- Supreme Court Confirms Duty to Perform Contracts Honestly
- April 9, 2015 | Author: Owen Bourns
- Law Firm: Perley-Robertson, Hill & McDougall LLP/s.r.l. - Ottawa Office
- The Supreme Court’s recent decision in Bhasin v. Hrynew enshrined into Canada’s common law the concept of a “duty of to perform contracts honestly”. Take note that this case is not about a duty to negotiate an agreement in good faith, but rather concerns performance obligations.
In this case the plaintiff (Mr. Bhasin) and the defendant individual (Mr. Hrynew) both were sales representatives for the defendant company (Can-Am). Mr. Bhasin’s agreement with Can-Am was for 3 years with an optional 3 year extension that automatically kicked in unless one party gave notice of non-renewal at least 6 months before the end of the term. Mr. Bhasin and Mr. Hynew were competitors for the same clients, even though were both representatives of Can-Am. Mr. Hrynew was more valuable to Can-Am and the two defendants together took steps to try and force a “merger” of Mr. Bhasin’s and Mr. Hrynew’s businesses, although the Court found that the merger was really more of a hostile takeover.
In 2000, Can-Am was under pressure from the Alberta Securities Commission about enrolment officers’ compliance with securities law. As part of its response to those concerns Can-Am appointed the defendant Mr. Hrynew as a provincial trading officer (PTO) to review other Can-Am enrollment officers’ compliance with securities laws. However, Can-Am and Mr. Hrynew also used the opportunity to move forward with a plan to restructure its agencies in Alberta in a manner that would result in Mr. Bhasin working for Mr. Hrynew. In that process Can-Am misled Mr. Bhasin by stating that: (a) Mr. Hrynew had an obligation to treat the information he was reviewing confidentially and (b) that the Commission had rejected a proposal to have an outside PTO. Can-Am then attempted to force the merger and as part of same required that Mr. Bhasin allow Mr. Hrynew to audit his records. Mr. Bhasin’s refusal of the audit eventually led to Can-Am giving a notice of non-renewal under the Agreement.
The trial judge found that there was an implied term of the contract that decisions about whether to renew would be made in good faith and that the defendant Can-Am had breached that term as follows:
[...] 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”
The Court of Appeal overturned the trial decision because it found the pleadings to be deficient and because the lower court erred by implying a term of good faith into the context of an unambiguous contract containing an entire agreement clause.
Supreme Court Decision
In arriving at its conclusion the Supreme Court reviewed the status of conflicting case law across common law Canada, Quebec and the United States. Existing case law ranged from finding no duty of honest performance, to the existence of some duty of honest performance in some circumstances, to the existence of a duty of honest performance in all contracts (Quebec and the United States).
Ultimately, the Court determined that a uniform change was required to “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”.
The Court recognized throughout the decision that “good faith” is an organizing principle of contract law and further described what is meant by the term “organizing principle”:
[A]n 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. [emphasis added]
As such, the Court evolved the organizing principle of good faith as a standard to underpin a more specific legal doctrine, namely a general duty of honesty in contractual performance, which the Court described as follows:
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.
The Court was clear to distinguish this duty from the stronger duties of disclosure and fiduciary loyalty:
The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.
Importantly, the Court specified that this duty of honest performance is a stand-alone general doctrine of contract law and not a term to be implied into all commercial contracts. It operates irrespective of the intentions of the parties.
There may be some who take the position that acknowledging such a duty creates uncertainty in commercial contracting and disputes resulting therefrom. However, the Court says this should not be the case because the duty of honest performance is simply a reflection of what should be the intention of the parties and determining the intention of the parties at the time of contract formation is the primary object of contractual interpretation. Further, “parties will rarely expect that their contracts permit dishonest performance of their obligations”.
Having found that a general duty of honest performance exists, the Court held that the Defendant Can-am had breached the duty on account 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”. It concluded that damages for breaching the duty of honest performance shall be calculated on the basis of what the plaintiff’s economic position would have been had Can-Am fulfilled that duty. In Bhasin the Supreme Court adjusted the plaintiff’s damages to $87,000.
 Bhasin v. Hrynew, 2014 SCC 71 (CanLII) http://www.canlii.org/en/ca/scc/doc/2014/2014scc71/2014scc71.html
 Bhasin v. Hrynew at paras 2-9
 Bhasin v. Hrynew at paras 10-13
 Bhasin v. Hrynew at para 15
 Bhasin v. Hrynew at para 41
 Bhasin v. Hrynew at para 64
 Bhasin v. Hrynew at para 73, see also paras 92-93
 Bhasin v. Hrynew at para 86
 Bhasin v. Hrynew at para 74
 Bhasin v. Hrynew at paras 45 and 76
 Bhasin v. Hrynew at para 76
 Bhasin v. Hrynew at para 108
 Bhasin v. Hrynew at para 110