On November 13, 2014 the Supreme Court released Bhasin v Hrynew, 2014 SCC 71 creating a duty of good faith contractual performance. In the last five years much ink has been spilled in an effort to interpret and apply Bhasin. A comprehensive review is beyond the scope of this article but the basic contours of the duty can be highlighted.
The Organizing Principle
In Bhasin, Justice Cromwell articulated a duty of good faith as an “organizing principle” that in carrying out a contract, the contracting party should have “appropriate regard to the legitimate contractual interests of the contracting partner” and “not seek to undermine those interests in bad faith.” This duty of good faith contractual performance requires that “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.”
Bhasin involved a long term dealer who had an automatic renewal agreement unless notice of non-renewal was provided. While the notice was given within the proper time frame, the Court found that misleading the dealer during the term of the contract about a plan not to renew the contract and instead work with a new dealer amounted to a breach of the duty.
Cromwell J. described the duty as incremental step in the law noting it did not nullify “the legitimate pursuit of economic self-interest” and that it does not impose “a duty of fiduciary loyalty or of disclosure or require a party to forego advantages flowing from the contract…”
In articulating the organizing principle Cromwell J. also noted that the previously delineated fact specific categories of good faith obligations within contractual relationships should continue to be recognized. These include:
- where the parties must co-operate in order achieve the objects of the contract;
- where one party exercises a discretionary power under the contract; and
- where one party seeks to evade contractual duties.
Justice Caldwell of the Saskatchewan Court of Appeal explains that it is appropriate to first look for “guidance in the existing jurisprudence regarding the duty of good faith” and, if applicable, “interpret the requirements of the general organising principle within the existing legal doctrines.”
It has been affirmed that the Bhasin good faith doctrine does not create a freestanding cause of action. Rather the applicable cause of action remains breach of contract and without underlying contractual obligations there can be no application of the doctrine.
Many courts have tended to stay in a narrow lane and apply the instructions of Cromwell J. only to those parties who intentionally or actively lie or mislead each other; “intentional dishonesty is required”. Other courts note Bhasin “is limited in application” and they show little appetite for sanctioning conduct that does not amount to active deception of the other party. At minimum, conduct is required that contains “some measure of dishonesty, or at least a lack of straightforwardness.” For example, an honest belief that a contract allowed a party to charge certain fees took one case outside the purview of Bhasin.
One instance where a breach of the duty was found involving deliberate dishonesty dealt with an operator of an ethylene production facility who had enough ethane to run the plant at a somewhat higher rate than it did. However, the operator chose not to given it could optimize its profits without doing so. This decision reduced the profits of the owner. There were various bases to argue the operator had simply not met its obligations to operate the plant pursuant to reasonable commercial standards. However, the Court also noted the operator breached the duty of good faith contractual performance by deliberately misleading the owner about the capacity of the plant and ability to produce more ethylene.
Performance of the Terms, not the Terms Themselves
Appellate courts have resisted attempts to stray outside the realm of dishonest conduct when considering the legitimate contractual expectations of the parties. On the one hand, contracting parties are entitled to act in their own best interests and are generally entitled to perform (and expect performance of) the contract in accordance with its terms. But at some point they cannot perform certain contracts in a way that seeks to “undermine [legitimate contractual] interests in bad faith.”
The Alberta Court of Appeal has stressed that, “the danger lies in imposing ‘legitimate contractual interests’ that are contrary to the plain wording of the contract, or that involve the imposition of subjective expectations and interpretations on the contract.”
The Court stressed the focus is only on the performance of the contract rather than any examination of the terms of the contract to decide if they are “honest”, “capricious”, or negotiated in “good faith”, much less whether they are “fair and reasonable” or whether the consequences of performance are more or less advantageous to either party than that party might have hoped or desired.
The Court noted that the concepts of “dishonesty, arbitrariness, and capriciousness” on the one hand, and “unreasonableness” on the other hand have distinct meanings in law. Therefore, Bhasin does not establish a new “common law duty of reasonable exercise of discretionary contractual power.”
Instead, a contractual discretion can be exercised giving primacy to the best interests of the party exercising the discretion. Acting in one’s self-interest in a commercial contractual context is not in itself dishonest, capricious, nor arbitrary and such self-interest can sometimes justifiably result in another party suffering a loss. Here, the Court set aside a trial decision awarding a bonus to an employee who had been terminated prior to the date in which his contract said he needed to remain as an employee in order to receive the bonus.
Less than Honourable May Not Breach the Duty
The Ontario Court of Appeal has distinguished between conduct that is less than honourable but does not “rise to the high level required to establish a breach of the duty of honest performance.” In CM Callow Inc. Zollinger, 2018 ONCA 896 the defendant terminated a winter maintenance contract in accordance with a ten day notice provision. The plaintiff alleged that the defendant had made its decision many months before and then wrongly stood by silently while the plaintiff performed many “freebies” under a separate summer maintenance contract that were done as incentives for the defendant to renew both contracts.
The Court of Appeal did not consider this to be dishonest conduct directly related to the performance of the contract. To hold otherwise would effectively rewrite the ten day notice provision that the parties had bargained for. The situation may have been different had the plaintiff asked pointed questions about the renewal as the plaintiff did in Bhasin and where an honest answer was not provided.
The Court also contrasted this with another of its decisions which concerned the termination of a consulting contract on the basis that the contractor had a criminal record, even though the contractor had disclosed that record and complied with all the requirements of the security check prior to entering into the contract.
The B.C. Court of Appeal has also cautioned against expansively reading Bhasin to stretch the concept of bad faith outside of dishonest contractual performance. Here, an arbitral award was overturned involving a complex contract for waste removal services that allowed an authority to make certain allocations that would impact the amount of work and revenue of the plaintiff. A central feature of the contract involved a target level of revenue for the plaintiff each year. The plaintiff complained that a particular allocation in one year made it impossible to achieve the target and it should be compensated for the shortfall. The arbitrator reasoned that an exercise of discretion that is wholly at odds with the legitimate contractual expectations of the other party is dishonest in the sense contemplated in Bhasin.
In overturning the award, the Court of Appeal noted that Bhasin is “concerned substantially with conduct that has at least a subjective element of improper motive or dishonesty.” The Court also noted that in other contexts, bad faith has been established with “conduct that is contrary to community standards of honesty, reasonableness or fairness” or where “the conduct in question is so reckless that absence of good faith can be deduced and bad faith presumed.” None of that kind of conduct was present and the authority’s allocation decision had a sound rationale. It carried none of the “stench” required to fall within the objectionable conduct contemplated in Bhasin.
The Supreme Court will have the opportunity to provide further guidance on the duty of good faith contractual performance in 2020. It granted leave to appeal in both the CM Callow and Greater Vancouver decisions.