SCC establishes duty of honesty between contracting parties

In perhaps the most important contract decision of the past 20 years, the Supreme Court of Canada today established a general doctrine of good faith between parties and a specific duty of honesty — opening up the civil courts to a potential wave of lawsuits based on perceived deceptions.

The ruling, Bhasin v. Hrynew, involves a dispute between Harish Bhasin, a retailer, and Canadian American Financial Corp., the wholesaler. Larry Hrynew was a competitor of Bhasin’s working with CAF.

Bhasin and CAF were engaged in a three-year contract that entitled Bhasin and his sales agents to retail CAF products. The contract would be automatically renewed unless one of the parties gave at least six months’ notice prior to the end of the period.

The case outlines the rather convoluted tale of how Hrynew attempted to capture Bhasin’s clientele — at first by suggesting a merger, then by working with CAF to mislead Bhasin and pressure him into a merger. In the end, CAF terminated Bhasin’s contract and his sales agents jumped ship to work with Hrynew.

Bhasin sued both parties, claiming a conspiracy and that CAF’s conduct constituted a failure to act in good faith. The trial judge agreed, but CAF and Hrynew won at the Alberta Court of Appeal on the basis the contract renewal terms were unambiguous and no duty of good faith had been provided for in the contract.

Today, the SCC — in a unanimous decision written by Justice Thomas Cromwell — reverses the appeal court and establishes a new good faith doctrine and a duty of honesty between contracting parties.

The decision states: “… there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations. … The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.”

Brandon Kain, a litigator at McCarthy Tétrault LLP who represented Bhasin, says the case has “massive implications” for businesses across Canada. The ruling creates new law around an overarching doctrine of good faith from which many specific duties may extend.

“That overarching principle can give rise to various duties, and the court doesn’t define what the outer limits of those duties are,” he says. “In this case, one of those duties is a duty of honest performance in contracting, which means basically that parties can’t lie or knowingly mislead each other with respect to the performance of their contractual obligations.”

Neil Finkelstein, who worked with Kain on the file, says the establishment of a general duty of good faith in performance contracts is entirely new law, which may explain why the case was originally overturned at the Alberta Court of Appeal.

“The other side followed the letter of the contract and since there was nothing in the contract about good faith, they weren’t going to imply a duty into it,” says Finkelstein.

“What the Supreme Court here said is, ‘No, that’s wrong. There is — and this is an organizing principle of contract, the court said, as an organizing principle of contract, you don’t have to write it in. There’s an obligation of good faith and that includes at least honest dealing.”

While the decision lacks a specific test for what constitutes dishonesty — leaving discretion in the hands of trial judges to weigh reasonableness and honesty in the context of each case — contracting parties have little to worry about, says Kain.

“Concepts like reasonableness and honesty that are frequently invoked in other areas of the law and judges have shown themselves perfectly well equipped to deal with them.”

Finkelstein also points out that the duty is limited to honesty, which is not the same as a duty of loyalty or a fiduciary duty — as in the case of a professional-client relationship.

“I think most people have a pretty good idea of what honesty is when you exclude that you don’t have to positively disclose things that are against you, unless you’re asked — you can’t lie.”

Eli Lederman, however, isn’t so sure. The lawyer at Lenczner Slaght Royce Smith Griffin LLP who represented Hrynew and CAF, says the Supreme Court’s decision leaves a lot of grey areas around the definition of honesty that will have to be tested going forward and creates uncertainties that are bound to result in a wave of lawsuits.

“What this decision does is it adds a certain layer of contractual risk,” says Lederman, “that any contracting party will have to be careful when they exercise what they think is a clear and unambiguous right, that they have not done anything that may perceived by the counter-party as being dishonest when they exercise that right.”

In fact, rather than creating a more open and honest exchange between contracting parties, Lederman says that parties may go out of their way to keep quiet about their reasons or intentions when exercising a right granted within a contract — since deception cannot be inferred when things like reasons and intentions are hidden.

“I think there certainly is that risk that contracting parties will feel as a result of this decision that, when they exercise termination right or non-renewal right, they may feel compelled or inclined to be silent as to the reasoning for that lest they risk being challenged that it was not a truly honest explanation or description or disclosure of the reasoning for that exercise.”

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