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Good faith contractual dealings three years on from Bhasin v. Hrynew

 

By James Hardy, Articling Student

In November 2014, the Supreme Court of Canada (“SCC”) released their decision in Bhasin v. Hrynew, setting out a duty of honest performance in contract law.[i] On its release, there were concerns that the judgment might introduce a wide-ranging duty to Canadian contract law, with commentators noting that “the tone of the judgment is expansive in the direction of granting relief.”[ii] As courts continue to interpret and apply Bhasin, the effect on contract law has been subtle rather than seismic. There is however important guidance on how parties to contracts should conduct themselves when discussing and performing their contractual obligations.

The Decision in Bhasin

Mr. Bhasin held a dealership agreement with Can-Am, selling investment products on Can-Am’s behalf. Mr. Bhasin had a troubled relationship with another Can-Am dealer, Mr. Hrynew, who sought a merger with Mr. Bhasin’s dealership, effectively to take over his business. Can-Am, encouraged by Mr. Hrynew, proceeded to try to implement this merger, eventually doing so by not exercising Mr. Bhasin’s renewal clause.

The SCC recognized a new “duty to perform contracts honestly.”[iii] The principles in the case were summarized as follows:

1. Within contract law, there exists an organizing principle of good faith.
2. The implications of the principle for a case should be determined by reference to case law developed in the context of that situation or relationship.
3. There is a new common law duty, as a manifestation of the principle of good faith, of parties to be honest with one another in the performance of their contractual obligations.[iv]

In the result, the new common law duty of honest performance formed the basis upon which Mr. Bhasin was entitled to damages based on Can-Am’s dishonesty when they declined to exercise the renewal clause.

Subsequent decisions applying Bhasin

As will be seen from the discussion below, to date, decisions following Bhasinhave generally limited its effect. In areas of law where there already existed a duty of good faith, such as employment and insurance contracts, Bhasin has added very little. In other areas of law, Bhasin has been read narrowly by the Courts.

The General Contractual Context

In areas of the law where there did not previously exist a recognized duty of good faith in contractual performance, the potential for Bhasin to change the law was more significant. So far, this change has not materialised. Courts have instead emphasised the more cautious aspects of the Bhasin decision, with the result that it is unclear to what extent Bhasin has materially changed the law.

An illustration of this can be seen in Addison Chevrolet Buick GMC Ltd. v. General Motors of Canada.[v] The case concerned a dispute over the allocation of Canadian ‘bail-out’ funds to General Motors of Canada, and whether Addison Chevrolet should have received a portion of those funds. Addison Chevrolet argued that General Motors had a duty at common law to not prefer its own interests and therefore to provide assistance to Canadian dealerships equal to the assistance they had provided to American dealerships.

The Court found that no such duty existed. In a careful reading of Bhasin, the Court emphasised the parts of Bhasin that focused on the goals of predictability and certainty in commercial transactions.[vi] The Court remarked that “Bhasin is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for,”[vii] describing the doctrine of good faith as “not the source of contractual obligations but a guide to the application of them.”[viii]

The Court differentiated the duty of good faith and the fiduciary statutory duty of fair dealing (for example, in franchise relationships), noting that while fiduciaries are required to act in the best interests of those they owe a duty to, the duty of good faith was lower and allowed a party to a contract to honestly prefer its own interests. Indeed, the Court argued that, in the context of a franchise agreement, it was impossible for both parties to be under the same obligation not to prefer their own interests.

Addison has been followed in several subsequent cases, including the very recent case of Expoed Inc. v. Anaca Technologies Ltd.[ix] The case involved a dispute over an alleged breach of a software license agreement. The plaintiffs sought to demonstrate that the defendant intentionally deceived the plaintiff into agreeing to the license agreement, and was dishonest in its performance thereof.

Justice Myers agreed with the decision in Addison that Bhasin does not by itself provide for wide-ranging new contractual obligations. He summarisedBhasin saying it “rationalized, renamed, and provided an overall framework for understanding several pre-existing aspects of duties of good faith,” and also “added one arguably new (arguably not new) duty not to lie to one's contractual counterparty.”[x] As there was no evidence of any lies or acts of dishonesty, the plaintiff’s claim was dismissed.

