Supreme Court of Canada says There is a Duty to Act Honestly in the Performance of Contracts

“Does Canadian common law impose a duty on parties to perform their contractual obligations honestly?” That was the “key issue” that the Supreme Court of Canada sought to resolve in the case of Bhasin v. Hrynew, 2014 SCC 71 (CanLII), released November 13, 2014. Writing on behalf of the unanimous Court, the Honourable Justice Thomas Cromwell held:

I would answer [the question] in the affirmative. Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations.

Facts

As is set out in Justice Cromwell’s reasons for decision:

[2] The appellant, Mr. Bhasin, through his business Bhasin & Associates, was an enrollment director for Canadian American Financial Corp. (“Can-Am”) beginning in 1989. The relationship between Mr. Bhasin and Can-Am soured in 1999 and ultimately Can-Am decided not to renew the dealership agreement with him. The litigation leading to this appeal ensued.

[3] Can-Am markets education savings plans (“ESPs”) to investors through retail dealers, known as enrollment directors, such as Mr. Bhasin. It pays the enrollment directors compensation and bonuses for selling ESPs. The enrollment directors are in effect small business owners and the success of their businesses depends on them building a sales force. It took Mr. Bhasin approximately 10 years to build his sales force, but his business thrived and Can-Am gave him numerous awards and prizes recognizing him as one of their top enrollment directors in Canada.

[4] An enrollment director’s agreement that took effect in 1998 governed the relationship between Can-Am and Mr. Bhasin. (That Agreement replaced a previous agreement of an indefinite term that had governed their relationship since the outset in 1989.) The Agreement was a commercial dealership agreement, not a franchise agreement. There was no franchise fee and it was not covered by the statutory duty of fair dealing such as that provided for in [the Alberta Franchises Act.]

[5] That said, there were some features of the 1998 Agreement that are similar to provisions typically found in franchise agreements. Mr. Bhasin was obliged to sell Can-Am investment products exclusively and owed it a fiduciary duty. Can-Am owned the client lists, was responsible for branding and implemented central policies that applied to all enrollment directors. Mr. Bhasin could not sell, transfer, or merge his operation without Can-Am’s consent, which was not to be withheld unreasonably.

[6] The term of the contract was three years. [The contract] allowed termination on short notice for misconduct or other cause. Clause 3.3 — the provision at the centre of this case ― 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.

[7] Mr. Hrynew, one of the respondents and another enrollment director, was a competitor of Mr. Bhasin and there was considerable animosity between them. The trial judge found, in effect, that Mr. Hrynew pressured Can-Am not to renew its Agreement with Mr. Bhasin and that Can-Am dealt dishonestly with Mr. Bhasin and ultimately gave in to that pressure.

[8] When Mr. Hrynew moved his agency to Can-Am from one of its competitors many years before the events in question, Can-Am promised him that he would be given consideration for mergers that would take place and he in fact merged with other agencies in Calgary after joining Can-Am. He was in a strong position with Can-Am because he had the largest agency in Alberta and a good working relationship with the Alberta Securities Commission which regulated Can-Am’s business.

[9] Mr. Hrynew wanted to capture Mr. Bhasin’s lucrative niche market around which he had built his business. Mr. Hrynew personally approached Mr. Bhasin to propose a merger of their agencies on numerous occasions. He also actively encouraged Can-Am to force the merger and made “veiled threats” that he would leave if no merger took place. The trial judge found that the proposed “merger” was in effect a hostile takeover of Mr. Bhasin’s agency by Mr. Hrynew. Mr. Bhasin steadfastly refused to participate in such a merger.

[10] The Alberta Securities Commission raised concerns about compliance issues among Can-Am’s enrollment directors. In late 1999, the Commission required Can-Am to appoint a single provincial trading officer (“PTO”) to review its enrollment directors for compliance with securities laws. Can-Am appointed Mr. Hrynew to that position in September of that year. The role required him to conduct audits of Can-Am’s enrollment directors. Mr. Bhasin and Mr. Hon, another enrollment director, objected to having Mr. Hrynew, a competitor, review their confidential business records.

