In 2014, the Supreme Court of Canada recognised good faith as a general organising principle of the common law of contract and that there is a common law duty of honesty when it comes to carrying out contracts. In short, when it comes to contracts, all parties must act in good faith and honestly.
One would think that good faith and honesty are basic moral, ethical and legal principles, so it is somewhat surprising that the Supreme Court felt it necessary to re-affirm such basics. Following this decision, many pleadings in contract cases now have both plaintiffs and defendants alike asserting an express or implied duty of good faith and honesty and that the other party breached those terms, among others. The effect of the formal recognition of the obvious by the Supreme Court of Canada has reinforced the importance of integrity and credibility within the justice system. Those with integrity and credibility are onside of both morals and the law and are more likely to succeed in Court. Perhaps by stating the obvious the Supreme Court of Canada has done its nation an incredibly valuable service of promoting such ideals in a time of pervasive – yet not persuasive – disinformation.
What is the backstory to the law of good faith and honesty in contracts? We must look a back to the Court of Queen’s Bench of Alberta’s trial judgment, as well as the appeals that followed.
In 1989, Harish Bhasin was 44 years old and decided to change careers with the goal of financial security for his family. He got involved in the business of selling Education Savings Plans (ESPs), which are nowadays commonly known as Registered Education Savings Plans (RESP). The plans in essence involve a parent or other family member depositing funds in trust for a child’s education. When this is done, the government will match funds up to a certain dollar limit each year. Those funds are invested, often in mutual funds or similar investments. Over time, the annual contributions by parents or other family, annual matching and investment growth build up funds that can be used for college or university and help a child enhance their education. If they are used for education, there is no tax. If the funds are used for another purpose, they are taxed.
The plaintiff, Harish Bhasin aligned himself with a company called the Canadian American Financial Corp. (Canada) Limited (CAFC), which supplied the financial products in support of the ESPs (later known as Allianz Education Funds Inc.). Mr. Bhasin was essentially the salesperson and maintained the customer relationships. He did well financially selling to communities in Edmonton and Alberta. Mr. Bhasin was one of many small business aligned with CAFC. One of the defendants, Larry Hrynew owned a business that competed with Mr. Bhasin’s business and also sold CAFC financial products.
In 1998, CAFC introduced a standard contract to the businesses selling its financial products. Mr. Bhasin signed. Mr. Hrynew did not. The standard contract had a 3 year term and an automatic renewal clause for successive 3 year terms. This clause, according to the Trial Judge “came back to haunt” Mr. Bhasin. In 2001, CAFC did not renew Mr. Bhasin’s contract and according to the Trial Judge, Mr. Bhasin’s “hopes and dreams for the future were destroyed by CAFC.” Mr. Bhasin sued Mr. Hrynew and CAFC.
There was allegedly more than just a non-renewal going on here. Mr. Bhasin had a history of receiving awards from CAFC, but that changed after 1998. In 2000, Mr. Hrynew was appointed to a position of Provincial Trading Officer by CAFC and was to audit his competitor, Mr. Bhasin. Furthermore, CAFC tried to get Mr. Bhasin to merge with another agency operated by Mr. Hrynew. Mr. Bhasin would not agree to these things and his contract was not renewed. Mr. Bhasin had to start all over again selling the ESP products of a CAFC competitor. CAFC scooped up his sales team. In short, Mr. Bhasin lost his business.
At trial, Mr. Bhasin argued there was an implied duty of good faith in the contract and the audit and non-renewal of his contract was a breach of the duty of good faith. He also alleged there was an implied term that his contract would not be terminated without a valid reason. It is these arguments that would win the day in terms of the duties of good faith and honesty.
The Trial Judge analysed the existence of an implied (as opposed to explicit) duty of good faith by looking at Mr. Bhasin’s vulnerability vis-à-vis CAFC and the intentions of the parties. CAFC was not permitted to shelter under an entire agreement clause that stated only what was written in the contract was part of the contract (arguing there was no implied term allowed). The Trial Court did not accept this based on the imbalance of power and considered that the entire agreement clause in the circumstances could not eliminate a duty of good faith, for that would be “unjust or inequitable”. The Court also found that the lead up to and use of the non-renewal was dishonest.
