The Supreme Court of Canada (SCC) has just released its decision in Bhasin v. Hrynew, which recognizes for the first time in common law Canada that every party to a contract has a legal duty to perform its contractual obligations honestly and with regard to the legitimate interests of the other party. This duty cannot even be avoided by express agreement between the parties. It is difficult to overstate the importance of this decision in terms of bringing some measure of coherence and clarity regarding what is expected of contracting parties in the performance of their contractual obligations.

BACKGROUND

Beginning in 1989, the appellant, Mr. Harish Bhasin, worked for Canadian American Financial Corp. (Can-Am), which markets education savings plans to investors through retail dealers known as enrolment directors—the position held by Mr. Bhasin. In effect, the enrolment directors acted as small business owners with their success depending on building a sales force. Between 1989 and 1999, Mr. Bhasin expanded his sales force and business.

Mr. Bhasin’s relationship with Can-Am during the material time was governed by a commercial dealership agreement (Agreement). In particular, the Agreement, which took effect in 1998, had a term of three years and provided that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary.

In the end, Can-Am decided not to renew the Agreement. However, Mr. Bhasin alleged that decision was as a result of pressure from Mr. Larry Hrynew, another enrolment director and a competitor of Mr. Bhasin, who wanted to capture Mr. Bhasin’s alleged lucrative niche market. Mr. Bhasin claimed that he was ultimately obliged to take less remunerative work with one of Can-Am’s competitors, and sued Can-Am for breach of an implied term of good faith in the Agreement.  The trial judge found liability against the defendants.

The Alberta Court of Appeal reversed the decision of the Alberta Court of Queen's Bench stating that the issue of good faith was not properly pled and that the lower court erred by implying a term of good faith in the context of an unambiguous contract containing an entire agreement clause. The SCC reversed the decision of the Alberta Court of Appeal and, in so doing, provided its analysis regarding the imposition of good faith in contracts and imposed a new common law duty to act honestly in the performance of contractual obligations.

SCC DECISION

The SCC began by noting that Canadian common law in relation to good faith performance of contracts was piecemeal, unsettled and unclear. It stated that two incremental steps were in order to make the common law more coherent and just. The first step was to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law recognizes obligations of good faith contractual performance. The second step dictated by the court was to recognize, as a further manifestation of that organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

The court noted that the organizing principle of good faith recognized that, in carrying out the performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the opposing party. Further, the court recognized that "appropriate regard" for the opposing party's interests will vary depending on the context of the contractual relationship. It does not require acting to serve those interests in all cases—it merely requires that a party not seek to undermine those interests in bad faith. The SCC was clear to state that this general principle has strong conceptual differences from the much higher obligations of a fiduciary and that good faith performance does not engage duties of loyalty to the opposing party or a duty to put the interests of the opposing party first.

The SCC was also clear that good faith, which may be invoked in widely varying contracts, calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. Additionally, the court made clear that the development of the principle of good faith is not an invitation to veer into a form of ad hoc judicial moralism or "palm tree" justice. Rather, the court held that the principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which places substantial weight on the freedom of contracting parties to pursue their individual self interests. The court also stated that the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

The court was clear that under the new general duty of honesty, parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. While that obligation does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from a contract, it is a straightforward requirement not to lie or mislead the other party about one's contractual performance.

The SCC stated that the new duty of honest performance is a general doctrine of contract law which imposes, as a contractual duty, a minimum standard of honesty in contractual performance and operates irrespective of the intention of the parties—it is analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability. The court also noted that the precise content of honest performance will vary with context and that parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.

While it is clear that this new general duty will vary based upon the circumstances of each case, this decision provides much needed clarification on this area of the law and represents an important development in Canadian contract law.