Bhasin v. Hrynew 2014 SCC 71 – Summary and Implications
The decision in Bhasin v. Hrynew deals with this key question: does the Canadian common law impose a duty on parties to perform their contractual obligations honestly? The Supreme Court of Canada (the “SCC”) finds that it does and states that finding such a duty “…will make the law more certain, more just and more in tune with reasonable commercial expectations.”
Facts:
Mr. Bhasin, the appellant, was an enrollment director for Canadian American Financial Corporation (“Can-Am”), the corporate defendant. Can-Am markets education savings plans (“ESP’s”) to investors through retail dealers known as enrollment directors. Mr. Bhasin was one such enrollment director with Can-Am. Can-Am paid the enrollment directors compensation and bonuses for selling ESP’s and Mr. Bhasin was obliged to sell Can-Am investment products exclusively. Mr. Bhasin also owed Can-Am a fiduciary duty. The contract that governed the relationship between Mr. Bhasin and Can-Am - a three year contract - contained a provision which stated that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice otherwise.
Mr. Hrynew, the individual defendant, was another enrollment director with Can-Am and a competitor of Mr. Bhasin. Mr. Hrynew had moved his agency to Can-Am from a competitor company many years before and was promised by Can-Am that he would be given consideration for mergers that would take place. Mr. Hrynew wished to capture Mr. Bhasin’s lucrative niche market. He had previously approached Mr. Bhasin to propose a merger of their agencies and he had encouraged Can-Am to force the merger. Mr. Bhasin, though, had refused to participate in such a merger.
When the Alberta Securities Commission (the “Commission”) raised concerns about compliance issues among Can-Am’s enrollment directors, it required the appointment of a provincial trading officer (“PTO”) to conduct audits of Can-Am’s enrollment directors. Can-Am appointed Mr. Hrynew to this position. This was a position that would allow him to review the confidential business records of other enrollment directors. Mr. Bhasin objected to having Mr. Hrynew review his confidential business records.
During Can-Am’s discussions with the Commission about compliance, it was clear that Can-Am was considering a restructuring of its agencies in Alberta that involved Mr. Bhasin working for Mr. Hrynew’s agency. Can-Am repeatedly misled Mr. Bhasin by (i) telling him that Mr. Hrynew, as PTO, was under an obligation to treat the information he collected confidentially and (ii) that the Commission had rejected a proposal to have an outside PTO.
When Mr. Bhasin continued to refuse to allow Mr. Hrynew to audit his records, Can-Am gave notice of non-renewal under the contractual agreement between them. Mr. Bhasin, at the end of the contract term, lost the value in his business and the majority of his sales agents were successfully solicited by Mr. Hrynew’s agency. He was left to take a lower paying position with one of Can-Am’s competitors.
Trial and Appeal Court of Alberta decision:
At trial, the Alberta Court of Queen’s Bench found that both defendants owed Mr. Bhasin a duty of good faith and that they had breached this duty. The trial decision further found that had Can-Am acted honestly, Mr. Bhasin would have been able to take steps to prevent the loss of his business.
The Alberta Court of Appeal reversed the trial decision based on the express provisions of the contractual agreement between the parties.
SCC Decision:
At the SCC level, one of the key issues considered by the Court is whether Can-Am owed Mr. Bhasin a duty of good faith.
The Court finds that Can-Am acted dishonestly with Mr. Bhasin throughout the period leading up to its exercise of the non-renewal clause both with respect to its own intentions and with respect to Mr. Hrynew’s role as PTO. The Court further finds that Can-Am had breached the duty of honest contractual performance and was liable to Mr. Bhasin for damages arising from the loss of his business. The claims based on inducing breach of contract and unlawful means conspiracy against Mr. Hrynew were rejected. As such, the appeal with respect to Can-Am was allowed and the appeal with respect to Mr. Hrynew dismissed. Mr. Bhasin was awarded damages in the sum of $87,000 plus interest.
In the lengthy SCC decision, the Court surveys the current state of the common law with respect to good faith in contractual dealings and expanded on the way forward towards an organizing principle of good faith. The Court acknowledges that good faith contractual performance is a general organizing principle of the common law and that there is a common law duty of honesty which applies to all contracts:
[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.
The Court also describes a basic level of honesty and good faith between parties as a requirement for the proper functioning of commerce:
[60] Commercial 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. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties….
In creating a new common law duty of honesty in contractual performance under the broad umbrella of the organizing principle of good faith performance of contracts, the Court states:
[73] …I would hold that there is a general duty of honesty in contractual 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. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith…..
[77]…The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.
The Court further states that the duty of honest contractual performance is different from a fiduciary duty or a duty to disclose:
[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests. That said, a dealership agreement is not a contract of utmost good faith (uberrimae fidei) such as an insurance contract, which among other things obliges the parties to disclose material facts: Whiten. But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.
The Court provides the following summary of the principles:
[93]….
(1) There is a general organizing principle of good faith that underlies many facets of contract law.
(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.
(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.
Implications:
The SCC recognizes that the content of honest performance will vary with context. As a result, the lower courts will be left with the issues of defining what this requirement specifically entails for parties to a contractual agreement. Having said this, the following are just some of the key implications of the duty of honest contractual performance on parties who have entered into contractual relations:
In the commercial context, and other contractual relations generally, parties will be obliged to ensure that they do not lie or mislead one another about matters that are directly linked to the performance of the contract. Business owners should ensure that they are transparent, honest and always wary of their conduct.
In the insurance context, there is a difference between a duty to disclose all material facts and actively engaging in dishonest behaviour so as to breach the duty of honest contractual dealings.
In the employment context, case law before Bhasin v. Hrynew limited good faith obligations of the employer to the termination of the employee only. Now, the application of the duty of honest contractual performance may apply to the whole employment contract including everything from the negotiation process through to termination of the employee. Further, in the employment context, the courts have found that good faith and honest contractual obligations do not include treating all employees in the same way if there are specific differences in their employment contracts.
The duty of honest contractual performance does not require that a party subordinate their interests to that of the other party as required in fiduciary relationships.
The full SCC decision can be found here