The New General "Principle" of Good Faith Performance and the New "Rule" of Honesty in Contract Performance: Bhasin v. Hrynew 2014 SCC 71John D. McCamus

June 2, 2015

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1. Introduction• In Bhasin v. Hrynew, 2014 SCC 71, the Supreme

Court of Canada:• Recognized for the first time a general organizing

"principle" underlying various aspects of contractual doctrine to the effect that parties "generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily"

• Recognized a new rule spawned by that principle that parties must comply with a duty of "honest performance, which requires parties to be honest with each other in relation to the performance of their contractual obligations"

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1. Introduction• Confirmed the existence of three more specific

duties of good faith performance– A duty to cooperate in the achievement of the purposes of the

agreement– A duty to exercise contractual discretionary powers in good faith

and not for an ulterior motive– A duty not to evade contractual obligations

2. The Parties and the Story• The defendant (respondent), Can-Am, a supplier

of educational savings plans ("ESP's") through retail dealers known as "enrolment directors"

• The plaintiff (appellant) Bhasin, an enrolment director since 1989 who built up a successful business selling Can-Am ESP's in Calgary

• The defendant (respondent) Hrynew, another Calgary enrolment director of Can-Am who competed with Bhasin in the Calgary market

2. The Parties and the Story• Bhasin's dealership contract with Can-Am provided:

– A three-year term– Each party could terminate on 6-months' notice– Bhasin was obliged to sell Can-Am products exclusively– Can-Am owned directors' client lists– An entire agreement clause

• Hrynew held a position of influence with Can-Am. He was the largest Can-Am dealer in Alberta - he was on good terms with Can-Am's regulator, the Alberta Securities Commission ("ASC") – when he left a previous supplier to join Can-Am, he indicated a desire to merge with/takeover existing Can-Am enrolment directors – Can-Am facilitated such mergers

2. The Parties and the Story• Hrynew wanted to take over Bhasin's business and hire

Bhasin as an employee – Can-Am supported Hrynew in this ambition

• Hyrnew's overtures to Bhasin to merge their business were resisted by Bhasin

• Hrynew threated Can-Am that it would leave Can-Am if the Bhasin merger was not achieved

• Can-Am became concerned that ASC might revoke its licence

• Can-Am informed the ASC that it planned to restructure its business in a manner that would involve Bhasin – Bhasin was not informed of these plans

2. The Parties and the Story• The ASC required Can-Am to appoint a provincial trading

officer ("PTO") to audit the activities of its enrolment directors – Can-Am appointed Hrynew

• Bhasin refused to allow Hrynew to review its confidential business records

• Can-Am lied to Bhasin about Hrynew's role – falsely asserted that the ASC would not allow the appointment of an outsider as PTO and that Hrynew was bound by an obligation of confidentiality

• Can-Am also "equivocated" when Bhasin asked if the merger with Hrynew was a "done deal"

2. The Parties and the Story• Can-Am threated to terminate Bhasin if he did not

cooperate – Bhasin refused to allow Hrynew to audit – Can-Am terminated

• Bhasin claimed:– Breach of Can-Am's duty of good faith performance– Inducing breach of contract by Hrynew– Conspiracy by Can-Am and Hrynew

• Trial judge held that the appointment of Hrynew as auditor and the use of the contractual discretion to terminate for the improper purpose of a forced expropriation of Bhasin's business were both breaches of an implied duty of good faith performance

2. The Parties and the Story• Alberta Court of Appeal reversed on the basis that a duty

of good faith could not be implied in an unambiguous agreement containing an entire agreement clause

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3. The Decision of the Supreme Court of Canada

• "[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations." (para. 33 per Cromwell J. for a unanimous Court)

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4. Good Faith Performance as an Organizing Principle

• Distinction drawn by Cromwell J. between overarching (or underlying) general "principles" and the detailed and more specific "rules" of law

• The organizing principle of good faith performance ("OPGFP") is manifest in a number of existing doctrines, such as, unconscionability, implied terms, other unspecified principles of contract interpretation

• OPGFP also appears in numerous contexts in more explicit form

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4. Good Faith Performance as an Organizing Principle

• More particularly, OPGFP is the principle underlying three particular good faith doctrines or rules

– The rule that parties must co-operate to achieve the objects of the contract (Dynamic Transport 1978 SCC – real estate trans – nothing on who must get the rezoning done – imp term v. in g.f.)

