Introduction

The Supreme Court of Canada’s unanimous decision in Bhasin v Hrynew, 2014 SCC 71 has been making headlines since its release last week. The case is big news in the legal and business worlds because it creates a duty of honest contractual performance that is new to Canadian common law. (It also seeks to clarify how good faith fits into the law of contract.)

Now that the Supreme Court has established this duty, contracting parties and their legal advisors are left to put it in practice – which might be easier said than done, given the decision’s focus on broad statements of principle rather than concrete practical guidance.

Facts and procedural history

(Please see paras 2-16 and 94-107 for a more detailed overview of the facts.)

The parties were in the business of education savings plans. There was a “commercial dealership agreement” (somewhat similar to a franchise agreement) between the appellant, Mr. Bhasin, and the respondent Can-Am, as it was then known. Bhasin acted as an “enrollment director” and was responsible for marketing the education savings plans to investors. The other respondent, Mr. Hrynew, was also an enrollment director, and one of Bhasin’s competitors.

There were two parallel—and problematic—sets of conduct: First, Hrynew wanted to take over Bhasin’s work, and in that regard successfully “pressured Can-Am not to renew its agreement with Mr. Bhasin” (paras 7, 97). Second, Can-Am appointed Hrynew as a “provincial trading officer” to perform a compliance review under  Alberta securities law, which meant he would have to “audit his competitor agencies, including Mr. Bhasin’s”; this appointment became a contentious issue amongst the parties (paras 10, 97).

Importantly, the trial judge found that Can-Am lied to Mr. Bhasin throughout these dealings (paras 15, 97-101).

Whilst clear that Hrynew and Can-Am acted badly, it was unclear how, if at all, that would translate into legal liability.

The trial judge looked to several causes of action: She found that Can-Am was in breach of contract, particularly an implied term of good faith performance. From there, she found Hrynew liable for intentionally inducing breach of contract, and both respondents “liable for civil conspiracy” (paras 14, 23).

This decision was overturned on appeal. The Alberta Court of Appeal disagreed that there was an implied term of good faith “in the context of an unambiguous contract containing an entire agreement clause” (para 16) and the other causes of action fell too.

The Supreme Court of Canada ultimately found Can-Am, but not Hrynew, liable for breach of the duty of honest performance “when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause” (para 103). It makes sense that Hrynew was not found liable for breaching the new duty, because he was not a party to the contract between Bhasin and Can-Am. The Supreme Court also agreed with the Court of Appeal and found that Hrynew was not liable for inducing breach of contract or unlawful means conspiracy (para 104).

(Of course, Bhasin could not have pleaded breach of the duty of honest performance, because it did not yet exist. But a party is supposed to plead facts and not law, and Justice Cromwell agreed that Bhasin’s pleadings were adequate; the essential facts and evidence came out at trial; and the respondents suffered no prejudice: see paras 18-21.)

The Supreme Court found Can-Am liable for $87,000 in damages, representing the value of Bhasin’s business at the time of non-renewal (paras 110-111). As Justice Cromwell explained: “if Can-Am had performed the contract honestly, Mr. Bhasin would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to Mr. Hrynew” (para 109).

Overview of the Court’s analysis

Justice Cromwell took what he called “two incremental steps” to advance the common law of contracts: The “good faith” step and the “duty of honesty” step (para 33). Defining “good faith” and “honest performance” in the abstract is a bit like trying to pin jelly to the wall. So how did the Court characterize these concepts?

Simply stated, good faith is characterized as an organizing principle of contract law; it is “not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations” (paras 63-64 with emphasis added; see also para 33). Justice Cromwell found it unnecessary to exhaustively define what good faith means as an organizing principle (para 90).

We do know this much: Unlike breach of the new duty of honest performance, breach of an alleged duty of good faith is not a cause of action in and of itself – at least not yet. Good faith continues to exercise most of its power through doctrines that already exist:

[66]      This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that this list is not closed.

