Honesty the Best Policy

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.

Fairness Over Form In Billing For Legal Services

The Alberta Court of Queen’s Bench recently emphasized the public importance of judicial oversight in billing for legal services – in essence, a form of consumer protection regulation—in Stubbard v Hajduk Gibbs LLP, 2014 ABQB 632.

In Alberta, billing for legal services is subject to the Alberta Law Society’s Code of Conduct and the Alberta Rules of Court. Section 206(1) of the Code provides that a lawyer’s charges must be fair and reasonable. Rule 10.2(1) states that, except to the extent a retainer agreement otherwise provides, a lawyer is entitled to be paid a reasonable amount. Rule 10.5 allows a lawyer and client to agree to billing at a different rate than would be determined under Rule 10.2, again subject to reasonableness. Rule 10.7 outlines requirements specific to a contingency agreement, which include that it must be in writing, be signed by the client (in the presence of a witness) and lawyer, contain certain particulars, and be served on the client.

In other words, notwithstanding parties’ right to contract, the court has inherent jurisdiction to review agreements and billing for legal services for reasonableness The regulation of contingency agreements is particularly pointed.

Stubbard involved the review of lawyers’ charges in a divorce action. In 2005 the client and her counsel entered into a retainer agreement for billing on a flat fee or hourly basis. In 2010, the firm discovered that it did not have a signed copy of the agreement and took steps to formalize and change it – by lowering the hourly fee and adding a contingency component by which the firm would be entitled to 35% of the matrimonial property and spousal support awards if the matter required a trial or settled within 12 days of trial (the firm had estimated the client’s matrimonial property claim as between $900K to $2.4M).

The parties then executed the 2005 agreement, adding a footnote stating that the document replaced the 2005 agreement and was effective retroactive to 2005, and attaching a second document by which the client agreed to enter into the revised terms of retainer. The formalized 2010 agreement, however, was never executed.

The client applied to a review officer for a taxation of accounts. She had been billed $71,000 cumulatively, was still married, and the issue of matrimonial property had yet to be resolved. The review officer sought a reference from the Court of Queen’s Bench.

Counsel for the law firm argued that contracts for legal services are enforceable in accordance with their terms regardless of criteria for assessment under the Rules, relying on Steinke v Hajduk Gibbs LLP, 2014 ABQB 34 and Samson Cree Nation v O’ Reilly & Associés, 2014 ABCA 268.

The Court distinguished the Steinke and Samson decisions and discussed legal fees, legal fee contracts, and public policy at some length (paras. 19‑26). The Court noted that the basis for taxation rules is the uneven bargaining position between lawyer and client, and insisted on this basis that — even where there is an agreement to contract out of the Rules, and even if the Rules permit such an agreement — there must still be oversight, and it is the overarching duty of the Court to view work performed through the filter of reasonableness.

While the Court concluded that it could and would distinguish Steinke and Samson, it was not necessary to do so because neither the 2005 nor the 2010 agreement took effect – the 2005 agreement having been replaced in its entirety, while the 2010 agreement failed to meet the Rules’ requirements for contingent fee agreements. On this basis, the Court directed the review officer to ignore both the 2005 and 2010 agreements and to tax the client`s account based on the criteria in Rule 613 of the former Rules of Court (in force at the time of the lawyer’s appointment).

Ultimately, the Court rejected any notion that contractual terms in a retainer agreement oust the Court’s inherent jurisdiction to review accounts for fairness in the context of assessment Rules, or what it considered is “clearly consumer protection regulation” (paras. 21‑24).