Canada: The Second Opinion: Good Faith In The Shadow Of Contractual Rights

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Are parties under a duty of good faith in deciding whether to exercise a right of non-renewal when the term of an evergreen contract comes to an end?  In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal said no, at least where the evergreen clause does not contain an express provision to this effect.  The ruling in Bhasin contains an extensive review of the law in this area, and may well prove to be the most important Alberta case on the duty of contractual good faith since Mesa Operating Ltd. v. Amoco Canada Resources Ltd. (1994), 149 A.R. 187 (C.A.).  It is also an important cautionary tale for those who would seek to use the duty of good faith to limit discretionary contractual rights.

Background

Bhasin involved a claim against a company ("CAFC") which marketed RESPs to parent-investors through various retail dealers.  The plaintiff, Mr. Bhasin, was one such retail dealer, and had been in a contractual relationship with CAFC for some time.  CAFC proposed a change to its dealership contracts, and a council of dealers that included Bhasin obtained a legal opinion about the new wording, which Bhasin reviewed.  Among the changes introduced by CAFC was an evergreen clause in s. 3.3 to which Bhasin agreed after express negotiations.  The clause stated that the term of the contract would last for three years, and be automatically renewed for successive three year periods, unless either party notified the other that they desired expiry of the agreement at least six months prior to the end of the relevant term.

The litigation arose when CAFC selected Mr. Hrynew, a competitor of Bhasin, to audit its dealers in order to monitor their compliance with Alberta securities law.  Bhasin objected to being audited by Hrynew given the potential for misuse of his confidential information.  As well, Hrynew wished to merge his own business with Bhasin's, and although this was encouraged by CAFC, Bhasin refused.  When CAFC exercised its s. 3.3 right to not renew the contract, Bhasin sued both CAFC and Hrynew, and the action was allowed at first instance.  Moen J. found, inter alia, that CAFC breached an implied duty of good faith by exercising the non-renewal right for improper reasons, i.e., to retaliate against Bhasin for refusing to submit to Hrynew's audit and to coerce Bhasin into merging with him.

The Bhasin Appeal

The Court of Appeal, consisting of Justices Côté, Paperny and Belzil, unanimously overturned the trial judgment.  After observing that many of Moen J.'s findings were based on arguments that Bhasin never pleaded, it proceeded to reject her fundamental conclusion that the non-renewal right was subject to implied preconditions.  In doing so, the Court produced the following list of legal principles to the delight of defendants everywhere:

1. There is no duty to perform most contracts in good faith. ...

2. The only duty of good faith in employment contracts is relatively narrow: not to announce or implement their termination in a harsh or demeaning way. That duty does not extend to the reasons for termination, but to the manner of termination. Even if we accepted the contract here to be an employment contract, or a melded contract including an employment contract, that would not help the plaintiff. The two governing cases say that employment contracts are not generally contracts of good faith in all respects. ...

3. a.  Courts can imply terms in contracts which are not explicit only when  the new term is

i. so obvious that it was not even thought necessary to mention, or

ii. truly necessary to make the contract work at all, not merely reasonable or fair.

b.  Mere foresight of a possible happening is not enough; both parties must have intended the term.

c.  The law's presumption is against implying terms.

4. . Notwithstanding #3, a term cannot be implied in a contract which would contradict an express term of that contract. ...

5. Though Mr. Bhasin's case at trial emphasized mental suffering, it is not compensated in contracts law (partly subject to #2 above on harsh modes of termination).

6. Some degree of inequality in bargaining power, need, or knowledge, is not enough to upset or amend the terms of a contract, short of actual unconscionability. (Or a request for equitable remedies to enforce, or statutory duties or rights to rescind.) ...

7. Parol evidence is not to be used directly to interpret a contract

a. if its words are unambiguous,

b. or to look at the actual subjective intent of one or both parties.

8.  A contract can validly exclude or nullify parol evidence, previous negotiations, representations, terms, promises or conditions, not found in the written document (absent actual fraud). ...

9. Courts should be especially wary of altering or interpreting creatively formal contracts carefully negotiated and written, with legal advice. ...

10. Courts should not attempt after the fact to rewrite a contract to accord with what the court now thinks, or one party now believes, is more just or more businesslike, especially in the full light of hindsight. ... (para. 27, citations omitted)

Applying these principles, the Court made four interesting findings.

First, it held that Moen J. erred in relying upon parol evidence of contractual negotiations, oral promises and the expectations of the parties given the existence of an entire agreement clause in the contract.  This clause excluded any "terms.. expressed, implied or statutory, other than expressly set out in this Agreement".  As a result, the Court distinguished the Ontario Court of Appeal's ruling in Civiclife.com Inc. v. Canada (A.G.) (2006), 215 O.A.C. 43, where an entire agreement clause that did not expressly exclude implied terms was found insufficient to preclude the application of the duty of good faith.  The Court also noted that, even apart from the entire agreement clause, it was inappropriate to consider this parol evidence since the contract was not ambiguous and the evidence went beyond mere background knowledge.

Second, the Court rejected the submission that the contract was an "employment" agreement, such that CAFC was subject to a duty of good faith by operation of law.  It noted that the agreement was "clearly not an employment contract in form or substance", and that even if it were, employment contracts are not as a general matter contracts of good faith, particularly in "a case of non-renewal (expiry), not of termination".

Third, the Court also rejected the argument that a duty of good faith arose by implication from the intentions of the parties.  It observed that nothing in the contract suggested the parties intended it to be of perpetual duration.  Instead, 3.3 plainly stated that the agreement would expire if one party chose to exercise its non-renewal right.  To suggest that "the contract will keep renewing itself automatically every three years, if the motive for giving the notice does not meet certain standards... flatly contradicts the clause's words".

Finally, the Court held that Moen J. erred in focusing upon inequality in bargaining power or sophistication between the parties.   In fact, given Bhasin's receipt of the legal opinion and the "expressly negotiated" nature of the evergreen clause, the Court found that the existence of such inequality was not "even arguable".

Significance

The significance of Bhasin lies in the Court's refusal to impose a duty of good faith upon the exercise of non-renewal rights, even though – as Moen J. emphasized below - they involve the use of a discretionary power.  As the Ontario Court of Appeal observed in Civiclife.com, discretionary contractual powers are one of the classic situations in which courts will imply duties of good faith.  Indeed, the Alberta Court of Appeal's own prior judgment in Mesa was such a case; Lord Sumption made the same point more recently in Hayes v Willoughby [2013] UKSC 17  at para. 14.

By declining to imply such a duty in Bhasin, the Court has signalled that the mere fact a contractual right is discretionary is not itself a sufficient reason for placing good faith constraints upon it.  Rather, judges must still ask whether those constraints are consistent with the text, context and purposes of the relevant provision and the contract as a whole. There may be some cases in which an unfettered discretionary right is precisely what a reasonable observer would conclude the parties intended.  The non-renewal provision in Bhasin is an example of this phenomenon.

As a practical matter, Bhasin also suggests that parties negotiating evergreen clauses should insist upon express limits to any non-renewal power if they are concerned that it may be exercised for improper purposes.  Absent such express terms, the strategy of sheltering in the common law duty of good faith at trial may prove difficult, especially where the evergreen clause was negotiated between parties of roughly equal bargaining power with the benefit of legal advice, and is located in a contract containing an entire agreement clause.  In the end, as Bhasin confirms, "the thoughts or impressions of the parties cannot be used to vary the express terms of a contract".

To view original article, please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.