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Supreme Court of Canada Creates New Duty of Honest Contractual Performance

31 Mar 2015

The Supreme Court of Canada has unleashed bold new changes to the common law that has huge implications in employment and commercial or business litigation. The case, Bhasin v. Hrynew, 2014 SCC 71, created a new duty of honest contractual performance between parties.

The parties were engaged in the business of education savings plans in Alberta. The plaintiff, Bhasin, had a “commercial dealership agreement” (“agreement”) with a company called Canadian American Financial Corp (“CAF Corp.”). This agreement set out that Bhasin was to act as an “enrollment director” and was responsible for marketing these education savings plans to parents. Bhasin basically acted as a sales agent on behalf of CAF Corp. The term of the agreement was for 3 years, with an automatic renewal at the end of the term unless there was written notice provided within 6 months of the termination date.

The defendant, Hrynew, was also an “enrollment director” and a competitor of Bhasin. He sought to take Bhasin’s clients for himself. At first he attempted to do so by proposing a merger between himself and Bhasin on multiple occasions. Bhasin refused.

Hrynew and CAF Corp. decided to up the pressure to force a merger with Bhasin. CAF Corp. made Hrynew their new “provincial trading officer” to review compliance with Alberta’s securities regulations, which meant that Hrynew had the power to audit enrollment directors (such as Bhasin). Bhasin refused to allow Hrynew to audit his confidential business records.

In June 2000, CAF Corp. outlined its plans to the Alberta Commission for a merger where Bhasin would work for Hrynew. However, the above was not made known to Bhasin. In fact, CAF Corp. actively and repeatedly misled Bhasin with respect to the above and advised him that they were under an obligation to keep information in confidence. And in 2001, CAF Corp. terminated their agreement with Bhasin. Bhasin had lost his entire business and the majority of his sale agents when to work for Hrynew.

The Court’s Analysis

Bhasin sued both Hrynew and CAF Corp.

The trial judge held both Hrynew and CAF Corp. liable for civil conspiracy. Hrynew was held liable for intentional breach of contract. CAF Corp. was held liable for contract breach, by breaching an implied term of good faith.

Hrynew and CAF Corp. appealed the trial judge’s decision. The Alberta Court of Appeal disagreed with the trial judge, allowed the appeal and dismissed Bhasin’s lawsuit by finding that the trial judge erred and that there was no implied term of good faith.

The matter was then appealed to the Supreme Court of Canada. The Supreme Court held that CAF Corp. was liable for breach in the duty of honest performance and as such was liable for $87,000 in damages, which was the value of Bhasin’s business at the time of the termination of the agreement.

The Supreme Court began its analysis by asserting that the common law is “unsettled”, “piecemeal” and “incoherent” when it comes to recognizing a general and independent doctrine of good faith and therefore it was time to take two incremental steps.

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.

Our Thoughts

It is a positive step forward. It is difficult to argue that contracting parties should act in an honest way in dealing with each other and that this will foster rather than hinder business relationships. However, there is a big “but” in this situation. While it may be easy to agree with the broad application of a general duty of honesty in contractual performance the question arises as to what will happen with its application. In the general business context, it will be left to the lower courts to hammer out some sort of highly fact-specific approach to the application of this new duty.

Employers already owe their employees a duty of good faith and fair dealing in regards to the manner of the employee’s dismissal (please see the Supreme Court of Canada decision of Honda v. Keays). However, Bhasin v. Hrynew will likely enlarge this duty outside the termination context and into formation of the employment relationship.

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.