Appeal Watch: SCC likely to clarify contractual interpretation and good faith in Bhasin v. Hrynew

On August 22, 2013, the Supreme Court of Canada agreed to hear an appeal from the Alberta Court of Appeal’s decision in Bhasin v. Hrynew, 2013 ABCA 98.

The SCC’s granting of leave in Bhasin signals the Court’s eagerness to determine a longstanding legal debate about the judicial interpretation of contracts and the duty to exercise discretionary contractual powers in good faith. As such, the Supreme Court’s decision will likely have significant ramifications for agreements throughout Canada.

BACKGROUND

Canadian American Financial Corporation (“CAFC”), a subsidiary of global financial services giant Allianz, marketed registered education savings plans (RESPs) for parent-investors through retail dealers in Canada. Harish Bhasin and Larry Hrynew were two of such retail dealers.

As Enrollment Directors with CAFC, Mr. Bhasin and Mr. Hrynew were contractually prohibited from selling anything other than the RESP products provided by CAFC. Bhasin and Hrynew both sold CAFC’s financial products in Alberta through their respective small businesses, and as such were direct competitors.

In 1998, CAFC wished to enter into a standard contract with all of its Enrollment Directors. CAFC consulted with some of its best Enrollment Directors in the country, including Bhasin and Hrynew. After the select group of retail dealers obtained independent legal advice, Bhasin and most of the Enrollment Directors signed the standard contract. Hrynew did not sign, nor did CAFC require him to sign.

Clause 3.3 of the 1998 agreement stipulated that the duration of the contract shall be three years, and thereafter automatically renewable for three-year periods – unless either CAFC or the Enrollment Director provided six months’ notice of their desire to terminate.

In 2001, CAFC gave Bhasin a timely notice under Clause 3.3 that when the agreement next came up for renewal, CAFC would let the contract expire.

Consequently, Bhasin joined a competitor of CAFC and brought an action for damages against CAFC and Hrynew, for his alleged role in CAFC’s decision to terminate the 1998 agreement.

DECISION OF THE ALBERTA COURT OF QUEEN’S BENCH

The 529-paragraph decision of Moen J. of the Alberta Court of the Queen’s Bench (“ABQB”) encompassed lengthy discussions about implied terms of good faith, entire agreement clauses, the parol evidence rule, civil conspiracy, inducing breach of contract, and the sufficiency of pleadings – issues which Justice Moen disposed of in the plaintiff’s favour.

However, the parties’ legal dispute centred around Clause 3.3, which Justice Moen held as “obvious” that all the parties to the 1998 contract understood would be exercised in good faith [2011 ABQB 637 at para 104].

Justice Moen notes that unlike in Quebec and the United States, where statutes explicitly recognize a general duty of good faith in the performance of commercial contracts, Alberta has no such legislation. Nonetheless, she ruled that the terms of the 1998 agreement, including the discretionary power of non-renewal, were subject to an overarching implied term of good faith, both implied-by-law and implied by the parties’ intentions. Given the contract’s wording and the behaviour of the parties at the time of entering the 1998 agreement, and notwithstanding the contract’s four corners clause, CAFC had a duty to exercise its discretionary power under Clause 3.3 honestly, reasonably, and fairly [ibid at paras 126, 132, 140, 257].

Justice Moen held that CAFC breached the overarching requirement of good faith by using its contractual power to not renew the 1998 agreement as leverage to compel Bhasin to submit to Hrynew’s audit and allow his dealership be taken over by Hrynew’s dealership [ibid at paras 236, 252]. Moen J. found that requiring Bhasin to submit to an audit by Hrynew, wherein his competitor would have direct access to Bhasin’s client records, was in and of itself unfair to the plaintiff [ibid at paras 218-220, 226]. Moreover, the ABQB found that CAFC had pushed for the merger at Hrynew’s behest – so that his dealership could absorb Bhasin’s lucrative South Asian client base – and not for legitimate business purposes as CAFC claimed [ibid at paras 238, 254-258]. Hrynew’s position as the Enrollment Director of the largest CAFC dealer in Alberta gave him particular clout with the head office, and it was through his influence that CAFC attempted to force an amalgamation and end its 1998 contract with the plaintiff [ibid at para 522].

Justice Moen also ruled that Hrynew was liable for intentionally inducing CAFC to breach the 1998 contract, and that CAFC and Hrynew were liable as parties to civil conspiracy by unlawful means [ibid at paras 317, 319, 329].

Ultimately, the ABQB awarded $380,597 to the plaintiff for loss of income and business, and $74,479 in judgement interest.

DECISION OF THE ALBERTA COURT OF APPEAL

Despite the breadth of Justice Moen’s ABQB decision, the Alberta Court of Appeal (“ABCA”) narrowed the Bhasin dispute to legal questions about courts varying or supplementing a contract, implying a duty of good faith, and ruling based on parol evidence [2013 ABCA 98 at para 1].

