« Lex Loci

Honesty the Best Policy

November 26th, 2014   Authored by Jennifer Joss and Chad Babiuk

It may have been news to some people that parties to a contract could cheat and mislead with impunity so long as they performed their contractual obligations. The Supreme Court of Canada now says otherwise in Bhasin v Hrynew, 2014 SCC 71 – importing minimum standards of honesty and good faith to the common law of contract.

Mr. Bhasin’s agency sold investment instruments exclusively for Canadian American Financial Corp (Can‑Am). Their business relationship was governed by a contract with a 3 year term that automatically renewed unless 6 months’ written notice was given stating the contrary. They enjoyed 10 years of business together.

Enter Mr. Hrynew. Mr. Hrynew was Mr. Bhasin’s competitor and sought to merge his agency with Mr. Bhasin’s, first by approaching Mr. Bhasin and then by pressuring Can‑Am to force a merger. During the same period, the Alberta Securities Commission had compliance concerns with agencies selling Can‑Am’s investment instruments and required Can‑Am to appoint someone to oversee compliance. Mr. Hrynew was appointed and sought to review Mr. Bhasin’s confidential business records. Mr. Bhasin refused.

Can‑Am responded by:

  1. lying to Mr. Bhasin about Mr. Hrynew being bound to a confidentiality agreement – no such agreement was in place;
  2. lying to Mr. Bhasin about the Alberta Securities Commission rejecting a proposal to have an outside person to oversee the compliance of agencies; and
  3. equivocally answering Mr. Bhasin’s question as to whether a merger of his and Mr. Hrynew’s agencies was a done deal.

When Mr. Bhasin continued to refuse Mr. Hrynew access to his confidential business records, Can‑Am gave notice not to renew its contract with Mr. Bhasin. As a result, Mr. Bhasin lost the value of his business and his employees joined Mr. Hrynew’s agency.

While Mr. Bhasin was clearly wronged by Can‑Am, it had not breached the terms of their agreement, potentially foreclosing a remedy for Mr. Bhasin.

This prompted the Supreme Court’s review of the doctrine of good faith in the law of contract – typically reserved for established classes of contracts (franchise and insurance contracts, for example).

The Court took two “incremental steps” to find in Mr. Bhasin’s favour and to end the “piecemeal” approach to importing a duty of good faith in contractual performance. The first step was to find that good faith contractual performance is a general organizing principle of the law of contract. Within the rubric of good faith the Court then established a new duty of honest performance applicable to all contracts.

Can‑Am failed to meet that minimum standard when it lied to Mr. Bhasin about Mr. Hrynew’s appointment. The Court found Can‑Am to have breached the agreement and awarded Mr. Bhasin the lost value of his business had Can‑Am fulfilled its duty.

Somewhat unusually, these incremental developments made the front page of the national news (Globe and Mail, November 14, 2014). Why does a commercial case verifying contractual principles garner such attention?

First, businesses will have to be more mindful in how and what they communicate to contracting parties. While there may be no express duty to disclose information affecting one party’s performance, equivocally answering direct questions affecting performance may constitute a breach of contract (Bhasin, paras 86 and 100). Savvy parties will seek to inform themselves knowing they are entitled to an honest answer.

Second, the organizing principle of good faith contractual performance provides fertile ground for new duties of contractual performance. Claims of good faith are no longer limited to discrete situations and relationships. Litigators will certainly test the principle’s fecundity in all manner of contexts. Justice Cromwell forestalls some potential proliferation of new duties when he states:

The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the 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 (para 66).

Specific new duties of good faith contractual performance may not spring up overnight without warning. However, cautious parties may think twice in making representations affecting performance, in a way that does not take unfair advantage of their contractual partners. Enterprising lawyers will be on the lookout.

And, finally, the decision is newsworthy because most non‑lawyers are incredulous to learn that honest performance is in fact something new. Most would agree that honesty is, or should be, expected from every party to a contract.