– The requirement that contractual discretionary powers be exercised reasonably and for the purpose for which they were conferred (lease renewal at a "reasonable fair market value as established by lessor" Mitsui 1995 SCC – see also Greenberg v. Meffert real estate brokerage)

– The rule that parties must not evade their contractual obligations through devious means (Mason – v. claims wife refused to bar her dower – see also GATX v. Hawker Siddley)

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4. Good Faith Performance as an Organizing Principle

• OPGFP also underlies the specific rules requiring GFP in the manner of dismissal of employees (Honda v. Keays), GFP in running tender competitions (Ron Engineering), GFP in insurance contracts

• The existing law of GFP is "piecemeal, unsettled and unclear"

• Recognizing OPGFP will "help bring certainty and coherence to this area of the law in a way that is consistent with reasonable commercial expectations"

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4. Good Faith Performance as an Organizing Principle

• Recognizing OPGFP brings common law Canada's contract law into alignment with the law of our major trading partners, the U.S. and Quebec

• An organizing principle "states in general terms a requirement of justice from which more specific legal doctrines may be derived"

• It is not a free-standing rule, but rather a standard that underpins and is manifest in more specific legal doctrines and may be given different weight in different situations" (relying on Ronald Dworkin for the distinction)

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4. Good Faith Performance as an Organizing Principle

• But the list of specific rules is not closed

• OPGFP requires parties to have "appropriate regard" for the interests of other parties but does not impose a fiduciary duty of loyalty

• Cromwell J. noted that some Canadian judges have articulated a general implied term of GFP – he declined to do so but instead articulated the broad general principle underlying other more specific doctrines.

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5. The New General "Rule" Requiring Honesty in Performance

• In Cromwell J.'s view, the 3 existing GFP rules did not extend to this fact situation

• In particular, he rejected the trial judge's holding (and the appellant's argument) that the GFP rule requiring GF in the exercise of contractual discretionary powers applied to the exercise of a right to terminate – this would turn the agreement here into a contract of indefinite duration

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5. The New General "Rule" Requiring Honesty in Performance

• And if you did so apply it, there would be no damages, in any event as you calculate them on the basis of minimal performance by Can-Am, i.e., exercising their right to terminate (Open Window)

• But this is an appropriate occasion to recognize a new duty – a "general duty of honesty in contract performance"

• "this means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract"

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5. The New General "Rule" Requiring Honesty in Performance

• Cromwell J. responded to two possible objections to the new duty– First, it's unclear and leads to commercial uncertainty– Second, imposing GF (honesty) is inconsistent with freedom of

contract– With respect to the first, reasonable commercial people expect the

other party to be honest– With respect to the second, surely parties would not wish to agree to

be dishonest with each other– Further, "honesty" is a component of GFP in the U.S. and Quebec

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6. What the Duty of Honesty is Not

• New duty not to be confused with fiduciary duty of loyalty – a party to a contract has "no general duty to subordinate his or her interest to that of the other party"

• New duty of honesty is not a duty of disclosure – you just have to tell the truth – no affirmative obligation to disclose even a firm intention not to renew prior to the notice required by the agreement.

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6. What the Duty of Honesty is Not

• New duty not the same as civil fraud – fraud requires the defendant to intend that the plaintiff rely on the false statement – plus measure of damages is expectancy, not tort damages.

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7. Can You Contract Out of the New Duty?

• No you cannot, it is a general doctrine of contract law and operates irrespective of the intentions of the parties (like unconscionability)

• Thus, the entire agreement clause in Bhasin's agreement with Can-Am is not an impediment to the duty arising in this case

• Cromwell J. does not indicate whether this also applies to the other three specific GF duties

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7. Can You Contract Out of the New Duty?