From the outset, the ABCA focused on the fact that the council of Enrollment Directors, of which the plaintiff was part, had obtained a legal opinion about the new wording in the standard contract proposed by CAFC in 1998 [ibid at para 5]. The ABCA also highlighted that during the month-long trial, extensive parol evidence was heard about what the parties thought, their intentions, and their assumptions [ibid at paras 12, 28]. Furthermore, the ABCA confirmed the appellants’ assertion that the issues on which Moen J.’s reasons were based upon were never pleaded – nor were the majority of facts relied upon by the ABQB to support its conclusions [ibid at paras 19-20].

In relatively short order, the ABCA listed the legal rules it found applicable to the Bhasin v. Hrynew dispute, which can be summarized as follows:

  1. There is no duty to perform most contracts in good faith.
  2. The only duty of good faith in employment contracts is relatively narrow: not to announce or implement their termination in a harsh or demeaning way. That duty does not extend to the reasons for termination, but to the manner of termination.
  3. Courts can imply terms in contracts only when the new term is so obvious that it was considered unnecessary to mention, or the new term is truly necessary to make the contract work at all. Mere foresight of a possible occurrence is not enough – both parties must have intended the implied term. Additionally, the law’s presumption is against implying terms.
  4. A term cannot be implied in a contract which would contradict an express term of that contract.
  5. Mental suffering is not compensated in contracts law.
  6. Some degree of inequality in bargaining power, need, or knowledge, is not enough to upset or amend the terms of a contract, short of actual unconscionability.
  7. Parol evidence is not to be used directly to interpret a contract if its words are unambiguous, or to look at the actual subjective intent of one or both parties.
  8. Short of actual fraud, a contract can validly exclude or nullify parol evidence, previous negotiations, representations, terms, promises or conditions, not found in the written document.
  9. Courts should be especially wary of altering or creatively interpreting formal contracts carefully negotiated and written with legal advice.
  10. Courts should not attempt, especially in the full light of hindsight, to rewrite a contract to accord with what the court now thinks is more just or more businesslike. [ibid at para 27, citations omitted]

Although much case law was cited by the ABCA in support of the above ten propositions, the Court of Appeal did not embark in any meaningful discussions of them, and treated these “rules” as self-evident axioms on the state of contract law in Canada.

Applying these rules, the ABCA unanimously disposed of Justice Moen’s central findings in eight paragraphs. The appellate bench held that the large amount of evidence which went outside the contract was unduly relied upon by the trial judge in her reasons. Particularly troubling for the ABCA was Justice Moen’s use of this parol evidence in finding that an implied term of good faith governed the 1998 contract. It was the ABCA’s position that given legal proposition #7 above, and given that the contract was unambiguous and contained an entire agreement clause, Moen J.’s reliance on parol evidence was in error [ibid at paras 28-30].

Moreover, in light of propositions #1, 2, or 3, the Alberta Court of Appeal could not agree with Justice Moen’s finding of an overarching term of good faith as implied-by-law. The ABCA was of the view that the 1998 agreement was not analogous to an employment contract – which are not contracts of good faith in any case, it held – and Bhasin had not been terminated by his employer but rather their contract had simply been allowed to expire as provided for in Clause 3.3 [ibid at para 31].

The appellate court also ruled that Justice Moen’s grounding of the implied term in the intention of the parties at the time of entering the 1998 agreement could not be reconciled with legal propositions #3, 4, 7, 9, and 10. According to the Court of Appeal, given the explicit wording of Clause 3.3, the parties did not intend to create a contract that would last into perpetuity, which is what the ABQB’s reading into the contract would create if its decision was upheld [ibid at paras 32-33]. However, it is this author’s view that Justice Moen pre-emptively addressed this point at paragraphs 256-257 of her trial judgement:

CAFC certainly was not obligated under the 1998 Agreement to continue the contractual relationship forever. However, CAFC was obligated under the 1998 Agreement to exercise the non-renewal clause in a way that respected Bhasin’s interests to a standard of good faith – this means honestly, reasonably and fairly.

Finally, the Alberta Court of Appeal also disagreed with Moen J.’s emphasis on the unequal bargaining power of Mr. Bhasin in relation to CAFC, which she used to find that an implied term of good faith was required in order to effect the whole of the contract and the intentions of the parties. Given propositions #6, 7, 8, 9, and 10, and given that Bhasin had the benefit of independent legal advice, the ABCA ultimately ruled that the plaintiff’s claim must fail [ibid at paras 34-35].

IMPLIED BY INTENTION: COURTS’ ROLE IN INTERPRETING CONTRACTS

As litigator Mark Wiffen points out, and upon perusing the Alberta Court of Appeal’s recent decisions on contract law, one of the appellate justices who decided Bhasin, Justice Jean Côté, appears to strongly favour using the strict “textualist” approach to contractual interpretation over the “intentionalist” approach.

