Duty of honest performance

In a business sale the duty can matter wherever one side is performing something under a signed agreement: a lease, a supply contract, an earn-out calculation or a right to terminate. The Supreme Court of Canada, in Bhasin v. Hrynew, described it as a simple requirement not to lie or mislead the other party about one’s contractual performance.

What the courts have said

• It is not a duty of loyalty or of disclosure, and it does not require a party to give up advantages the contract gives it (Bhasin).
• Whether a party knowingly misled the other is fact-specific, and can include lies, half-truths, omissions and even silence, depending on the circumstances (C.M. Callow Inc. v. Zollinger).
• A party that exercises a termination right can breach it by actively misleading the other side (Callow).
• Parties are not free to exclude it, though in some contexts they may relax its requirements so long as they respect its minimum core requirements and do so in express terms; a generically worded entire agreement clause does not exclude it (Bhasin).

What differs by province

Bhasin and Callow state common-law rules. In Quebec the Civil Code governs: article 6 requires civil rights to be exercised in accordance with good faith, and article 1375 requires the parties to conduct themselves in good faith when an obligation arises and when it is performed or extinguished. Whether the duty reaches a particular statement in your deal is a question for a lawyer, for example about a letter of intent or an earn-out. See also whether a letter of intent is binding.