Does the duty of honest performance apply to a letter of intent?

In Bhasin v. Hrynew, the Supreme Court of Canada said there is a common law duty, applying to all contracts, to act honestly in the performance of contractual obligations. A letter of intent is a document BDC says may create binding obligations where it so provides. The duty applies to contracts, so it can reach clauses that bind. Whether a given letter’s clauses bind turns on its wording.

What the duty requires

The Court described it as a simple requirement not to lie or mislead the other party about one’s contractual performance. It said the duty does not impose a duty of loyalty or of disclosure, or require a party to forego advantages flowing from the contract. In C.M. Callow Inc. v. Zollinger, the Court said parties must not lie or otherwise knowingly mislead each other, and said knowingly misleading can include half-truths, omissions and even silence, depending on the circumstances.

Where a letter of intent comes in

BDC says a letter of intent is not intended to be fully binding unless otherwise expressly stipulated, and that it is not intended to create a contractual obligation to close a deal, though that does not preclude legal weight. Confidentiality and exclusivity are the clauses BDC names in particular as ones that can bind. If a letter’s clause gives one side a discretion, the Court in Wastech Services said contractual discretion must be exercised in good faith, which is a separate point from honest performance.

What this page does not decide

Ask a lawyer whether any duty applies to the negotiation itself, since the sources read here do not settle it. The Civil Code of Québec is different in form: it says the parties shall conduct themselves in good faith both when the obligation arises and when it is performed or extinguished. See the duty of honest performance and compensation when a buyer strings a seller along.