The duty of honesty in contractual performance flows from there, falling “under the broad umbrella” of the good faith principle (paras 72-73). This duty “applies to all contracts” (para 33). It “should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance” (para 74; emphasis added).

Breach of this duty will result in liability for damages. Because it is a breach of contract, the contractual measure of damages will be used (para 88).

The next sections will unpack these conclusions, and will make four interrelated arguments:

  1. The common law already had a decent (if imperfect) handle on when parties owe each other obligations grounded in good faith.
  2. Despite some clarification on how good faith and honesty are supposed to work, arguably not much has changed: Contracting parties will still do their best to safeguard their own self-interest, whilst remaining hopeful that their partners are being honest with them.
  3. Clarification from the Supreme Court on how the principle of good faith works is a welcome development in theory, but it only takes us so far.
  4. In the end, it is doubtful that increased certainty will be achieved in practice, because the Court left a lot of issues unresolved and subject to context.

Point 1: The common law, as it then was

According to Justice Cromwell, the pre-Bhasin v Hrynew common law on good faith was “piecemeal, unsettled and unclear” (para 59). But good faith still existed as an informing principle for, as Justice Cromwell put it, “particular types of contracts, particular types of contractual provisions and particular contractual relationships” (para 42). He reviewed several areas where the concepts of good faith, fairness, and honesty have protected contracting parties:

  • The implied term of good faith in employment contracts, particularly in the manner an employer terminates an employee (para 54)
  • The reciprocal duties of good faith in insurance contracts between insurer and insured (para 55)
  • The implied duty of good faith / fair dealing in tendering (para 56)
  • The doctrine of unconscionability (para 42)
  • The estoppel doctrines (para 88)
  • The cause of action of civil fraud (para 88)

There are also some statutory obligations to act fairly and in good faith, in franchise law and labour law (para 46).

Point 2: Fingers crossed for honesty

Justice Cromwell suggested several times that parties naturally expect their contracting parties to tell the truth, which makes common sense (see e.g. paras 45, 60-61, 80). Because of this, in his view, “the duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations” (para 76).

Yet the reality is that rational commercial actors will put their own self-interest above the interest of their contracting partner. As Justice Cromwell acknowledged: “A party to a contract has no general duty to subordinate his or her interest to that of the other party” (para 86). For this reason, the decision may be seen as interfering with freedom of contract, even though the Court adamantly denied that was the case (see especially paras 39 and 59).

So how much will the duty of honest performance actually fetter contracting parties who are trying to advance their own interests? Justice Cromwell seemed to draw the line at deliberate lies (para 73; emphasis added):

[The duty] means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.

What about “lying by omission”? It is unclear when that would cross the line into being deliberately misleading (see para 87), although Justice Cromwell did say this:

… a dealership agreement is not a contract of utmost good faith (uberrimae fidei) such as an insurance contract, which among other things obliges the parties to disclose material facts: Whiten.  But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.

[At para 86; emphasis added.]

(Recall that, in the result, the Supreme Court accepted the trial judge’s conclusions about Can-Am’s “lies” to Bhasin: See paras 101-103.)

Parties can’t completely contract out of this duty:

The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.

[At para 77; emphasis added.]

We learn in childhood the importance of telling the truth. Which makes the imposition of a duty of honest performance seem redundant at best, or paternalistic at worst. Justice Cromwell was keen to declare that this decision was not about “judicial moralism or ‘palm tree justice,’” (para 70) but an admonishment to act in a certain way will almost inevitably be interpreted as an infringement on freedom to contract – even if it’s completely reasonable and justified.

On the other hand, if parties are still free to look out for themselves whilst being more forthright and transparent, then perhaps the decision is sensible and not as revolutionary as first thought?

