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Renato Pontello

Honesty is now the law in Canada

Late in 2014, the Supreme Court of Canada released a landmark decision in Bhasin v. Hrynew . Harish Bhasin, who had a business that sold educational savings plans to the public, had a long-standing relationship with the wholesaler Canadian American Financial Corp. to sell its registered investments.

In 1998, the parties formalized their relationship by entering into a dealer agreement having a three-year term. The agreement renewed automatically unless either party provided written notice of termination within the last six months.

Bhasin was a competitor of the defendant Larry Hrynew. When Hrynew moved his agency to CAF many years before the events in question, CAF promised him he would be given consideration for mergers that would take place. Hrynew wanted to capture Bhasin’s lucrative niche market around which he had built his business and had recently hired new staff.

Hrynew personally approached Bhasin to propose a merger of their agencies on numerous occasions, which Bhasin refused. During the currency of the new agreement, the defendant also actively encouraged CAF to force a merger of Bhasin’s sales force with his own and made “veiled threats” that he would leave if no merger took place.

The wholesaler appointed Hrynew to audit Bhasin for compliance with securities laws. When the plaintiff became uneasy with the competitor’s audit powers, the wholesaler falsely advised Bhasin that Hrynew was obligated to treat the information obtained from the audit confidentially.

When Bhasin asked if the merger was a “done deal,” CAF answered equivocally despite the fact CAF outlined its plans to the Alberta Securities Commission to force Bhasin to work for Hrynew’s agency. When Bhasin continued to refuse to allow Hrynew to audit his records, CAF threatened to terminate the agreement and shortly thereafter gave notice of non-renewal.

Hrynew subsequently poached Bhasin’s sales team. Bhasin sued CAF and Hrynew.

The SCC in a unanimous decision written by Justice Thomas Cromwell took what it called “two incremental steps” to advance the common law of contracts by establishing a new good faith doctrine and a duty of honesty between contracting parties in the performance of their contractual obligations. The gist of the two principles is best described by Cromwell himself:

“In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” [italics added]

The court went on to explain the principle of good faith, which is to be read into all contracts in Canada, means a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. This does not mean parties can no longer pursue their economic self-interest (even causing loss to another); it merely requires that a party not seek to undermine those interests in bad faith.

Under the new general duty of honesty in contractual performance, 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 proactive 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.

Though “incremental” in nature the new principles are likely to have a profound effect in the coming years on the manner in which we negotiate, manage, and enforce contracts.

How does Bhasin affect in-house counsel?

Internal communications

It would be useful to make clients aware of the existence of these new duties and discuss practical compliance measures (e.g. memos, lunch-and-learns). Organizations that believe they are only bound by the words contained within the four corners of their contracts and that they can continue to gain the upper hand through deception and “sins of omission” can no longer act with impunity.

Going forward businesses need to be mindful that there are consequences if they fail to act with candour, honesty, and transparency in their dealings with their contractual partners, notwithstanding the terms of their contracts.

In-house counsel should weigh the pros and cons of putting in place systems to document their internal decision-making processes to dispel accusations of bad faith and dishonesty. At the same time, the use of existing tools (e.g. Salesforce.com) should be reviewed and steps taken to ensure discussions relating to customers, distributors, sales representatives, suppliers, employees, and the like are honest and in good faith.

The proper recording of reasons behind certain actions, such as contract renewals and terminations, may go a long way towards reducing litigation risk.

External communications

Parties may be tempted to remain silent as a general practice when exercising certain contractual rights, such as termination, however, should they act any different if the terminated party asks point blank why its contract was brought to an end? Should reasons be provided, even when terminating for sole convenience, simply to avoid being sued?

The same questions arise with regard to dealings with other external parties. There is no active duty of disclosure, however, parties are required to act honestly. Balancing the two may be a fine line. Acts of omission could result in a finding of dishonesty.

Template agreements

It would be prudent to revisit standard agreements for compliance with Bhasin. The court made it clear the duty of honesty cannot be contracted out of, however, Cromwell did say parties should be free in some contexts to “relax” the requirements of the doctrine as long as they “respect its minimum core requirements.”

On the flip side, contracts could be amended to provide that it is the intention of the parties that none of their provisions should be implicitly interpreted to contract out of the duty of honesty.

Negotiations

The court did not recognize a duty of honesty in the context of negotiations between parties. Based on the rationale underpinning Bhasin, however, it could reasonably be argued the duty applies to negotiations as well. Negotiating parties need to be mindful of conduct during negotiations that may be misleading or otherwise dishonest. This duty can be easily lost sight of during the heat of the battle.

Dealings with employees

It will be interesting in the coming years to see how Bhasin will affect employer-employee relationships. Will the principles be invoked in wrongful terminations? How will it impact performance reviews, promotions, discipline cases, etc.?

Underperforming employees who are terminated under the guise of a business reorganization for example, may be able to find relief if it can be established they were in fact terminated based on not cutting the mustard.

The court indicated both new principles are consistent with its 2008 decision in Honda Canada Inc. v. Keays, so reviewing the Honda case may provide some insights as to how Bhasin will be applied in the labour and employment area.


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