Canada: Justice And Certainty: The Duty Of Good Faith And The Honest Performance Of Contracts

With the case of Bhasin v. Hrynew¹ the Supreme Court of Canada has incorporated a broad principle, the duty of good faith, into every contract and contractual dispute that comes before the courts. It also created a new legal duty of honest performance of contracts. The stated goal of the Supreme Court in so doing was to make the law most just, more certain and more consistent.

FACTS

Mr. Bhasin and Mr. Hrynew both sold investment products, specifically education savings plans for a company called Can- Am. The two men were competitors. Mr. Hrynew wanted to take over Mr. Bhasin's business and pressured Can-Am not to renew its contract with Mr. Bhasin. Can-Am appointed Mr. Hrynew as a provincial trading officer to perform an audit that involved him auditing his competitors, including Mr. Bhasin. Mr. Bhasin refused to allow Mr. Hrynew to audit his files and Can-Am threatened him with termination and within a year refused to renew his contract. As the result of the non-renewal of Mr. Bhasin's contract, Mr. Bhasin lost the value of his business and his sales agents were poached by Mr. Hrynew.

TRIAL

The trial judge found that Can-Am was not honest with Mr. Bhasin throughout the events leading up to the non-renewal of his contract. At trial, it was held that Can-Am was liable to Mr. Bhasin for breach of contract and in particular a breach of a duty of good faith performance of its contract with Mr. Bhasin. Mr. Hrynew was found liable for intentionally breaching contract and both defendants were found liable of civil conspiracy.

APPEAL

On appeal, the court found that there was no duty of good faith in the contract between Bhasin and Can-Am, and no implied duty of good faith and overturned the decision on all grounds.

THE SUPREME COURT OF CANADA

The Supreme Court of Canada, in a unanimous decision, reversed the appeal decision and found Can-Am liable for breaching their duty of honest performance of the contract with Bhasin. The Court articulated two new concepts in the law of contract, being: 1) the organizing principle of good faith; and 2) the duty of honest performance.

Canadian law has long recognized the obligation to perform certain types of contract in good faith. These include employment contracts, insurance contracts, tenancy agreements, agreements in the tendering context and other specific types of contracts, particularly those in which there are clear power imbalances. Aside from these specific areas, the Court held that the law with respect to a generalized and independent doctrine of good faith in contract was "unsettled and incoherent".

The Court rationalized its decision by pointing out that considerations of good faith are often at play in contractual interpretation and that a duty of good faith and honesty was recognized at law in Quebec and the United States – two important trade partners with common law Canada.

The Court was clear that good faith is the organizing principle and the common law duty is to perform contractual obligations honestly. The Court acknowledged that the organizing principle of good faith can extend beyond the limits of honest contractual performance and declined to define the limits of the implications of good faith as an organizing principle based on the facts before it.

According to the Supreme Court's decision, it is clear that the duty of honest performance is not a duty of loyalty or a fiduciary duty. It does not include a requirement that one party subordinate his interest to the other. Rather, it is a duty to perform contractual obligations without lying or misleading the other contracting party.

The Court's analysis becomes complicated with respect to the question of whether, and to what extent, contracting parties can vary their obligations under the new duty of honest performance. In the case before the Court, the agreement between the parties contained an "entire agreement" clause. The Court ruled that, because the duty of good faith was a general doctrine of common law, the parties could not exclude it by way of an "entire agreement clause".

However, the Court did allow some wiggle room for contracting parties by stating that the content of the duty of honest performance will be dictated by context and that parties should be free to relax the requirements of the duty of honest performance, so long as they meet its core requirement. It seems that this caveat strives to incorporate a standard of reasonableness into the duty of honest performance. Parties will be free to determine the standards by which honest performance is measured, so long as those standards are reasonable.

CONCLUDING COMMENT

On one hand, it is certain that this change is incremental as the Court suggests. Realistically, it is likely that the public does expect a certain level of honesty in the performance of contracts to be imposed by the courts and one imagines that the number of cases in which the Court rewards a party who knowingly performs a contract dishonestly or in bad faith are rare. However, it is difficult to believe that, at least in the immediate future, this decision will create commercial certainty as it seems bound to create an increase in litigation to determine the boundaries and content of the new organizing principle and duty.

Footnote

1. 2014 SCC 71.

Originally published in Taxes & Wealth Management, May 2015.

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