The creation of “a general duty of honesty in contractual performance” by the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71 [Bhasin SCC] simply recognizes that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (para 73). The highest court in Canada generated this conclusion from the gravamen of Moen, J’s seminal decision, which resulted from a trial that spanned the period from May 2 to May 26, 2011 at the Alberta Court of Queen’s Bench (Edmonton Judicial Centre). In the case, Mr Bhasin had sued Canadian American Financial Corporation [Can-Am] and one, Mr. Hrynew for, inter alia, breach of an enrollment director’s agreement on the marketing of education savings plans to investors, as indexed at: 2011 ABQB 637.
The Supreme Court succinctly captured the background facts to Moen J’s findings of dishonesty and breach of the implied term of good faith against Can-Am, when it broadly outlined that:
There were two main interrelated story lines.
The first concerns Mr. Hrynew’s persistent attempts to take over Mr. Bhasin’s market through a merger — in effect a takeover by him of Mr. Bhasin’s agency. The second concerns the difficulties [that] Can-Am was having with the Alberta Securities Commission, which regulated its business and its enrollment directors in Alberta. The Commission insisted that Can-Am appoint a full-time employee to be a [provincial trading officer] PTO responsible for compliance with Alberta securities law. Can-Am ultimately appointed Mr. Hrynew, with the result that he would audit his competitor agencies, including Mr. Bhasin’s, and therefore have access to their confidential Absolutely convinced that there was something unfair about the ABCA’s clinical construction of the law, Mr. Bhasin embarked on a mission “to make sure that justice was done”:…business information. Mr. Bhasin’s refusal to allow Mr. Hrynew access to this information led to the final confrontation with Can-Am and its giving notice of non-renewal in May 2001. Can-Am, for its part, wanted to force a merger of the Bhasin agency under the Hrynew agency, effectively giving Mr. Bhasin’s business to Mr. Hrynew. It was in the context of this situation that the trial judge made her findings of dishonesty on the part of Can-Am.
The trial judge concluded 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. Her detailed findings amply support this overall conclusion.
At the trial level, Madam Justice Moen found that the Defendant, Can-Am, was either dishonest or misleading in its communication with the Plaintiff, Bhasin, regarding matters that directly involved the performance of the contract between the parties. Based on her findings, she profusely used the words “dishonest” and “misleading” or their variants throughout her written decision, to describe the conduct of Can-Am. Justice Moen demonstrates the conviction that the facts of the case before her required the application of the good faith principle, notwithstanding the constraints or limitations around that legal concept at the point she was writing her decision. Prior to Justice Moen’s decision, the type of agreement between the Plaintiff and the Defendant did not fall within the traditional categories of contract that required good faith performance: e.g employment, insurance and franchise agreements.
On appeal by the Defendant Can-Am, the Alberta Court of Appeal (ABCA) dismissed the Plaintiff’s lawsuit. It held that Justice Moen’s conclusions were erroneous because: (i) the Plaintiff’s pleadings were insufficient, and (ii) the trial judge implied a term or duty of good faith in the context of an unambiguous contract containing an entire agreement clause, and thereby violated the entire agreement clause in this case.
Absolutely convinced that there was something unfair about the ABCA’s clinical construction of the law, Mr. Bhasin embarked on a mission “to make sure that justice was done”: The Globe & Mail (14 November, 2014) A-16. He filed an appeal to the Supreme Court of Canada. Justice Cromwell, writing for a unanimous Supreme Court of Canada [SCC], effectively reversed the critique by the ABCA. The Supreme Court upheld Justice Moen by confirming that: (i) “the question of whether [a conduct] amounted to a breach of the duty of good faith is a legal conclusion that did not need to be pleaded separately”; and, (ii) “the trial judge did not make a reversible error by adjudicating the issue of good faith”.
Justice Cromwell outlined that the development in this area of law is desirable for specific reasons, which include “First, the current Canadian common law is uncertain. Second, the current approach to good faith performance lacks coherence. Third, the current law is out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law Canada – Quebec and the United States”: I cannot agree more with the erudite jurist.
A few of the laudable features of this new, common law “duty of honest performance” – which is not to be construed as an implied term, but as a general doctrine that imposes a contractual duty – are as follows:
- it applies to all contracts;
- it contemplates “active dishonesty” and a conduct or action of “actively misleading or deceiving the other contracting party in relation to performance of the contract.”
- it is distinguishable from a duty of disclosure or the higher obligation of fiduciary loyalty;
- it has significant similarities with the law relating to civil fraud and estoppel, although not subsumed by them and,
- it requires the contracting parties to be honest with each other in relation to the performance of their contractual obligations.
According to the Supreme Court, the duty of honest performance is akin to equitable doctrines that impose some form of limitations on the freedom to contract in a manner similar to the doctrine of unconscionability. The justification for the limitation imposed by this new common law duty is that parties to a contract “will rarely expect that their contracts permit dishonest performance of their obligations”.
By virtue of her pioneering trial decision – which led to the crystallization of the new duty of honest performance – Justice Moen of the Alberta Court of Queen’s Bench has bequeathed an indelible legacy to the common law of contract in Canada.
About Olugbenga Shoyele