[11] Can-Am became worried that the Commission might revoke its licence and, in 1999 and 2000, it had many discussions with the Commission about compliance. During those discussions, it was clear that Can-Am was considering a restructuring of its agencies in Alberta that involved Mr. Bhasin. In June 2000, Can-Am outlined its plans to the Commission and they included Mr. Bhasin working for Mr. Hrynew’s agency. The trial judge found that this plan had been formulated before June 2000. None of this was known by Mr. Bhasin.

[12] In fact, Can-Am repeatedly misled Mr. Bhasin by telling him that Mr. Hrynew, as PTO, was under an obligation to treat the information confidentially and that the Commission had rejected a proposal to have an outside PTO, neither of which was true. It also responded equivocally when Mr. Bhasin asked in August 2000 whether the merger was a “done deal”. When Mr. Bhasin continued to refuse to allow Mr. Hrynew to audit his records, Can-Am threatened to terminate the 1998 Agreement and in May 2001 gave notice of non-renewal under the Agreement.

[13] At the expiry of the contract term, Mr. Bhasin lost the value in his business in his assembled workforce. The majority of his sales agents were successfully solicited by Mr. Hrynew’s agency. Mr. Bhasin was obliged to take less remunerative work with one of Can-Am’s competitors.

[14] Mr. Bhasin sued Can-Am and Mr. Hrynew. Moen J. in the Alberta Court of Queen’s Bench found that it was an implied term of the contract that decisions about whether to renew the contract would be made in good faith. The court held that the corporate respondent was in breach of the implied term of good faith, Mr. Hrynew had intentionally induced breach of contract, and the respondents were liable for civil conspiracy.

[15] The trial judge found that Can-Am acted dishonestly with Mr. Bhasin throughout the events leading up to the non-renewal: it misled him about its intentions with respect to the merger and about the fact that it had already proposed the new structure to the Commission; it did not communicate to him that the decision was already made and final, even though he asked; and it did not communicate with him that it was working closely with Mr. Hrynew to bring about a new corporate structure with Hrynew’s being the main agency in Alberta. The trial judge also found that, had Can-Am acted honestly, Mr. Bhasin could have “governed himself accordingly so as to retain the value in his agency”.

Decision

In overturning the decision of the Alberta Court of Appeal, which had itself overturned the decision of Justice Moen, Justice Cromwell held as follows:

[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is 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, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this 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.

Justice Cromwell cited three reasons for his decision that Canadian common law should recognize a contractual duty to act honestly in the performance of contractual obligations:

[41] First, the current Canadian common law is uncertain. Second, the current approach to good faith performance lacks coherence. Third, the current law is out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law Canada — Quebec and the United States. While the developments which I propose will not completely address these problems, they will bring a measure of coherence and predictability to the law and will bring the law closer to what reasonable commercial parties would expect it to be.

Justice Cromwell later added to those three reasons, stating, quite correctly I would submit:

[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties

In defining the scope of the “organizing principle” of good faith, Justice Cromwell wrote the following:

[63] The first step is to recognize that there is an organizing principle of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance. That organizing principle is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.

[64] As the Court has recognized, an organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore 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. It is a standard that helps to understand and develop the law in a coherent and principled way.

[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. 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.

[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 application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be 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.

…

[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.

With respect to whether the court should recognize a new common law duty of honesty in contractual performance - under the broad umbrella of the organizing principle of good faith performance of contracts Justice Cromwell held that the Court should. On this point Justice Cromwell wrote the following:

[73] This 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. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith… For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts.

[74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence. I am at this point concerned only with a new duty of honest performance and, as I see it, this 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. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.

[75] Viewed in this way, the entire agreement clause of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it.

…

[80] Recognizing a duty of honesty in contract performance poses no risk to commercial certainty in the law of contract. A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance. The duty is also clear and easy to apply. Moreover, one commentator points out that given the uncertainty that has prevailed in this area, cautious solicitors have long advised clients to take account of the requirements of good faith. A rule of honest performance in my view will promote, not detract from, certainty in commercial dealings.

Decision on Damages

In dealing with the issue of damages, Justice Cromwell found that Can-Am’s breach of contract consisted of its failure to be honest with Mr. Bhasin about its contractual performance and, in particular, with respect to its settled intentions with respect to renewal. Can-Am was therefore liable for damages calculated on the basis of what Mr. Bhasin’s economic position would have been had Can-Am fulfilled that duty. Justice Cromwell further observed that the trial judge had specifically held that but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to “retain the value in his agency”. In reaching this conclusion, the trial judge was well aware of the difficulties that Mr. Bhasin would have in selling his business given the “almost absolute controls” that Can-Am had on enrollment directors and that it owned the “book of business”. The trial judge also heard evidence and made findings about what the value of the business was, taking these limitations into account. Those findings, said Justice Cromell, allowed the Supreme Court to assess damages on the basis that 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.

