Tell Me No Lies – The New Duty Of Honesty In Contractual Performance

There has been a flood of commentary and discussion since the Supreme Court of Canada ("SCC" or the "Court") decision in Bhasin v. Hrynew, 2014 SCC 71 ("Bhasin") was issued on November 13th.

The reasons the case has garnered so much attention from practicing lawyers and legal academics, are twofold:

The Court created a new duty of honesty in contractual performance; and The Court articulated an organizing principle in relation to good faith in contract law more generally, namely that parties must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. In this article I will address what these developments mean to contract law in the commercial contracting context. I will suggest how commercial law and litigation practices might change in the future to take this decision into account. I will also identify the questions that the decision leaves unanswered-questions that we may be in a better position to answer over the next few years, as lower courts apply the principles in Bhasin in subsequent cases.

The Facts in Bhasin

I will summarize the facts in some detail as the relationships of the litigants and the behaviour of the defendants served as the perfect springboard for consideration by Canada's highest court of the notion of good faith performance in contract law. The facts are likely the reason leave was granted in this case, when it had been denied in other cases involving good faith arguments in the past.

For over 10 years, Bhasin was an enrollment director for Canadian American Financial Corp. ("Can-Am"). Can-Am is in the business of marketing education savings plans ("ESPs") to investors. Enrolment directors ("EDs") like Bhasin operated as small business owners; they were the retail sales force for Can-Am. Bhasin and Can-Am had a commercial dealership agreement (the "Contract") under which Bhasin was paid compensation and bonuses for selling ESPs.

While not a franchise agreement to which a statutory duty of fair dealing would apply,1 the Contract had many components that would be found in a franchise agreement, and which underscored the dependence of Bhasin's business on Can-Am2.

While Bhasin originally had an indefinite term agreement with Can-Am, the term of the Contract under which the dispute arose was for three years, commencing in 1998. The Contract contained an express renewal clause, which was at the core of the dispute between the parties. The renewal clause provided that the Contract would automatically renew at the end of the three-year term unless one of the parties gave six months' written notice.

Despite the fact that Bhasin was one of top EDs in Canada, his Contract was not renewed. His relationship with Can-Am soured, primarily due to the machinations of another ED, the other defendant, Hrynew.

Hrynew was a direct competitor of Bhasin who wanted Bhasin's lucrative book of business. Hrynew had tried to convince Bhasin to merge their agencies and also had tried to convince Can-Am to force a merger. Bhasin wanted no part of any merger.

When the Alberta Securities Commission ("ASC") raised concerns about compliance by Can-Am's EDs and required Can-Am to appoint a single provincial trading officer to review its EDs for compliance with securities law, Can-Am appointed Hrynew. Hrynew apparently saw his opportunity to horn in on Bhasin's position. Other EDs, including Bhasin, were required to provide confidential business information to Hrynew in this role, which Bhasin objected to and refused to do. Can-Am, with Hrynew's participation, but without Bhasin's knowledge or consent, proposed a new structure to the ASC in which Bhasin would work for Hrynew's agency.

When Bhasin continued to refuse to allow Hrynew to audit his records, Can-Am threatened to terminate the Contract and ultimately, in May of 2001, gave notice of non-renewal.

Bhasin lost the value in his business. The majority of his sales agents were recruited by Hrynew. He ended up taking less remunerative work with one of Can-Am's competitors.

Bhasin sued Can-Am and Hrynew, alleging breach of an implied duty of good faith in relation to the decision by Can-Am whether to renew the Contract, the tort of inducing breach of contract and civil conspiracy. The trial judge found the defendants liable on all three theories of liability.

The trial judge found that Can-Am had repeatedly misled Bhasin in a number of ways (these findings...