial contracts.

“Enunciating a general organizing principle of good faith and recognizing a duty to perform contracts honestly will help bring certainty and coherence to this area of the law,” Supreme Court Justice Thomas Cromwell wrote in the decision released on Thursday. One of the legal pillars of acting in good faith, Justice Cromwell wrote, is a duty to be honest about business conducted under a contract.

“It is a simple requirement not to lie or mislead the party about one’s contractual performance,” he said.

With the exception of Quebec, which imposed a duty of good faith years ago in contract law, Canadian courts have trailed other countries such as the United States in defining the legal standard. The courts have historically been reluctant to handicap businesses with rules that might interrupt the progress of commerce.

The Supreme Court’s decision marks a bold shift from that tradition.

In their ruling, the justices said an Alberta financial company now known as Heritage Education Funds Inc. breached its contract with Edmonton-based dealer Harish Bhasin when it “acted dishonestly,” “misled” and withheld information about its reasons for ending a contract with Mr. Bhasin in 2001. The lost contract cost Mr. Bhasin his business and set off a 13-year legal odyssey that included a five-week trial and appeals that culminated in Thursday’s decision.

“This is a very significant case,” said Neil Finkelstein, a McCarthy Tétrault lawyer in Toronto who argued for Mr. Bhasin before the Supreme Court in February. It has been difficult to hold businesses accountable for acting in bad faith, he added, unless contracts contain specific language requiring parties to act and communicate honestly. Language in contracts that do require a duty of good faith typically is inconsistent.

Mark Gelowitz, a litigator with Osler Hoskin & Harcourt, said that, in light of the decision, he is advising clients to be more mindful of what they say. “Parties are going to have to be dramatically more careful in how they communicate with other parties to a contract.”

In Mr. Bhasin’s case, an Alberta trial judge ruled Heritage Education Funds improperly breached its contract by acting dishonestly. The decision was overturned by an Alberta appeal court, which ruled no specific language in Mr. Bhasin’s contract required Heritage Education to act in good faith.

Mr. Bhasin was an independent dealer who sold education savings plans on behalf of Heritage Education. According to the Supreme Court, the Edmonton company was untruthful about its dealings with one of Mr. Bhasin’s competitors, which later hired away the dealer’s sales team. The Supreme Court upheld the trial judge’s award of $87,000, plus interest, and legal costs.

In an interview Mr. Bhasin, now retired, said he was determined to fight his case to right a wrong. “I felt that something wrong was being done to me. I had to fight it to make sure that justice was done and that this won’t happen to others.”

A spokesman for Heritage Education could not be reached for comment.

The Globe and Mail
Published Friday, Nov. 14 2014, 3:00 AM EST
Last updated Friday, Nov. 14 2014, 3:00 AM EST