A landmark Supreme Court of Canada (“SCC”) decision released on November 13, 2014 imposes a new common law duty on parties to all contracts to act honestly in performing their obligations. Bhasin v. Hrynew, 2014 SCC 71, represents a monumental shift in the law of contract and its pronouncements could significantly impact the way in which parties to commercial contracts organize their affairs and interact with one another during the course of a contractual relationship.
According to Justice Cromwell writing for the unanimous Court, a contractual party must not lie or mislead the party opposite about matters directly related to contract performance.
Background
This case involved a contractual dispute among Canadian American Financial Corporation (“CAFC”), a wholesaler of registered education savings plans, Harish Bhasin (“Harish”), a retail dealer, and Larry Hrynew (“Larry”). The CAFC entered into standard contracts with its retail dealers in the late 1990s (the “Agreement”). All retail dealers were prohibited from selling any other product other than the registered education savings plans marketed by CAFC. Section 3.3 of Harish’s standard contract with CAFC was subject to a three (3) year term and provided that the contract would automatically renew for successive three (3) year terms absent notice of termination being given by either party prior to six months from the end of the then current term.
Harish and Larry were direct retail competitors. Over the years, Harish had resisted persistent attempts by Larry to merge their retail operations. Larry was later appointed by CAFC to review and audit all of its retail dealers to comply with an investigation being conducted by the provincial securities regulator. Harish was upset with CAFC’s decision to hire Larry to conduct the audits and refused to give his direct competitor access to his books and confidential business information. Unbeknownst to Harish, at the same time, CAFC had a settled intention to restructure its agencies which would result in Harish working for Larry’s agency.
Harish made a number of inquiries to CAFC throughout this process but was continually misled by CAFC. CAFC had in fact deceived Harish by stating that Larry was under an obligation to treat all information confidentially and that the securities regulator had rejected a proposal to have a third-party conduct the audits. The CAFC also responded equivocally when Larry inquired as to whether the merger was a “done deal”. Harish continued to resist Larry’s attempts to audit his records, and in response CAFC threated to terminate Harish’s Agreement. In May, 2001 CAFC gave notice of non-renewal pursuant to the terms of the Agreement. Harish lost the value of his business and his sales agents were eventually solicited by Larry.
TRIAL AND COURT OF APPEAL
Harish sued CAFC and Larry. The trial judge held that it was an implied term of the Agreement that decisions about whether the contract would be renewed would be made in good faith and that in the circumstances CAFC had breached this implied term of good faith. The Court of Appeal overturned the trial decision and dismissed Harish’s lawsuit. The Court of Appeal concluded that the trial judge erred in reading in a term of good faith into a commercial contract which did not expressly contain a good faith requirement.
SUPREME COURT OF CANADA
Cromwell J. for the Court held that to bring more certainty and predictability to the law and to align the law with the reasonable expectations of commercial parties, it is necessary for the law of contract in Canada to grow by recognizing a new duty of honest performance which requires parties to be honest with each other in relation to the performance of their contractual obligations:
[73] …[t]he key question before the Court, therefore, is whether we ought to create a new common law duty under the broad umbrella of the organizing principle of good faith performance of contracts.
[74] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.
The Court held that CAFC’s dishonesty was “directly and intimately connected to” its performance of the Agreement with Harish and specifically, its decision to not renew the Agreement. Therefore, CAFC breached the Agreement when it failed to act honestly with respect to its grounds for non-renewal.
WHAT DOES THIS CASE MEAN?
The SCC made it clear that this new duty of honest performance is not to be confused with a duty of disclosure or any higher order obligations typically owed by a fiduciary. Quite simply, a party to a contract is under no obligation to place the interests of the opposing party above his or her own. This means that a party is not necessarily required to make disclosures to counterparts and is not required to forego advantages that he or she is properly entitled to pursuant to a contract.
This decision may influence the way in which parties to contracts communicate moving forward. While an open and collaborative exchange of information is always desirable in the commercial context, a contractual party may feel that there are times and circumstances where it is preferable to say less to counterparts to avoid possible allegations of breach of honest performance.
Finally, from a contract drafting perspective, the Court did not completely rule out the ability of parties to define the scope of honest performance in a particular commercial context. Cromwell J. did note that any departure or relaxation of the duty would need to be express and pointed to the U.S. and Quebec experiences as positive guides on this point moving forward.
If you are concerned that a party opposite you has been dishonest or has misled you with respect to their performance of a contract, we are available to discuss your matter.