At the time of the contract’s non-renewal the assessed value of the business was $87,000 and that was what the Supreme Court of Canada awarded Mr. Bhasin as damages for Can-Am’s breach.

Commentary

To say that this decision was not met with great interest by our office would be a misstatement of fact. That the Supreme Court of Canada has recognized, but not defined the limits of, an “organizing principal” of good faith in the performance of contracts leaves the door wide, wide open to further litigation; or at least that is what is presently presumed.

Whether Justice Cromwell’s statement is truly a watershed moment or whether it is simply the “incremental step” that Justice Cromwell holds it out to be is yet to be seen. Frankly, for whatever this opinion may be worth, I find myself coming down more on the side of incremental change. Justice Cromwell has a point: Who would ever intentionally contract for dishonesty?

Takeaways for those with Labour Pains

The subject of the duty of good faith in contracts of employment was mentioned several times throughout Justice Cromwell's decision. Although, as the Court confirmed in this decision, the duty of good faith with respect to employment contracts has been limited to only the manner of termination of employment contracts; not the performance of them. Specifically, at paragraph 54 of the Court’s reasons in Bhasin Justice Cromwell noted:

[54] …this court confirmed that there is a duty of good faith in the employment context in Honda Canada Inc. v. Keays, 2008 SCC 39 (CanLII), [2008] 2 S.C.R. 362. Mr. Keays was diagnosed with chronic fatigue syndrome and was frequently absent from work. Honda grew concerned with the frequency of the absences. It ordered Mr. Keays to undergo an examination by a doctor chosen by the employer, required him to provide a doctor’s note for any absences, and discouraged him from retaining outside counsel. The majority held that in all employment contracts there was an implied term of good faith governing the manner of termination. In particular, the employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” when dismissing an employee: para. 57, citing Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, at para. 98. Good faith in this context did not extend to the employer’s reasons for terminating the contract of employment because this would undermine the right of an employer to determine the composition of its workforce: Wallace, at para. 76.

This blog has previously taken issue with the statement of law that employers do not owe employees a duty of good faith in the performance of the employment contract. For example, readers interested in this subject would be encouraged to consider this blog’s earlier post Being Reasonable about Constructive Dismissal in which the following passage from the case of Robinson v. Royal Canadian Mint, [1992] OJ No. 2270 (Gen. Div.) is cited:

I find no difficulty in implying terms to the contractual relationship between [the employer and the employee] that [the employer] would treat [the employee] honestly and fairly. This is in keeping with Iacobucci J's reasoning in Machtinger v. Hoj Industries Limited and the modern day acceptance that the employer owes a duty to treat its employees in a fair and proper manner in all respects of the employment contract. This duty goes as far as to promote the interest of its employees and to see that the work atmosphere is conducive to the well-being of its employees.

Justice Chadwick’s comments in Robinson appear to have been eclipsed by the Court of Appeal for Ontario’s more recent decision in Piresferreira v. Ayotte, 2010 ONCA 384, about which much has been written on this blog.

Were I to be asked whether I believe the Supreme Court’s decision in Bhasin changes the way employment contracts will be approached, I would answer no. The Court very clearly referenced the leading case on the duty of good faith in employment and I do not believe that it has any intention of revisiting that subject any time in the near future. Keays was only decided in 2008 and the Supreme Court denied leave to appeal in Piresferreira in early 2011.

Whether the case changes the way independent contractor agreements are approached however, one supposes that the answer has to be yes. To what extent, I really do not know, but I suppose what we can take away from this case is that the parties, at the very least, cannot out and out lie to one another.

If you are a party to a contract who has suffered a loss as a result of being lied to by the other contracting party, it probably makes sense to speak with a lawyer. The professional, experienced and cost-effective litigation lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to you.

Contact Me

To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260. You may also use the contact box at the top of this page.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

Sean Bawden, publisher of Labour Pains, can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321.

Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. He is also a part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice.