The Supreme Court’s Take on Good Faith in Contracting

Contract law does not usually pay much attention to morality, especially after the parties reach an agreement. Once the two sides have settled on wording they are ordinarily free to pursue their interests to the limits of the plain wording.

Late last year the Supreme Court of Canada created obligations that could significantly change that – duties to act honestly and in good faith when performing a contract. This means more than just contract law professors celebrating a major change in their area of expertise. The decision will impact the drafting and performance of contracts in everyday business practice.

The case is Bhasin v. Hrynew. Can-Am marketed Education Savings Plans to investors through retail dealers called enrollment directors. Bhasin’s company acted as an enrollment director for Can-Am. For about 10 years Bhasin did very well for Can-Am, often receiving awards and accolades for his achievements. In 1998, the contract between Bhasin and Can-Am was renegotiated. The terms of the new agreement had some similarities with an ordinary franchise agreement, including a clause allowing termination of the agreement for misconduct. There was also a section that would automatically renew the contract unless the parties gave six months’ notice otherwise. If the agreement had been strictly a franchise agreement it would have been governed by Alberta’s Franchises Act. That statute imposes a duty of fair dealing. The Act did not apply, however. Neither was there a specific contractual duty to act fairly.

By 1999 the relationship between Bhasin and Can-Am had soured and his contract was not renewed. From a contract standpoint Can-Am had every right to choose not to renew. Bhasin believed his primary competitor, Mr. Hrynew, had used his considerable influence in their industry to pressure Can-Am into deciding not to renew the contract. He believed that Can-Am’s appointing Hrynew to audit Bhasin’s business records was an unfair business practice. As a result of the non-renewal, Bhasin lost substantial business. He sued Hrynew.

The case wound its way to the Supreme Court. That Court focused on the dealings between the parties and Can-Am. To afford justice to Bhasin the Court created both a “duty of good faith” and a “duty of honesty in the performance of contractual obligations”.

The Court noted that the duty of good faith cannot stand alone. It must be tied to already existing obligations such as the duties to be honest, candid, forthright and reasonable in contractual performance. The Court then said the duty of honesty in contractual performance should be thought of as a general doctrine that applies to all contracts. Exactly how these new duties will be applied to commercial contract relationships will be highly contextual. They will develop over the course of years as lower courts interpret this case.

In this specific situation, the Supreme Court found that Can-Am had acted dishonestly with Bhasin throughout the events leading to the non-renewal. The Court held that Can-Am, not Hrynew, was liable for breach of a duty of honest performance – thus creating the brand new duties between contracting parties in a business relationship.

Many relationships, including employee/employer or contracts governed by statute such as Alberta’s Franchises Act, already include real or implied duties of good faith, fidelity, fairness and the like. These have not hamstrung businesses’ ability to contract in their best economic self-interest, nor have they imposed a heightened legal “moralism” over parties carrying out business pursuant to the strict terms of their contract. It is unlikely that the Bhasin case will be different. It is also doubtful the Supreme Court’s decision will limit the advantages parties gain through effective negotiation of contracts that favour them.

But while contract drafters and businesses gaining advantages through the wording of their contracts should not panic, the Supreme Court now tells us it is possible, at times, to look behind the terms of these contracts. Specifically, if one party lies or intentionally misleads one or more parties to a contract, they may not so easily invoke the common “termination” or “entire agreement” clauses that had once been a successful defence against unfair dealing lawsuits.

Despite the lack of detail on the level of good faith or honesty required, the Bhasin decision is very important. We now have a formal requirement of good faith and honesty when forming and carrying out commercial relationships – a requirement that will be interpreted by our common law for years to come. The evolving duties of good faith and honesty will need to be monitored by any conscientious business person moving forward.

This article originally appeared in Saskatchewan Business magazine and is reprinted with their kind permission