Bhasin v Hrynew, 2014 SCC 71
In a unanimous decision, the Supreme Court of Canada recognized a general organizing principle of good faith that underlies many facets of contract law, and created a new common law duty requiring contracting parties to honestly perform contractual obligations as a manifestation of this organizing principle. The new law was introduced to resolve a dispute where Canadian American Financial Corp. (“Can-Am”) essentially wanted to force the merger of one of its agencies, that of Mr. Bhasin, under the competing agency of Mr. Hrynew, and “acted dishonestly” in exercising a non-renewal clause in its contract with Bhasin to do so.
Motivations and Justifications for the New Law
The Court characterized these developments as bringing certainty and coherence to Canadian contract law in a way that is consistent with reasonably commercial expectations. [62]
The Court was of the view that the notion of good faith has deep roots in Canadian contract law, but has been developed “piecemeal” into an “unsettled and incoherent body of law”.[32] The Court pointed to examples in the law of unconscionability, [43] employment law, [44], landlord-tenant law, [45] insurance contracts, [45] and franchise legislation, [42] all of which contain elements of a notion of good faith, but otherwise fail to take a consistent principled approach to similar problems. [42]
The developments were also said to bring the law more in line with the law in Quebec and the United States. [41] The Court supported this position with reference to articles 6, 7, and 1375 of the Civil Code of Quebec, which recognize a broad duty of good faith, [83] section 1-304 of the Uniform Commercial Code in the United states, which imposes on every commercial contract “an obligation of good faith in its performance and enforcement”, [84] and section 205 of the Restatement (Second) of Contracts which provides for a general duty of good faith in all contracts. [84]
The Requirements and Contours of the Organizing Principle of Good Faith and the Duty of Honest Contractual Performance
The Court describes itself as taking two incremental steps to develop the law. First, by recognizing that good faith in contractual performance is a general organizing principle of common law, and, second, as a manifestation of this organizing principle, creating a common law duty which applies to all contracts to act honestly in the performance of contractual obligations. [33]
The Organizing Principle of Good Faith
The organizing principle of good faith means “simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”. [63] It requires that parties should have “appropriate regard to the legitimate contractual interests of the contracting partner”. [65] It does not require acting to serve those interests. [65] On the contrary, intentionally economically harming the other party to your own benefit is not necessarily against the good faith principle, and may even be encouraged on the basis of economic efficiency. [70] The organizing principle merely requires that a party not seek to undermine those interests in bad faith. [65]
The organizing principle is not a free-standing rule, but rather “a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations”. [64] Generally claims of good faith will not succeed if they do not fall within the existing doctrines of situations or relationships in which the law requires honest, candid, forthright, or reasonable contractual performance. These existing specific legal doctrines are not displaced. [68] However, the list is not closed, and can be expanded where existing law is found to be wanting and where the development can occur incrementally. [66] The Court was of the view that this approach mitigates concerns that recognizing a general notion of good faith will undermine certainty in commercial contracts. [71]
The Duty of Honest Contractual Performance
The general 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”. [73] While it is not to be confused with a duty of disclosure or of fiduciary loyalty, parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract. [86] This “minimum standard” is best described at para 86:
“[C]ontracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests”. [86]
The Court makes a “clear distinction” between failure to disclose a material fact (which presumably would not offend this new duty) and active dishonesty. [86]
The duty operates irrespective of the intentions of the parties. [74] As such, vague “entire agreement” clauses, such as the one used in this case, would not be an impediment to recognize the duty of honest contractual performance. [75] However, the duty of honest performance can be modified, if made in express terms, [78] so long as the agreement still respects the duty’s minimum core requirements (which seems to refer to the “minimum standard” as quoted above). [77]
The duty of honest performance flows directly from the common law organizing principle in good faith in a modest, incremental step. [73] It is not an implied term, but a general doctrine of contract law. [74]
The Court finally notes that the duty of honest performance has similarities with the existing law in relation to civil fraud and estoppel, but is not subsumed by them. [88]
Facts and Application
Mr. Bhasin had a thriving business, Bhasin & Associates, through which he worked as an enrollment director for Can-Am.[2] Bhasin was not an employee nor a franchisee of Can-Am. [72] Rather, their working relationship was governed by a commercial dealership agreement (“the Agreement”). The Agreement lasted for three years, and contained a provision that would automatically renew the Agreement for another three-year term unless one of the parties gave six months’ written notice to the contrary. [6]
