Supreme Court Declares a New Common Law Duty of Honest Performance: Bhasin v Hrynew

The Supreme Court of Canada has declared a new common law duty that will affect contract law in all the common law jurisdictions of Canada. In a December ruling, Bhasin v Hrynew, 2014 SCC 71, the Court declared a new common law duty of honest performance and also recognized a general organizing principle of contractual good faith.

Prior to this ruling, contract law has recognized a duty of good faith in the particular areas of the law that govern employment, insurance, and franchise contracts. Other areas of the law were less clear. In Bhasin, by way of a unanimous 7-0 decision, Cromwell J writes that the finding of this new common law duty will help contract law be both fairer and more certain while still allowing business to arrange their commercial affairs as they see fit. He notes that the Court’s articulation of a duty of honest performance and the underlying principle of good faith are minute changes in the law, but says he hopes that this will help clarify a confusing area of law.

Background

The case at bench featured appellant, Harish Bhasin, who brought a motion against Larry Hrynew and Canadian American Financial Corp. (“Can-Am”).

Bhasin worked as an enrollment director for Can-Am, starting in 1989. He enrolled individuals in educational savings plans marketed by Can-Am. He received bonuses and compensation from Can-Am for these enrollments. Bhasin operated effectively as a small business owner who hired a sales force.

The relationship between Bhasin and Can-Am was governed by a contract that would renew at the end of three-year period unless either party gave the other six months’ written notice that they wanted to terminate the relationship. Larry Hrynew was an individual enrollment officer. He had had originally worked for a competitor of Can-Am, but joined Can-Am. He was, in essence, a competitor of Bhasin. He approached Bhasin about a merger and also told Can-Am he would leave if a merger between the two did not take place. Bhasin refused to merge his business with Hrynew.

The Alberta Security Commission decided that, because of compliance concerns with some of Can-Am’s enrollment directors, it required Can-Am to appoint a provincial trading officer to review all of the records for compliance with securities law. In 1999, Can-Am appointed Hrynew to that position. This role require him to audit the confidential business records of all enrollment directors in the province, who were his competitors. Bhasin and another enrollment director objected.

Can-Am gave the Commission plans to restructure its agencies and, in those plans, showed Bhasin working for Hrynew. Bhasin was not aware of these plans. Can-Am also lied to Bhasin by telling him that Hrynew was obligated to treat any audited information as confidential and that the Commission had refused to allow it to appoint an outsider to the position of auditor. When Bhasin refused to grant Hrynew access to his records, Can-Am threatened to terminate the existing agreement it had with Bhasin. In May 2001, Can-Am gave notice of non-renewal to Bhasin. After his, Bhasin lost the value in his business and lost his workforce to Can-Am.

Legal History

An Alberta Court of Queen’s Bench, weighing in on the issue of good faith, found it to be an implied term of the contract that the decision of whether the contract would be renewed would be made in good faith. The case proceeded to the Albert Court of Appeal, which ruled that the good faith requirement of employment contracts could not be extended to all types of contracts. Further, it decided that good faith only applied to termination, and did not apply to non-renewal. On these bases, the judges allowed the appeal and dismissed the lawsuit. Bhasin then appealed the case to the Supreme Court.

Issues of the Case

The key issues in this case at were: 1) whether Bhasin properly pled a breach of the duty of good faith; 2) whether Can-Am owed Bhasin a duty of good faith; and 3) whether the respondents are liable for the torts of inducing breach of contract or civil conspiracy.

Decision

Justice Cromwell found that the Bhasin had properly pled a breach of the duty of good faith and that Can-Am did in fact owe Bhasin a duty of good faith. He also found that the respondents were not liable for the torts of inducing breach or contract or civil conspiracy.

Analysis

In his ruling, Cromwell J notes the incoherence of contract law on this matter:

The notion of good faith has deep roots in contract law and permeates many of its rules. Nonetheless, Anglo-Canadian common law has resisted acknowledging any generalized and independent doctrine of good faith performance of contracts. The result is an “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze” (para 32).

The small advances in contract law made through this ruling are an attempt to help settle contract law and bring businesses greater certainty. He also notes that the lack of an independent doctrine of good faith in Canada’s common law jurisdictions left them out of step with two major trading partners–civil law Quebec and the United States. He also details developments in the United Kingdom and Australia that strengthen the idea of a general notion of good faith in contract law.

The advances in Canadian common law from this ruling are: 1) the recognition that good faith contractual performance is a general organizing principle of common law contract law that “underpins and informs the various rules in which the common law” (para 33); and, 2) the recognition of common law duty that “applies to all contracts to act honestly in the performance of contractual obligations” (para 33). Justice Cromwell notes that these changes are part of the Court’s duty to develop the common law to keep up changes in society. The areas of contract law where there was a previously declared duty of good faith include employment, insurance, and franchise relationships.

Justice Cromwell further notes that “[c]ommercial 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” (para 60). This expectation of honesty is an existing expectation of parties in contract relationships. “It is, to say the least, counterintuitive to think that reasonable commercial parties would accept a contract which contained a provision to the effect that they were not obliged to act honestly in performing their contractual obligations” (para 60).

Conclusion

The intent of the Court is not to hinder business. Justice Cromwell stresses that “[a]n 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” (para 64). The recognition that different parties may have nuanced expectations of the meaning of good faith shows that the Court is providing a flexible guideline.

This decision is a positive move forward. This incremental changes balance the tensions between the desire to let businesses operate with freedom and the need for business to operate with some degree of certainty about their relationships with each other. The new duty of honest performance is not an onerous one. As noted, it falls far below a fiduciary duty to another party. With this ruling, the Court is simply asking businesses to operate honestly and to act so that they do not undermine the very purpose of a contract they have signed with another party. This change, though small, is overdue and can only improve the business climate in Canada.