Good Faith In The Shadow Of Contractual Rights

Most M&A contracts contain provisions that confer discretionary contractual powers on one or both parties to the transaction (e.g., the right to withhold consent to an assignment). One of the most pressing questions in modern contract law is whether the party in possession of such a power must exercise it in good faith. In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal recently addressed this issue, and held that parties are not under a duty of good faith in exercising a right of non-renewal when the term of an evergreen contract comes to an end. While Bhasin did not concern an M&A agreement, it is an important cautionary tale for those who would seek to use the duty of good faith to limit any discretionary contractual right, and may well prove important to future M&A litigation.

Background

The facts in Bhasin are discussed in detail in an earlier post on Canadian Appeals Monitor, and may be summarized fairly shortly here. The case involved a claim against CAFC, a company which marketed RESPs to parent-investors through various retail dealers, by one such retail dealer, Mr. Bhasin. Section 3.3 of their dealership agreement - to which Bhasin had agreed after legal advice and negotiations - contained an evergreen clause. It provided that the contract would automatically renew for successive, periods unless one party notified the other that they desired expiry of the agreement prior to the end of the relevant term. CAFC exercised its right to not renew the agreement, and Bhasin sued, alleging among other things that CAFC's decision was made in bad faith. According to Bhasin, CAFC declined to renew the contract in retaliation against Bhasin for refusing to submit to an audit by a competitor who CAFC had appointed to monitor its dealers' compliance with Alberta securities law, and to coerce a merger between Bhasin and that competitor. Bhasin's action was successful before Moen J. at first instance.

The Bhasin Appeal

The Court of Appeal overturned the trial judgment, rejecting Moen J.'s conclusion that the non-renewal right was subject to implied preconditions. In doing so, the Court produced a lengthy list of legal principles to the delight of defendants everywhere (see para. 27), which emphasize that there is no duty to perform most contracts in good faith, that courts are reluctant to rewrite or imply terms into commercial agreements, and that there are limits upon the judicial power to consider parol evidence. Applying these...