• Cromwell J. also indicated tentative agreement with the UCC position that parties might be able to be explicit about what GF requires – but such provisions must not be unreasonable

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8. Application of the New Rule of Honesty in Contractual Performance to the Present Facts

• The misleading statements of Can-Am to Bhasin breached the duty

• As trial judge held, if Can-Am had been truthful, Bhasin would have taken action to preserve the value of the business (valued at $87,000.00)

• $87,000.00 in damages awarded against Can-Am

• Hrynew didn't induce lying by Can-Am or use unlawful means (therefore no conspiracy)

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Implicationsa) How burdensome is the new duty? Where will it

arise?

•Cromwell J. suggests it is not a radical change and will not impose surprising burdens on parties

•Everyone expects the other party to contract to tell the truth

•Should we be advising clients to be careful when talking about termination? "no current intent – but things could change?"

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Implications• But how broadly does the new duty apply? – to

half-truths (normally considered to be "misrepresentations") – note; one of the lies in Bhasin was an "equivocation"

• Applies to misleading statements of intent concerning options to terminate or renew – other options? – other contractual discretionary powers?

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Implications• Unlike fraud, the new dishonesty duty does not

require that the dishonest party expected that the other would rely on the false statement

• Is this a potential source of surprise ("I was just giving my opinion")

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Implicationsb) Confirmation of the existing three specific

duties?

• In Bhasin, the Court plainly recognized the existence of the following good faith performance duties:

• The duty to exercise contractual discretionary powers reasonably and for the intended purpose

• The duty to cooperate in achieving the objects of the agreement• The duty to not evade contractual obligations through strategic or

devious means

• American experience suggests that these rules, especially the first, will be of greater practical significance than the new duty of honesty

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Implicationsc) The prospect of additional new good faith duties

• Can we expect frequent attempts to invite the courts to do so?

• Cromwell J. said that normally someone pleading bad faith would have to fit within the existing (four) rules

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Implicationsd) General principles, specific rules and unjust

enrichment

• Cromwell J., relying on Dworkin, drew a distinction between rules of law and their underlying principles which are not rules of law

• In a series of cases stretching back to Pettkus v. Becker, [1980] 2 S.C.R. 834, the SCC has articulated its own version of the unjust enrichment principle in terms of three elements – (1) benefit to defendant, (2) corresponding deprivation to the plaintiff, and (no "juristic reason")

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Implications• One Canadian scholar has argued strenuously

that this principle replaces the existing rules of restitutionary recovery

• Cromwell J. clearly indicates that this is not so

• The underlying principle of unjust enrichment can spawn new more specific rules or be a basis for amending the existing ones – but is not a "rule" in itself

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Implicationse) Sources of the Law

• The Bhasin opinion refers to a broad range of resources in making the case for recognition of the new principle and rule

• Canadian and English common law cases, law review articles, textbooks, the Ontario Law Reform Commission Report on Amendment of the Law of Contract, the American Restatement of Contracts 2d, American cases, the Uniform Commercial Code and, importantly, the civil law of Quebec

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Implications• New research burdens for litigators? Writers of

opinions?

f) Duty to perform in good faith – not a duty to negotiate in good faith

• Bhasin deals with a duty to perform contractual obligations in good faith, not a duty to negotiate them in good faith

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Implications• The principal authority imposing a duty to

negotiate in good faith (Empress Towers – B.C.C.A.) did so where a lease renewal was to be at the "market" rate "as agreed" by the parties – the market rate standard held to be important in later cases

• But would the new duty require honesty in negotiating pursuant to contractual obligations to negotiate, e.g., renewal terms or Contract B in an RFP process?

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ImplicationsConclusion

• Cromwell J. describes the innovations in Bhasin as an exercise in developing the common law to keep in step with the 'dynamic and evolving fabric of our society' where it can do so in an incremental fashion and where the ramifications of the development are 'not incapable of assessment'.

• Do you agree?