There is a longstanding judicial debate in Canada about whether contractual interpretation should be primarily guided by the intention of the contracting parties at the time the agreement was made (the intentionalist approach), or whether courts should discern the parties’ intent from the words used in the written contract (the textualist approach). Advocates of the latter believe that the words of a written agreement are all that really matter, while advocates of the former believe that the context, goals, and expectations of the parties are equally or more important.

The Alberta Court of Appeal in Bhasin was of the view that the trial judge placed too much emphasis on the parties’ subjective intentions in order to find that there was an implied term of good faith, which eroded the certainty that reducing an agreement to writing is aimed at achieving.

As the longest-serving judge on the Alberta Court of Appeal, it would of little surprise to this author if Justice Côté wielded considerable influence in penning the ABCA’s judgement in Bhasin.

It may be interesting to note that Côté J.A. has recently released four decisions on contract law: Ko v. Hillview Homes, 2012 ABCA 245 was rendered on August 22, 2012; Swan Group v. Bishop, 2013 ABCA 29 was rendered on January 28, 2013; Bhasin v. Hrynew was rendered on March 18, 2013; and Benfield Corporate Risk v. Beaufort International Insurance, 2013 ABCA 200 was rendered on June 13, 2013. Intriguingly, in all four judgements, Justice Côté (whether as part of a per curiam decision or under his explicit authorship) firmly emphasized the need for contractual certainty in Canadian law – see Ko v. Hillview at paras 3-8, Swan v. Bishop at paras 19-23, Bhasin v. Hrynew as previously discussed, and Benfield v. Beaufort at paras 110-119. In Ko v. Hillsview, Côté J.A. bemoaned the current state of Canadian contracts law:

Canadian courts sometimes give the public and businesses certainty in contractual disputes. But too often they do not. Even a clearly-written signed formal contract leads often to years of discoveries, and days or weeks of trial. Each step explores the entire history of the contract’s negotiation, the subjective musings of each party, and every possible after-the-fact disappointment or windfall. […] Some courts go thus astray by encouraging parol evidence, ignoring whole-contract clauses, inventing collateral unwritten obligations, and implying far-reaching terms. […] If that truly is Canadian contracts law, it needs fixing. It is another reason why litigation today is often priced out of reach. [ibid at paras 6, 8, 10, emphasis added]

With Bhasin, the highest court in the land has an opportunity to issue a definitive statement on the current position of Canadian contract law with respect to courts’ use of parol evidence and the principles of contractual interpretation.

IMPLIED BY LAW: EXERCISING DISCRETIONARY POWERS IN GOOD FAITH

Bhasin also provides an opportunity for the Supreme Court of Canada to revisit Justice McLachlin’s (as she then was) vigorous dissent from the majority opinion penned by the now-retired Justice Iacobucci in Wallace v. United Grain Growers, 1997 CanLII 332 (SCC). In her 6-3 minority opinion, McLachlin J. held that: “Recognition of an implied term in the employment contract of good faith in relation to the dismissal of employees is supported by previous decisions, academic commentary and related developments in other areas of contract law” [ibid at para 139]. However, Justice McLachlin restricted her approval of implying a good faith duty in the context of manner of employment dismissal [John McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 803].

Justice Moen of the ABQB found that the 1998 contract between CAFC and Mr. Bhasin was similar to an employment contract, and thus there was an implied term of good faith implied-by-law. At paragraph 71 of her reasons, Moen J. held that since “there is nothing in the case law to suggest that these classes of contracts are closed”, a contract may be “so similar to these classes that it cannot in a principled basis be excluded as a contract which has a good faith term imposed by operation of law.”

The Alberta Court of Appeal disagreed with Justice Moen’s analogy and its consequent implication of a requirement of good faith. But as litigator Brandon Kain from McCarthy Tétrault points out, the ABCA’s ruling in Bhasin is contradicted by some of the common law decided by previous appellate courts. For example, the Ontario Court of Appeal in CivicLife.com v. Canada (Attorney General), 2006 CanLII 20837, held that a discretionary contractual power “must be exercised reasonably, fairly, and with regard to how the other party’s interests are affected” [ibid at para 50].  Although the Alberta Court of Appeal in Mesa Operating v. Amoco Canada Resources, 1994 ABCA 94 (CanLII), did not go so far as to hold that a party must exercise its discretionary contractual power in good faith, it did find that “a party cannot exercise a power granted in a contract in a way that ‘substantially nullifies the contractual objectives or causes significant harm to the other contrary to the original purposes or expectations of the parties’” [ibid at para 22]. The ABCA in Mesa also noted that although a general obligation of good faith “is not an obvious part of contract law in England and Canada … it has become part of the general law of contract law in the United States” [ibid at para 16].

Bhasin v. Hrynew offers the SCC an opportunity to clarify whether Justice Moen was correct. This author speculates that since C.J.C. McLachlin was one of the three Supreme Court justices who granted Mr. Bhasin leave to appeal, the Chief Justice may be wishing to revisit the issue of implying a duty of good faith in the general exercise of discretionary contractual powers – more than a decade and a half after Wallace, and with an entirely different set of colleagues.

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