Rules that duty requires a “basic level of honesty” in contractual performance, not the rejection of economic self-interest.

In its recent decision in Bhasin v Hrynew, the Supreme Court of Canada harmonized decades of “unsettled and incoherent” case law about applying the doctrine of good faith in the common law provinces. Rejecting a “wholesale adoption” of an “expansive duty of good faith,” Justice Cromwell, writing for the court, described the ruling as a “modest, incremental change” to the existing law.

Background

Bhasin, the apellant, marketed education savings plans to investors on behalf of a financial corporation, Can-Am. The litigation arose after Can-Am chose not to renew its dealership agreement (the Agreement) with Bhasin.

The Agreement provided that the contract would automatically renew at the end of its three-year term unless one of the parties gave six months’ written notice. Hrynew, a competitor of Bhasin that also had an agreement with Can-Am, pressured Can-Am to not renew its Agreement with Bhasin. After the Alberta Securities Commission raised concerns about Can-Am’s business, Can-Am appointed Hrynew as a “provincial trading officer” to review compliance amongst other dealers, including Bhasin. Bhasin objected to having a competitor review his confidential business records.

Can-Am told Bhasin that Hrynew had an obligation to keep Bhasin’s commercial information confidential, and that the securities commission had rejected a proposal for an outsider to serve as provincial trading officer. The trial court found both statements were inaccurate. In addition, although Can-Am had already definitively decided it was going to force Bhasin’s agency to merge with Hrynew’s agency, when asked, Can-Am led Bhasin to believe that the take-over was not in fact a “done deal.”

Bhasin refused to let Hrynew review his records, and Can-Am gave notice of non-renewal. Bhasin lost the value in his business and the majority of his sales agents were successfully solicited by Hrynew. The trial judge found that Can-Am was in breach of an implied term of good faith, and that if Can-Am had acted honestly, Bhasin could have governed himself to retain the value in his agency. The Alberta Court of Appeal overturned the trial decision.  

Decision of the Supreme Court

The Supreme Court allowed the appeal as against Can-Am but modified the award of damages. Justice Cromwell analyzed previous appellate decisions where a duty of good faith had been identified and concluded it was time to recognize 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, in various situations and types of relationships recognizes obligations of good faith contractual performance.”

Justice Cromwell emphasized that adopting a rule of honest performance would promote certainty in commercial dealings and bring the common law provinces closer to civil code requirements in Quebec and the requirements of the Uniform Commercial Code in the United States.

As a manifestation of this general organizing principle, there is a common law duty, applicable to all contracts, to act honestly in the performance of contractual obligations. The court held that this means parties must not lie or knowingly mislead each other about matters directly linked to the performance of the contract. Good-faith performance is different from fiduciary duties, and does not impose a duty of disclosure or putting the other party’s interests first.

As an organizing principle, good faith is not a free-standing rule, but rather a “highly context-specific” standard that underpins more specific legal doctrines and may be given different weight in different situations. The Supreme Court of Canada confirmed that, generally, claims of good faith will not succeed if they do not fall within existing doctrines. However, the Supreme Court also stated that the list of doctrines is not closed. Applying the organizing principle of good faith to particular situations should be developed where the existing law is found 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.

While parties cannot contract out of the duty of honest performance, the Supreme Court acknowledged the parties should be free in some contexts to relax the requirements of the doctrine and the standards by which performance of these obligations is measured, so long as parties respect the organizing principle of good faith’s minimum core requirements.