Mr. Hrynew was another enrollment director, although originally not with Can-Am. [7, 8] There was great animosity between Hrynew and Bhasin. [7] Hrynew wanted to capture Bhasin’s market, and personally proposed a merger of their two agencies on numerous occasions. [9] Hrynew eventually moved his agency to Can-Am, [8] and successfully pressured Can-Am not to renew its agreement with Bhasin. [7] Although the Court eventually found no wrongdoing on the part of Hyrnew, [106, 107] the Court found that Can-Am “acted dishonestly toward Bhasin in exercising the non-renewal clause”, and thereby breached its contractual duty to perform the Agreement honestly. [94]
The finding of dishonest performance stems from a complicated factual matrix between Bhasin, Can-Am, and Hrynew. [96] Can-Am essentially wanted to force a merger of Bhasin’s agency under Hrynew’s, effectively giving Bhasin’s business to Hrynew. [97]
At one point Can-Am had decided that it wanted to restructure its business with Bhasin’s agency being merged under Hrynew’s, but was dishonest for “saying nothing of this” to Bhasin, [99] and, when confronted about Can-Am’s intentions, “did not tell him the truth” that the plan was a “done deal”. [99-100]
Can-Am also appointed Hyrnew as a Provincial Trading Officer (“PTO”) to audit Bhasin’s business for compliance with Alberta Securities law, despite Bhasin’s numerous protests of conflict of interest. Can-Am also lied to Bhasin that Hrynew would be under an obligation of confidentiality as PTO, and was untruthful about how the Alberta Securities Commission denied a request to have a third party act as PTO. [101] Can-Am pushed to have Hyrnew audit Bhasin’s agency as if it were required to do so by the Commission even though it had arranged to have one of its employees conduct the audit of Hrynew’s agency. [102] Bhasin’s refusal to allow Bhasin to audit his agency led to the final confrontation with Can-Am and its giving notice of non-renewal. [97]
No finding of Civil Conspiracy or Inducing Breach of Contract
The Court agreed with the Court of Appeal that Hyrnew was not liable for civil conspiracy and inducing breach of contract by unlawful means, as any unlawful means pertained to Can-Am alone, and Hrynew did not encourage Can-Am to act dishonestly in its dealings with Bhasin. [105-107]
Remedy
The Court awarded damages against Can-Am for the economic harm to Bhasin that resulted from not fulfilling its duty of honest contractual performance. The damages were calculated as the value in Bhasin’s business that was lost: $87,000. [110]
Commentary
The recognition of an underlying organizing principle of good faith in contract law and a duty of honest contractual performance comes as a dramatic change to Canadian contract law in light of what one scholar called a “perverted pride” that the common law has taken in the absence of such a notion. [36]
The change is especially sweeping because the duty of honest contractual performance applies to all types of contracts. It is not limited in the sense that the organizing principle of good faith is limited as only underpinning certain established legal doctrines (although the list of such doctrines is clearly not closed). As such, the new duty may have implications of negotiation of contracts relating to intellectual property assets, including licensing agreements and assignments between parties, as well as quick transactional exchanges. [60]
We are told that the duty of honest performance means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract, and we are told that this duty can be modified by contract, but not below a minimum standard. However, this minimum standard does not seem to be well expressed in general terms. It is phased as requiring that contracting parties have a “fair opportunity to protect their interests” if the contract does not work out. [86] This phrasing is clearly factually embedded into the case, where it seems Bhasin did not have a fair opportunity to protect his business from the loss resulting from the merger with Hrynew. Perhaps the closest the Court gets to a more general phrasing is when it quotes section 1-302(b) of the Uniform Commercial Code to say that the obligation of good faith cannot be contracted away to the point of being “manifestly unreasonable”. [77]
As for the organizing principle of good faith, it seems to play at least two roles. First, it places certain obligations (such as parties generally performing their contractual duties honestly and reasonably and not capriciously or arbitrarily, [63] and not undermining the other party’s interests in bad faith [65]) on contracting parties that are in recognized relationships or situations that are accepted to be underpinned by a notion of good faith. Secondly, it can be a vehicle to generate new specific legal doctrines, [64] such as the new duty of honest contractual performance. [73] Presumably, this means that new specific legal doctrines, in addition to the new duty of honest contractual performance, may be manifested in different situations so long as they can be justified by a good faith underpinning. [63] It is interesting to consider whether such developments, if they occur, would be characterized as less “piecemeal” than the specific doctrines of good faith that came before them.