The above improper conduct seems to be by CAFC, but the Trial Judge held that Mr. Hrynew was a driving force behind CAFC’s actions and in particular Mr. Hrynew pressured CAFC to bring about a merger, tried to discredit Mr. Bhasin in the eyes of CAFC and made threats to leave CAFC if there were no merger. The Trial Judge held there was and effort by Mr. Hrynew to interfere in the contractual relations between Mr. Bhasin and CAFC, as well as a civil conspiracy between the two defendants, however, the Trial Judge did not find a breach of the Competition Act.
In the end, the Trial Judge awarded damages for lost income to age 65 (offset by some degree of mitigation) and the loss of the business at age 65, but no damages for mental distress or punitive damages, even though the Judge found without a doubt that the “defendants acted unconscionably”. Judgment was rendered in 2011, one decade after the 2001 non-renewal. The judgment makes it clear that the Trial Judge was thoroughly unimpressed with the defendants.
The first appeal was to the Court of Appeal for Alberta, which took place in 2013 before a panel of 3 Justices that ruled unanimously. The Court of Appeal noted the Trial Judge focused on an implied term of “good faith”. The issue of good faith was in play on appeal.
The Appeal Justices reviewed a good deal of important and well-established contract law in support of a conclusion that the “thoughts or impressions of the parties cannot be used to vary the express terms of a contract.” The Court of Appeal also held that the “law’s presumption is against implying terms.” And further that inequality in bargaining power is not able to amend the terms of a contract, “short of actual unconscionability.” Lastly, the Justices considered that Courts should not “rewrite a contract” to accord with what is “more just or more businesslike” in the “full light of hindsight”. These contractual principles set the stage for the Appeal Court’s decision.
The Court of Appeal relied on all of these well-established contract law principles to rule that CAFC did not have to renew the contract and was within its rights to not do so. As a result, the appeal was granted and Mr. Bhasin’s case was thrown out by 3 Appeal Justices.
Onwards and upwards the case went to the Supreme Court of Canada in 2014, before a panel of 7 Justices. The Court posed the issues as whether Canadian common law imposes a duty of honesty in performing contracts and if so whether any party breached that duty. The Court ruled:
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.Bhasin v. Hrynew 2014, Supreme Court of Canada
The Court went on to rule that there is a general duty of honesty in contracts, yet left open a longstanding debate about whether a duty of good faith arises a term implied as a matter of fact or a term implied by law. The Court held that a duty of honesty will promote certainty in commercial dealings.
Applied to the facts of Mr. Bhasin on the one hand and Mr. Hrynew and CAFC on the other, the Justices found that CAFC was dishonest and therefore liable. However, the Justices did not find that Mr. Hrynew encouraged CAFC to act dishonestly and thus Mr. Hrynew did not induce a breach of contract and was not part of a civil conspiracy. As such, all claims against Mr. Hrynew dismissed by the Court of Appeal remained that way at the Supreme Court of Canada.
In assessing damages against CAFC, the Supreme Court of Canada did not accept lost income subject to mitigation and a future business valuation at age 65. The Supreme Court valued the business as of the breached and reduced the damages to that figure.
The Supreme Court has therefore endorsed the importance of acting honestly in contracts. And the case presents interesting twists and turns on liability of different defendants and the calculation of damages, with three levels of Court reaching varying decisions. The future of case law on the honesty requirement will now advance on the basis that honesty is a must in all contractual relations and must be considered by Trial Courts nationwide. The finger-pointing about who is being dishonest will be a focus for the future.
Addendum 1: in the 2020 case of C.M. Callow v. Zollinger, the Supreme Court of Canada looked at the termination of a winter maintenance contract in which a contractor was deceived about the renewal of a contract. The Court relied on the duty of honesty and found that there is a duty to exercise discretionary powers within contracts in good faith.
Addendum 2: in the 2021 case of Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the Supreme Court of Canada again looked at the duty to exercise discretion in good faith when it came to a discretion to select waste disposal routes between three facilities, where the contract made no guarantee of profit. Discretion must be exercised in good faith. It is apparent that a duty of good faith is alive and well in Canada.
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