Canada: Supreme Court Of Canada Imposes Common Law Duty Of Honest Performance On Contracting Parties

In Bhasin v Hrynew, (2014, SCC 71), a unanimous Supreme Court ruled that the Canadian common law should now impose a duty on parties to perform their contractual obligations honestly. The ruling is significant as it was previously unclear in the Canadian common law the role of the duty of good faith. The articulation of an overarching duty of good faith, as well as the requirement that contracting parties be honest with each other in relation to the performance of their contractual obligations, will have noteworthy effects for contracting parties Canada-wide.

The Facts

The Appellant Harish Bhasin, ("Mr. Bhasin") was an enrollment director for Canadian American Financial Corp. ("Can-Am") since 1989. Can-Am markets education savings plans to investors using enrollment directors like Mr. Bhasin. During his employment with Can-Am, Mr. Bhasin was very successful, building his own sales force over the course of ten years, and winning several "top enrollment director" awards with the company.

An enrollment director's agreement (the "Agreement") from 1998, governed the relationship between Can-Am and Mr. Bhasin. The Agreement term was for three years, and upon expiry of such, the Agreement would automatically renew at the end of the three-year term unless one of the parties gave six months' written notice to the contrary or there was misconduct or cause.

Another enrollment director with Can-Am, Mr. Hrynew, had significant acrimony with Mr. Bhasin, and through the course of the litigation, it became clear that Mr. Hrynew's main goal had been to capture Mr. Bhasin's lucrative business.

In 1999, due to concerns about compliance issues among enrollment directors, the Securities Commission required Can-Am to appoint a single provincial trading officer ("PTO") to review its enrollment directors to check for compliance with securities laws. Mr. Hrynew was appointed to that position by Can-Am, and part of his duties was to audit the other directors, including Mr. Bhasin. Due to mutual hostility between Mr. Bhasin and Mr. Hrynew, and the suspicion that Mr. Hrynew was trying to take over his business, Mr. Bhasin refused to allow Mr. Hrynew to audit him.

The Court found that Can-Am lied to Mr. Bhasin by telling him that Mr. Hrynew was under an obligation to treat information confidentially, and that the Securities commission had rejected the option of having an outsider to the company be the PTO. Neither of these representations were true.

It was also clear to the Court that Can-Am wanted to re-structure its Alberta agencies, and in 2000 the company outlined to the Security Commission a plan that would lead to Mr. Bhasin working for Mr. Hrynew. Again, Mr. Bhasin was unaware of this restructuring plan, and when he eventually asked about a "merger" at a meeting, Can-Am replied that it was not a "done deal" even though the plan to merge the businesses was already in motion.

Ultimately, as a result of refusing to let Mr. Hrynew audit him, Can-Am threatened to terminate the Agreement, and in May 2001, gave Mr. Bhasin notice on non-renewal under the Agreement. The Trial Judge concluded that Can-Am had exercised the non-renewal clause in a dishonest manner, and for the improper purpose of forcing a merger between Mr. Bhasin and Mr. Hrynew's businesses. Due to this non-renewal of the Agreement, Mr. Bhasin lost the value of his business in his assembled workforce, and the majority of his sales agents was solicited by Mr. Hrynew.

In a conclusion as to the conduct of Can-Am, Cromwell J. stated at para 30, "it repeatedly lied to him about the nature of the organizational changes required by the Alberta Securities Commission, the nature of the audits that were to be carried out by Mr. Hrynew, and was dishonest about its intention to force him out."

At the Trial level, the Court concluded that it was an implied term of the contract that the decision to renew the contract be made in good faith, and that Can-Am had breached this implied term. In support of that finding, Mr. Bhasin argued that there should be a recognized general duty of good faith in contract, as well as a duty of honest performance of contractual obligations.

Clarification of the Common Law Duty of Good Faith

Although the duty of good faith is found in numerous places in Canadian law, namely employment contracts, tendering contracts, franchise agreements, insurance contracts, and through specific statutes requiring good faith, the general common law duty was found by the Court to be "unsettled and piecemeal". As such, the Supreme Court undertook to outline what the common law duty of good faith should be:

[33] The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract that underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

In explanation of how this general duty will operate, Cromwell J. clarified the following:

  • The duty of good faith is not its own doctrine or free-standing rule, and instead is a requirement of justice which underpins more specific legal doctrines;
  • A claim of good faith is more likely to succeed if it falls within the kinds of situations or relationships where the law already requires some level of honest, candid and forthright contractual performance. However, the list of circumstances where good faith is already required is not closed, leaving it open to argue for the duty to apply in new circumstances;
  • A contracting party should have "appropriate regard" to the legitimate contractual interests of another contracting party, with the meaning of "appropriate regard" varying depending on the contractual context;
  • This general duty of good faith does not require one contractual party to serve the other parties contractual interests in all cases; "it merely requires that a party not seek to undermine those interests in bad faith" (at para 65); and
  • The duty of good faith does not engage any kind of fiduciary duty.

The Court also introduced a new duty of honest performance. Existing under the main umbrella of the duty of good faith, there is a general duty of honesty in contractual performance which is a requirement of a party not to lie or mislead the other party about their contractual performance. This general duty of honesty is not an implied term but "a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance" (at para 74). Lastly, it is important to note that Cromwell J. noted that an entire agreement clause cannot oust the duty, however express contractual provisions may be able "relax the requirements of the doctrine" (at para 77).

In summation of the common law duty of good faith and honest performance, Cromwell J. outlined at para 93:

  1. there is a general organizing principle of good faith that underlies many facets of contract law;
  2. in general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships;
  3. it is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith; a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

Significant Damages Awarded for Breach of Duty of Honest Performance

As the Trial Judge concluded that Can-Am acted dishonestly towards Mr. Bhasin, Cromwell J. easily concluded that Can-Am breached their duty to perform the contract honestly. Specifically, Can-Am failed to act honestly with Mr. Bhasin in regards to the exercise of the non-renewal, and throughout the period leading up to the non-renewal and termination when Can-Am lied about the restructuring and the requirements of having Mr. Hrynew as the PTO. Such dishonestly was a breach of the Agreement, which ultimately led to the destruction of Mr. Bhasin's business.

Damages were calculated on the basis of what Mr. Bhasin's economic position would have been if Can-Am fulfilled their duty of honest performance. It was estimated that $87,000 would represent the value of the business around the time of non-renewal, and the Court awarded damages in that amount to Mr. Bhasin.

Understanding the Principle of Good Faith in Contract Law

The recognition of the "organizing principle" of good faith, as well as the general duty of honest performance, will undoubtedly affect the performance of contractual obligations moving forward. Contracting parties should be cognizant of the fact that they now have the explicit obligation not to lie or mislead another party about their contractual performance. In the decision, the behaviour by Can-Am resulted in a breach of this duty of honest performance, and ultimately the award of damages against them.

While it is not the case that one contracting party must do everything in their power to serve the other contracting party's interests, a party should have "appropriate regard" to the legitimate contractual interests of the other party, and not act in bad faith to undercut those interests. Parties who knowingly mislead another contracting party may be liable for damages and should be appreciative of their duties throughout their participation in performing their contractual obligations. Should parties wish to diminish the effect the duty of honest performance has on their contract, and correspondingly set out required standards of performance, the limitation or modification of they duty must be done through express provisions.

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.

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