A few months ago, the Supreme Court of Canada released its decision in Bhasin v Hrynew, aprecedent-setting judgment, recognizing a general organizing principle of good faith in contract law.[1] More recently, the BC Court of Appeal in Moulton Contracting Limited v. British Columbia,[2]considered and elaborated upon Justice Cromwell’s discussion in Bhasin about the doctrines of good faith and implied contractual terms for “business efficacy,” clarifying that the two frameworks are distinct and not to be conflated.

The Court reversed the trial judge’s finding that there was an implied duty based on the business efficacy doctrine, and also rejected the argument that the implied duty (which could not be supported under the business efficacy framework) should arise under the good faith organizing principle as enunciated in Bhasin. In the absence of any alleged bad faith, dishonesty or capricious conduct, Bhasin did not inform the issues in this appeal.

Factual and Litigation Background

This case revolves around the grant of a Timber Sale License (“TSL”) by British Columbia (the “Province”) to Moulton Contracting Limited (“Moulton”). The holder of the TSL would have the right to access and harvest timber in a defined area.

During the tendering process for the TSL, the Province, as part of its duty to consult, held consultations with the Fort Nelson First Nation (“FNFN”). Following the grant of the TSL to Moulton, individual members of the FNFN (the “Behn Group”), who opposed the harvesting, blocked Moulton’s access. Moulton sued the Province, alleging breach of the following implied contract terms:

  • Access Promise: the Province impliedly promised that Moulton would have access to the logging site.
  • Consultation Promise: the Province impliedly promised that it had engaged in all necessary consultation at the time of the contract.[3]

The trial judge found that an implied Consultation Promise existed and was breached, while the alleged Access Promise did not exist because such an implied term was inconsistent with explicit terms of the contract.

The trial judge also found that the only implied term that was breached, resulting in liability for the Province, was an unpleaded “Dissatisfaction Term” for failing to inform Moulton of threats that were made by the Behn Group to block physical access to the timber harvest areas after the contract was executed. The effect of the Dissatisfaction Term was to impose an ongoing duty on the Province to inform Moulton of any dissatisfaction with its consultation expressed by any individual member of a First Nation.

Both the Consultation Promise and Dissatisfaction Term were implied by the trial judge to give business efficacy to the contract between the Province and Moulton, but liability was only found on the basis of the latter. Accordingly, only the appropriateness of the imposition of the Dissatisfaction Term was considered by the Court of Appeal.[4] Two claims were considered: negligent misrepresentation and breach of an implied contractual term.

No Negligent Misrepresentation

The Court determined that the Dissatisfaction Term, as articulated by the trial judge, was, in effect, an implied duty to warn because it would have imposed a positive obligation on the Province to notify Moulton, even after executing the contract, of any new dissatisfaction raised with its FNFN consultation.[5] The Court went on to conclude that this implied term, in its effect, was tantamount to enforcing the Access Promise, which the judge had already determined was inconsistent with the contract. Moulton had not met the legal threshold to establish it was owed a duty to warn, so the Dissatisfaction Term could not stand.

Rejection of Implied Contractual Term for “Business Efficacy”

After reviewing the jurisprudence for implied contractual terms for business efficacy, the Court highlighted that terms implied for business efficacy must be informed by what the contracting parties actually intended, not what reasonable parties would intend.[6] The trial judge had erred in applying this test, by considering “commercial reality” from the point of view of parties who contract with the Province generally,[7] rather than evidence of the parties’ actual intentions.

Bhasin Ruling also does not Apply, Ground Implied Terms

Unlike with implied business efficacy terms, application of the overarching principle of good faith operates irrespective of the intentions of the contracting parties.[8] It was thus argued by the respondents that the principle of good faith articulated by the Supreme Court in Bhasin supported implication of the Dissatisfaction Term. In particular, it was argued that the judge’s finding that the terms were necessary for the contract to have business efficacy accorded with the overarching principle of good faith.

This argument was swiftly rejected because it amounted to an improper conflation of the tests for implying contractual terms at law (per Bhasin) with the test for implying contractual terms for business efficacy.[9]Further, Bhasin could not properly be invoked by Moulton to assert that its “legitimate contractual interests” be read into the interpretation of the contract because doing so would apply Bhasin too broadly.[10] It was never pleaded nor argued that the Province had acted dishonestly, unreasonably, capriciously, or arbitrarily; absent such an allegation, Bhasin did not apply.

Takeaway

This decision is a helpful reminder that the Bhasin ruling, while potentially far-reaching in its application to cases of dishonesty or bad faith, reflects a truly incremental change to the law of contract by the Supreme Court and should generally not impact the determination of whether to imply terms.

Case Information

Moulton Contracting Limited v. British Columbia,, 2015 BCCA 89

Docket: CA41524

Date of Decision: February 26, 201