Point 3: Clarification for its own sake

There are two key benefits of Bhasin v Hrynew’s effort to clarify the law:

  1. Encouraging parties to be even more explicit in the contractual terms they negotiate, especially if they seek to contractually modify or “relax” the meaning of honest performance (paras 77-78). On the facts of this case, the “generically worded entire agreement clause” did not suffice (para 78).
  2. Urging lower courts to explain how they are applying good faith and the duty of honesty, and what those concepts mean in the circumstances. Reviewing previous cases, Justice Cromwell noted that:

[52]      The jurisprudence is not always very clear about the source of the good faith obligations found in these cases. The categories of terms implied as a matter of law, terms implied as a matter of intention and terms arising as a matter of interpretation sometimes are blurred or even ignored, resulting in uncertainty and a lack of coherence at the level of principle.

Providing clearer principles, however broad, is a valuable development for contracting parties, their legal advisors, and judges.

Point 4: Better off?

Certainty is a stated goal of Justice Cromwell’s reasons (see e.g. paras 1, 34, 40-41, 62). But several bows were left untied. Take the point that “a contracting party should have appropriate regard to the legitimate interests of the contracting partner” (para 65):

While “appropriate regard” for the other 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. This general principle has strong conceptual differences from the much higher obligations of a fiduciary.  Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.

We do not yet know what “appropriate regard” means, or what “legitimate interests” are, or what “bad faith” means, or what kind of conduct fills the spectrum between fiduciary obligations and good faith performance. And, again, it is unclear how far the parties can go in contractually modifying their obligations in this respect (see para 77).

Other outstanding questions and suggested answers:

  • Can you still argue good faith? As an overarching principle but probably not as a stand-alone cause of action. Justice Cromwell declined to resolve whether a duty of good faith (conceptually distinct from the duty of honest performance) can be an implied term in a contract, and whether it would be implied by fact or law (para 74), and suggested that good faith will, for the most part, continue to exist through current doctrines. However, Justice Cromwell left the door open a crack for good faith to be expanded (para 66).
  • Does the duty apply to contractual negotiations? No (unless the context, e.g. tendering, otherwise requires). The new duty is about the performance of contractual obligations so would not seem to apply to contractual negotiations. Negligent or fraudulent misrepresentation may be the most likely causes of action for issues arising during that stage.
  • Will a party be liable if it simply decides not to renew a contract? No, not unless the party has deliberately misled its contracting partner about its intentions. Parties must still be able to change their minds. Justice Cromwell indicated at para 86 that a party would not be liable for breach of the duty of honesty for “failure to disclose a material fact, even a firm intention to end the contractual arrangement” (unless it’s, say, an insurance contract). However, this draws a very fine line between liability and acceptable conduct. Justice Cromwell noted that arguments of “bad faith failure to renew a contract” have had “mixed success” in other common law jurisdictions (para 91). But on the facts of this case, Can-Am was liable for dishonesty in the way it exercised a non-renewal provision (para 103), so parties should exercise caution vis-à-vis renewal / non-renewal provisions and maintain appropriate supporting documentation.
  • Does the duty apply to contracts currently in force? Yes, one would expect. The Court did not address issues of application, but it is assumed that the duty exists from now on, and parties to contracts that are currently in force must act accordingly. Whether the new duty can be argued in litigation that has already commenced is a more complicated question.
  • When will it be worthwhile to sue for breach of the duty of honest performance? As with any breach of contract litigation, this will come down to strategy, cost-benefit analysis, and the extent of damages suffered. Whether this case will open the floodgates to frivolous claims remains to be seen. Also, it may be difficult to prove that breach of the duty was the actual cause of the plaintiff’s losses.

Conclusion

Time will tell if the new duty of honest contractual performance makes the wheels of commercial contracts turn more smoothly, or grind to a halt.

Context will be crucial to the application of the new duty, as Justice Cromwell acknowledged:

[69]      The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide to future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varying contexts and this 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. For example, the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange[.]

Flexibility is beneficial when you can make it work in your own or your client’s favour, but not as helpful for predicting outcomes. The result of an approach that depends on context is an inevitable increase in litigation in the lower courts. This consequence seems rather incongruous when compared to the Supreme Court’s recent focus on access to justice, which ideally means less litigation and not more.