Insights

Good Faith, Honest Performance and Your Deal: the Supreme Court of Canada’s New Principles of Contract Law

The Supreme Court of Canada made a significant change in the common law regarding the inherent obligations of contracting parties. In Bhasin v Hrynew, the Court recognized a general organizing principle of good faith and then created a new common law duty of honest performance in contract, both in relation to what was, generally speaking, a standard business contract that did not fall into a unique category. This unanimous judgment was written by Justice Cromwell and proceeds in a two-step process: First, the Court found that there is the general organizing principle of good faith in contract law; and Second, the Court found that this general organizing principle creates a common law duty of honest performance.

This case began when Harish Bhasin sued Heritage Educations Funds Inc., which, at the time, was known as Canadian American Financial Corp. (“Can-Am”). Mr. Bhasin owned Bhasin & Associates, which acted as an enrollment director for Can-Am’s business of selling educational savings plans to investors. Through his company, Mr. Bhasin was compensated with commissions and bonuses. It was accepted as fact that Mr. Bhasin had built a sales forces and a thriving business, which Can-Am had recognized through numerous awards and prizes. Mr. Bhasin was one of Can-Am’s top enrollment directors in Canada. This arrangement with Can-Am operated under a three-year term that would be renewed automatically unless one of the parties gave written notice. Can-Am also had an arrangement with Larry Hrynew, one of Mr. Bhasin’s competitors in Alberta. The Court found that as a result of business arrangements between Can-Am and Mr. Hrynew, Can-Am threatened and followed through with a termination of Mr. Bhasin’s contract. Mr. Bhasin sued.

At trial, Mr. Bhasin argued that it was implied term of the contract that if Can-Am decided not to renew Mr. Bhasin’s contract, that such a decision would be made in good faith. Mr. Bhasin argued that Can-Am did not act in good faith, so, accordingly, Can-Am owed Mr. Bhasin damages for this breach. Based in part on various findings of fact by the trial judge in the Court of Queen’s Bench for Alberta, Mr. Bhasin won his argument that Can-Am had acted dishonestly by misleading Mr. Bhasin of Can-Am’s intentions, specifically as they pertained to Mr. Hrynew’s role with Can-Am in Alberta and his interest and involvement in Mr. Bhasin’s business. Mr. Hrynew and Can-Am appealed.

At the Alberta Court of Appeal, Mr. Hrynew and Can-Am were successful in arguing that the trial judge had erred in applying a term of good faith into the contract, because the contract included what is known as an entire-agreement clause, which means that the entirety of the contract is outlined in the text. Mr. Bhasin appealed this decision.

At the Supreme Court, the Court recognized that “the notion of good faith has deep roots in contract law and permeates many of its rules.” However, this concept is not found or applied with much regularity in Canadian jurisprudence; what the Court described as “piecemeal, unsettled and unclear.” The Court’s intention was to “bring a measure of coherence and predictability to the law. To justify this position, the Court noted that “it is, to say the least, counterintuitive to think that reasonable commercial parties would accept the contract which contained a provision to the effect that they were not obligated to act honestly in performing their contractual obligations.” Accordingly, the Court defined the organizing principle that “parties must generally perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” This concept requires that parties should have “appropriate regard” to legitimate contractual interests of their contract and partner and not to undermine those interests in bad faith. However, it does not mean that parties owe a fiduciary duty to their contract partner, which would require that a party put their contracting partner’s interest above their own. Furthermore, the application of this organizing principle will be “highly context-specific” depending on what the nature of the contract requires. For example, a long-term, mutually-beneficial partnership would have different duties required than a one-time, transactional contract.

Having found this new organizing principle, the Court noted that none of the existing obligations in law would constitute a breach of the relationship between Can-Am and Mr. Bhasin. Accordingly, the Court created a new duty of honesty in contractual performance, which requires that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” Generally speaking, this is now a duty inherent in all contacts. However, the Court left open the possibility that there could be a contractual provision that would “influence the scope of honest performance in a particular context” because the scope of the duty will vary. Similar to the general organizing principle of good faith, this duty of honest performance is not a duty to disclose or one of fiduciary loyalty.

In this case, given the findings of fact by the trial judge, and subject to the (new) organizing principle of good faith and the duty of honest performance, the Court found that Can-Am acted dishonestly toward Mr. Bhasin in exercising the non-renewal clause in his contract. Given this breach of Can-Am’s duty to Mr. Bhasin, the Court awarded him $87,000.00 plus interest, which was the trial judge’s valuation of his business at the time of the non-renewal. However, the Court upheld the Alberta Court of Appeal’s decision in regard to Mr. Hrynew, finding that Mr. Bhasin did not have a claim against his former competitor.

The Court’s decision to find the new general organizing principle of good faith and, through it, the new common law duty of honest performance has, somewhat predictability, raised significant questions around the current and future obligations of parties in contractual relationships. On its face, the Court’s decision in this matter is somewhat limited: The Court only found that this duty requires that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” In this sense, this decision has only established a minimum standard that, at least in the Court’s view, is a widely-held assumption about contractual responsibility by reasonable parties. However, while the Court was specific that the duty is an inherent principle in all contracts, the Court did not provide much in the way of a clear description of what this new duty requires. This means that lower courts will fill in these blanks as contract disputes become adjudicated on this new organizing principle and its subsequent common law duty. As a result, it is likely that it will take many years before the jurisprudence around this issue is developed sufficiently to understand and explain sufficiently what these developments mean to Canadian contract law. If nothing else, we can expect that the parties to a contract will now be watching their contractual partners very closely for any sign of dishonesty or absence of good faith.

2014 SCC 71