It has been almost a year since the Supreme Court of Canada's unanimous decision in Bhasin v. Hrynew, which was the subject of great attention and some alarm when released. What did it mean to have "good faith as an organizing principle" of the common law of contract? What difference does a "duty of honesty in contractual performance" mean for commercial dealings in Canada?
To answer those questions, we undertook a review of the early Bhasin jurisprudence in Ontario (at the trial and appellate levels) and nationally (at the appellate level). These findings indicate that, at least to date, Bhasin has made only an incremental change in the law.
Recall that the case concerned a dealership agreement between Mr. Harish Bhasin and the Canadian American Financial Corp. (Can-Am). For more than 10 years, Mr. Bhasin operated as an enrolment director for Can-Am, selling its education savings plans to investors in Alberta. Their agreement provided for automatic renewal after three years unless one party gave notice to the contrary. The contract had an entire agreement clause and no express requirement for honesty or good-faith performance.
Can-Am also had a contract with Mr. Larry Hrynew, the enrolment
director of the largest agency in Alberta and a direct competitor
to Mr. Bhasin. Mr. Hrynew coveted the lucrative niche market held
by Mr. Bhasin and made several attempts to convince Mr. Bhasin to
merge their businesses. After Mr. Bhasin refused, Mr. Hrynew asked
Can-Am to force a merger. The situation became extreme. Can-Am
engaged in a range of pressure tactics against Mr. Bhasin,
ultimately giving notice of non-renewal when Mr. Bhasin did not
cave. These facts led the Supreme Court to conclude that
"dishonesty on the part of Can-Am was directly and intimately
connected to Can-Am's performance of the Agreement" and
constituted a breach of the common law duty to act honestly. Mr.
Bhasin won his damages.
LESSONS SINCE BHASIN
As of October 6, 2015, Bhasin had been considered in 85 reported decisions across Canada. We focused our review on the 41 reported decisions from Ontario (trial and appellate) and the eight appellate-level reported decisions from the other provinces.
Of those 49 decisions, a clear breach of the Bhasin duty of good faith was found in only five cases with final verdicts. Three of those cases — Antunes v. Limen Structures Ltd., Bray v. Canadian College of Massage and Hydrotherapy and Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc. — concerned employment and real estate and were decided largely on the basis of the pre-existing good-faith doctrines. It is likely that all three cases would have been decided the same way before Bhasin.
The remaining two decisions — Lavrijsen Campgrounds v. Reville and Valles v. Advantagewon Inc. — were applications of Bhasin in contractual areas where there was no pre-existing statutory or common law duty of good faith. However, given their particular facts, even these two cases probably would have been decided the same way before Bhasin.
Nothing in the early application of Bhasin appears to be superseding established contractual interpretation principles. In fact, several other courts across the country have gone to some lengths to limit its application: for example, see Moulton Contracting Ltd. v. British Columbia, Eureka Farms Inc. v. Luten, Tender Choice Foods Inc. v. Planet Energy, Reserve Properties Ltd. v. 2174689 Ontario Inc., Chuang v. Toyota Canada Inc. and Empire Communities Ltd. v. Ontario. The following decision is representative.
In Addison Chevrolet Buick GMC v. General Motors of Canada, the plaintiff franchisee argued that good faith required a more equal shouldering of the pain resulting from General Motor's declining market share than the express terms of the franchise agreement provided. In dismissing the claim, Justice S. F. Dunphy of the Ontario Superior Court wrote:
Bhasin is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight.
These early decisions are reminders that Bhasin will not save you from a bad bargain, nor will it excuse you from laxity in the performance of contractual obligations. For the large majority of commercial matters, the best advice is undoubtedly the same as it always has been: don't lie. If you want specific rights in your contract, include them — don't assume they will be read in later. Read the contract and perform it. If there are special statutory or common law obligations (for example, in insurance, franchise, tendering or employment situations), perform those terms too.
Until this area is further developed, the good faith organizing principle and duty of honesty in contractual performance are most likely to be applied in those few cases — like Bhasin itself — where one party's conduct constitutes an overt departure from reasonable commercial expectations.
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.