The Second Opinion: Good Faith In The Shadow Of Contractual Rights

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Are parties under a duty of good faith in deciding whether to exercise a right of non-renewal when the term of an evergreen contract comes to an end? In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal said no, at least where the evergreen clause does not contain an express provision to this effect. The ruling in Bhasin contains an extensive review of the law in this area, and may well prove to be the most important Alberta case on the duty of contractual good faith since Mesa Operating Ltd. v. Amoco Canada Resources Ltd. (1994), 149 A.R. 187 (C.A.). It is also an important cautionary tale for those who would seek to use the duty of good faith to limit discretionary contractual rights.

Background

Bhasin involved a claim against a company ("CAFC") which marketed RESPs to parent-investors through various retail dealers. The plaintiff, Mr. Bhasin, was one such retail dealer, and had been in a contractual relationship with CAFC for some time. CAFC proposed a change to its dealership contracts, and a council of dealers that included Bhasin obtained a legal opinion about the new wording, which Bhasin reviewed. Among the changes introduced by CAFC was an evergreen clause in s. 3.3 to which Bhasin agreed after express negotiations. The clause stated that the term of the contract would last for three years, and be automatically renewed for successive three year periods, unless either party notified the other that they desired expiry of the agreement at least six months prior to the end of the relevant term.

The litigation arose when CAFC selected Mr. Hrynew, a competitor of Bhasin, to audit its dealers in order to monitor their compliance with Alberta securities law. Bhasin objected to being audited by Hrynew given the potential for misuse of his confidential information. As well, Hrynew wished to merge his own business with Bhasin's, and although this was encouraged by CAFC, Bhasin refused. When CAFC exercised its s. 3.3 right to not renew the contract, Bhasin sued both CAFC and Hrynew, and the action was allowed at first instance. Moen J. found, inter alia, that CAFC breached an implied duty of good faith by exercising the non-renewal right for improper reasons, i.e., to retaliate against Bhasin for refusing to submit to Hrynew's audit and to coerce Bhasin into merging with him.

The Bhasin Appeal

The Court of Appeal, consisting of Justices Côté...