In Northrock Resources v. ExxonMobil Canada Energy,[xi] a case concerning the disposition of assets subject to rights of first refusal, the Saskatchewan Court of Appeal adopted a similar approach to Addison. The Court of Appeal emphasised the aspects of the Bhasin decision that focused on freedom to contract in commercial contexts. The Court of Appeal approved the trial judge’s approach of considering existing, pre-Bhasin case-law on the duty of good faith in the context of rights of first refusal, suggesting Bhasin had not meaningfully changed those duties.

Employment and Insurance Context

As recognised by the Court in Bhasin, considerations of good faith were already relevant to contracts where power imbalances between the parties were present, such as employment or insurance contracts.[xii]

Those concerned by the impact of Bhasin were perhaps given cause for further concern in the case of Styles v. Alberta Investment Management Corp.[xiii]This case concerned an employee who lost their entitlement to payment under a long-term incentive plan (“LTIP”) due to the employee’s termination without cause. The Alberta Court of Queen’s Bench found that Bhasin required the employer to exercise its discretion reasonably when terminating an employee without cause where it would deprive them of a substantial benefit. The Court found that “where the termination deprives an employee of the right to received earned performance bonuses … then the discretion to terminate without cause becomes arbitrary” if it resulted in the employee not receiving the payment under the LTIP, and if there was no reasonable explanation for that deprivation.[xiv] The employee was awarded damages for the loss of their LTIP entitlement.

The Alberta Court of Appeal unanimously reversed the decision,[xv]criticizing the trial court for expanding the duty of “good faith and honesty” to a duty of “fairness and reasonableness.”[xvi] The Court described Bhasin as recognising, first, a general organising principle of good faith, which underlays specific situations where good faith duties were already recognised, and second, a narrower duty of honest performance of contractual obligations. The Court held that the more general organising principle should “only be applied to situations where it has previously been invoked”, while recognising a limited ability to progress the law.[xvii] This case was not such a situation. The Court rejected the argument that Bhasin required ““reasonable exercise of discretion” in contractual performance.”[xviii]

The Court noted that the Supreme Court in Bhasin held that good faith in the employment context “did not extend to the employer's reasons for terminating the contract of employment because this would undermine the right of an employer to determine the composition of its workforce.”[xix] The employer could terminate the contract of the employee at its absolute discretion, even if the termination prevented the employee from becoming entitled under the LTIP, and the award of damages was reversed.

A similar approach was adopted in Avalon Ford Sales (1996) Ltd. v. Evans,[xx] where the Court interpreted Bhasin as recognising only a future possibility of new substantive rules. Good faith was described as an “organising principle” as opposed to a “free-standing rule.”

Bhasin has also changed little in the insurance context. In Bhasin itself, the SCC identified a well-established chain of case law that already gave rise to a duty of good faith in the insurance context.[xxi]

Practical Implications of Bhasin

While the cases since Bhasin may not demonstrate the expected seismic change in contract law, there are some important lessons from Bhasin that should inform the performance of contracts. The decision in Bhasin itself was grounded in Can-Am’s dishonest and deceptive comments to Mr. Bhasin. Can-Am had no obligation to disclose the relevant facts to Mr. Bhasin – but when they chose to make a statement, they had a duty to be honest.

Of course, parties should never lie to other parties to a contract: saying ‘no comment’ is always preferable to a deceptive comment. Awareness of this duty is also valuable; for example once a party to a contract asks a question to its counterparty, the response must be honest. That is, a party concerned about another party’s performance of a contract can ask questions and if they choose to respond it must be an honest response.  If they choose not to respond, that may also be informative.

Further, parties to contracts should be aware that when it comes to the duties recognized by the SCC in Bhasin, the case law is continuing to develop. Despite the apparent lack of success in making this claim to date, it should not be surprising that aggrieved parties will continue to allege breaches of the duty of honest performance, and parties should avoid interacting with their contractual counterparties in any way that could be perceived as a breach of this duty.

Conclusion

As Bhasin approaches its third birthday, trial and appeal Courts alike have heeded the call in Bhasin to develop any new duty incrementally, and with reference to existing duties. Three years is not a long time for a single case to impact the common law, and regard should be had to the possibility that this duty may be expanded in the future. It is certainly likely that lawyers will frequently argue bad faith, and so doing anything that could be construed as such should be avoided. However, so far, Courts have responded with reserve, and Bhasin’s predicted impact has – thus far – not materialised.

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