eCaseNote 2015 No. 02

Honesty is the Best Policy – Duty of Good Faith in Contract Performance

Bhasin v Hrynew 2014 SCC 71

Thanks to one Alberta business deal gone bad, all Canadian commercial relations now require a little added good. In its recent decision in Bhasin v Hrynew, the Supreme Court of Canada has established a new duty of good faith that requires businesses to perform their contractual obligations honestly.  

The Case

The plaintiff was Bhasin, whose business sold RESPs provided by Canadian American Financial Corp (CAF). Their contract was to renew automatically every three years, and either party had a non-renewal right on six months’ notice with no requirement for reason.

  CAF worked with Hrynew, a competing sales operation, to mislead and pressure Bhasin into a merger. CAF even appointed Hrynew to a position in which he could audit the confidential business records of other sales operations, including Bhasin’s. Throughout, CAF lied with respect to its own intentions and Hrynew’s role.

Bhasin’s resistance was met with CAF’s notice that it would not renew his contract, thereby diminishing the value of his business.

Bhasin argued the contract was terminated in bad faith, after CAF and Hrynew misled and withheld information about its reasons for termination. Although Bhasin won at trial against both defendants, the Alberta Court of Appeal overturned the decision, finding that the trial judge mistakenly implied a term of good faith despite a clear termination clause.  

The Supreme Court of Canada unanimously sided with Bhasin, finding CAF liable for damages, and in doing so vastly expanded the responsibilities of contracting commercial parties. While implied duties of good faith have long applied in such areas as employment and insurance law, there was no previous general duty in commercial relations.

Justice Cromwell, who wrote the decision, determined that the first step was to recognize the “organizing principle” of good faith that underlies and manifests itself in various specific doctrines governing contractual performance. That organizing principle is that parties must act honestly and reasonably, and not capriciously or arbitrarily.

The second step was to use this organizing principle of good faith to create a new duty of honesty in contractual performance. The Court stated that this duty, which applies to all contracts, requires that parties “must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” This does not require disclosure or loyalty, or the subordination of one’s own interests to that of the other party. It imposes only a “minimum standard of honest contractual performance.”

Justice Cromwell believes creating this doctrine will “help bring certainty and coherence” to commercial contracts. It also falls in line with commercial parties’ reasonable expectations – as no one would enter into an agreement wherein deceit was acceptable.

The Implications

Companies and individuals can now hold businesses accountable for acting in bad faith, even absent language specifically requiring honesty. As such, people communicating on behalf of businesses must be extremely careful not to mislead those with whom they have contractual relations. Those who feel they have been wronged by their contracting partner now have an extra avenue by which to seek recovery.

Importantly, this new duty of honesty cannot be excluded by an agreement of the parties. However, the Court suggested that the parties could influence the scope of the duty through express contractual terms, so long as they respected the core requirements. Parties must therefore consider their own vulnerabilities when deciding upon the presence and particularities of such terms.

This case also signifies greater judicial interest beyond what contracting parties do, and towards why and how they do it. Businesses should consider this when making decisions detrimental to a contracting partner, and ensure appropriate motives and methods.

While franchisers don’t have to be friends, and suppliers don’t have to be soulmates, the relationship between contracting parties has changed. Parties must be mindful of this new duty of good faith – both to avoid being the target of accusatory litigation, and to appropriately recover damages suffered by bad faith in business dealings.

The comments contained in this eCaseNote provide general information only and should not be construed as legal advice or opinion. For more information or specific advice on matters of interest, please call our offices at (709) 579-2081.