In Bhasin v Hrynew (2014 SCC 71), the Supreme Court of Canada (the “SCC”) recognized a general duty of honesty in contractual performance which cannot be excluded by an entire agreement clause.
Harish Bhasin (“Bhasin”) marketed education savings plans for Canadian American Financial Corp. (“Can-Am”). The agreement governing the relation between Can-Am and Bhasin (the “Agreement”) was for three years. The Agreement provided for automatic renewal after the three-year term, unless either party gave notice of non-renewal to the other party.
Bhasin had considerable animosity with Larry Hrynew (“Hrynew”), who also marketed education savings plans for Can-Am. Hrynew was in a strong position with Can-Am as he had a good working relation with the Alberta Securities Commission which regulated Can-Am’s business. After the Alberta Securities Commission raised concerns about Can-Am’s business, Can-Am appointed Hrynew as a provincial trading officer (“PTO”) to conduct audits of Can-Am’s dealers.
Bhasin objected to Hrynew, Bhasin’s competitor, reviewing Bhasin’s confidential business records. Can-Am repeatedly misled Bhasin by telling him that Hrynew, as a PTO, was under an obligation to keep the information acquired about Bhasin confidential, and that the Alberta Securities Commission had rejected a proposal for an outsider to serve as a PTO; both these statements were false. Bhasin continued to refuse to let Hrynew audit his confidential business records. Consequently, Can-Am gave Bhasin a notice of non-renewal of the Agreement. After the Agreement terminated, Bhasin lost the value in his business.
Bhasin successfully sued Can-Am for breach of the Agreement. The Alberta Court of Queen’s Bench (“ABQB”) held the Agreement had an implied term that decisions about renewal of the Agreement would be made in good-faith. Can-Am was held to have violated this term as it acted dishonestly with Bhasin. The Alberta Court of Appeal overturned the ABQB decision.
The SCC held there is a common law duty applicable to all contracts to act honestly in the performance of contractual obligations. Further, good-faith contractual performance is a general organizing principle of the common law of contract which underpins the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good-faith contractual performance. The SCC held this approach is in line with the reasonable expectations of commercial parties.
The organizing principle of good-faith, the SCC held, requires a contracting party to have appropriate regard to the legitimate contractual interests of the other contracting party. Further, contracting parties must act honestly in the performance of contractual obligations, that is, not lie or knowingly mislead the other contracting party about matters directly linked to the performance of the contract. Thus, there is a general duty of honesty in contractual performance. This duty of honesty, however, does not impose a duty of loyalty to the other contracting party or a duty to put the other contracting party’s interests first.
Good-faith is a highly context-specific standard depending upon the legitimate interests of the contracting parties. The principle of good-faith, the SCC held, would have different implications in the context of a long-term contract than it would in a more transactional exchange. The SCC also highlighted that contracting parties continue to have the freedom to pursue their individual self-interest.
The SCC held that Can-Am breached its duty to perform the Agreement honestly that it owed to Bhasin by dishonestly exercising the non-renewal clause. Further, the entire agreement clause in the Agreement did not assist Can-Am as the duty of honesty in contractual performance is a general doctrine of contract law, like unconscionability, that applies to all contracts, and contracting parties cannot exclude this duty. Contracting parties, however, remain free to contractually relax the requirement of the duty of good-faith in contractual performance, provided they respect the core requirements of this duty.