What Does “Duty of Honesty” Mean In An Agreement of Purchase and Sale?

scales of justice on a wood base in front of a Toronto home.

In an earlier article I discussed the duty of good faith in the formation and performance of resale residential agreements of purchase and sale with particular focus on a buyer relying on his conditions to terminate an agreement. Typical conditions include the buyer arranging financing and/or insurance, and performing a home inspection, all of which conditions usually provide that the buyer may rely on such condition in his sole and absolute discretion.  In a recent decision the Supreme Court of Canada has ruled that there is a general duty of honest contractual performance in every contract. “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 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”.

The court also stated that “…parties …must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily” and have “…appropriate regard to the legitimate contractual interests of the contracting partner…”

The court stated that this narrow duty of honesty already “accords with the reasonable expectations of parties that parties do not expect dishonesty among their trading partners.”

It is not a duty of fiduciary loyalty, a duty of disclosure or a duty to forego the advantages of a contract.

The court’s decision is limited to the performance of contracts and did not address the negotiation of contracts. During negotiations you can bargain hard and in your own best interest only, without regard for the other party’s legitimate interests provided that you are not legally unconscionable or untruthful.

So, how does this new “duty of honesty” in the performance of contracts affect a buyer’s ability to rely on his conditions to terminate an agreement?

Simply put, he must not lie or mislead the other party. The typical conditions mentioned above allow a buyer to terminate the agreement if he can’t satisfy the stated and bargained for condition, but NOT for any other reasons, for example, buyer’s remorse. A buyer should not be permitted to use his financing condition, or home inspection report or any other condition not expressly addressing buyer’s remorse to get out of a deal on account of buyer’s remorse because that wasn’t part of the bargain and he would be acting dishonestly and capriciously in a way intended to bring a contract to an end for an undisclosed reason without regard to the legitimate interests of the seller.

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