Canada: Honesty Is No Longer Just The Best Policy, It's The Law

Last Updated: December 22 2014
Article by George Waggott and David Wentzell

In its recent landmark decision, Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada has found that each party to a contract is, at a minimum, contractually obliged to perform its responsibilities honestly and with an appropriate regard to the other party's interest. This duty of honesty in contractual performance stems from the principle of good faith, which the Court has advanced to apply contextually to all types of contracts. The duty neither imposes obligations of loyalty or disclosure, nor rises to the level of fiduciary obligations. It does, however, prohibit parties from lying or acting to "otherwise knowingly mislead each other about matters directly linked to the performance of the contract."

The application of the duty of good faith was previously unclear and in underscoring the importance of its decision, the Court stated "[F]inding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations." The Court's notable imposition of a minimum standard of honesty in contractual performance stands to support confidence in contractual relations and provide reassurance by providing parties with a fair opportunity to protect their interests.

Facts

Mr. Bhasin sold education savings plans (ESPs) on behalf of Canadian American Financial Corp. (Can-Am), with whom he had a dealership agreement, and had done so since 1989. The dealership arrangement was such that each of the dealers was in effect a small business owner, and reliant on the continuation of successful sales of these ESPs. In 1998, a new agreement was concluded between Can-Am and Mr. Basin, replacing a previous agreement that had an indefinite term. The new agreement had a three year term, which automatically renewed unless one party gave six months' written notice of non-renewal.

Mr. Bhasin and another dealer of Can-Am's ESPs, Mr. Hrynew, had a difficult relationship, and Mr. Hrynew pressured Can-Am not to renew Mr. Bhasin's dealership agreement by threatening to leave Can-Am if they did not help create a "merger" of Mr. Hrynew and Mr. Bhasin's businesses. Mr. Bhasin refused to merge, while Can-Am gave Mr. Hrynew audit powers over the various dealer businesses in the province pursuant to a request by the Alberta Securities Commission for oversight over the dealers. These powers allowed Mr. Hrynew access to the private business records of Mr. Bhasin. Can-Am relented to Mr. Hrynew's pressure to facilitate the conditions by which Mr. Hrynew could take over Mr. Bhasin's business, and did not renew Mr. Bhasin's dealership agreement.

Throughout this time period Can-Am repeatedly gave Mr. Bhasin false information by stating that Mr. Hrynew had an obligation to treat the audit information confidentially, by stating that the Alberta Securities Commission did not permit them to hire someone from outside the company to conduct the audits, and by not revealing that they had in fact planned the takeover of Mr. Bhasin's business by Mr. Hrynew and had even discussed it with the Alberta Securities Commission. The statements regarding the confidentiality of the information revealed by the audit and the Alberta Securities Commission's disallowance of an external auditor were categorically false.

The SCC Decision

The issue was whether Can-Am had an implied good faith obligation to make decisions regarding whether to renew the dealership agreement and whether this good faith obligation contained a requirement to act honestly in the performance of the contract. Can-Am and Mr. Hrynew argued that the presence of a "whole agreement" clause in the dealership agreement prevented the application of an implied term of good faith, and that no such requirement was placed on Can-Am. The Court rejected this argument, and created a new framework within which to assess good faith and honest conduct by contracting parties.

Cromwell J., writing for a unanimous Court, acknowledged that prior to this case, the law on good faith was incoherent and unsettled, making its application difficult. Rather than continuing in this vein, the Supreme Court of Canada made two changes to the law to make it "more coherent and more just". The Court first recognized that good faith contractual performance is an organizing principal of contract law. Secondly, it created a common law duty to act honestly when performing contractual obligations, which the Court stated came from the principle of good faith.

As a reason for the developments, the Court stated that the previous uncertain state of the law around good faith conflicted with reasonable business expectations, and in particular expectations of businesses from the United States and Quebec, two jurisdictions where good faith obligations are statutorily enshrined. In discussing the development of the principle of good faith in future case law, the Court outlined that "development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs."

The duty of honesty is admittedly more novel than good faith itself, and will only be more fully understood as it is applied in future cases . The Court stopped short of imposing a duty of disclosure, and stated that the duty of honesty in contractual performance "means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract". Parties are not able to exclude the application of the duty of honesty in their contracts through the use of a "whole agreement" or other similar clause, though the Court did not rule out an agreement whereby the parties expressly limit the scope of honest performance, while maintaining "minimum core requirements".

The result is that parties cannot be actively dishonest with each other, and though the exact scope of the duty of honesty may be contextual, parties must respect the duty's minimum core requirements.

Outcome

Ultimately, the Court held that Can-Am breached its duty to perform the dealership agreement honestly, but that Mr. Hrynew did not encourage Can-Am to deal dishonesty with Mr. Bhasin, and so could not be said to have induced the breach of Can-Am's duty of honest performance. Damages against Can-Am were assessed on the basis of the position Mr. Bhasin would have been in, had Can-Am discharged its duty of honesty, which was reflected in the value of Mr. Bhasin's business at the time of non-renewal of the dealership agreement. Damages against Can-Am were $87,000.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

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