How many of you enter into a contract knowing that you will only breach it afterwards? If you do that, now it would be a violation of the good faith requirement. Good faith did not use to be the law uniformly applied throughout the common law jurisdictions in Canada. Recently, however, the Supreme Court of Canada through Bhasin v Hrynew, 2014 SCC 71, has incorporated good faith into all contractual obligations throughout the Country. Why has the Supreme Court of Canada finally decided to act now? Please note that the Bhasin v Hrynew decision has already been summarized on the Blogue du CRL in French and can be read here. For our English readers, however, my effort in this article is to provide a brief overview of the case and shed some light on the potential influence of international treaty obligations on the Supreme Court of Canada’s decision to introduce the principle of good faith in all the common law jurisdictions throughout the Country.
Bhasin concerned a contractual relationship between Mr. Bhasin (‘B’) working at Bhasin& Associates and Canadian American Financial Corporation (‘C’) since the year 1998. B sold education savings plans for C as its ‘enrollment director’. The contract contained an automatic renewal clause at the end of the three-year time period unless the contract was terminated earlier with a six-month written notice. In reliance upon the contract, B spent a significant amount of time and money in building his book of clients. During the relevant time frame, a similar contractual relationship existed between C and Mr. Hrynew (‘H’), another vendor similarly situated as B. H was interested in a takeover of B’s business and encouraged C to force B to merge with H. B however rebuffed the overtures. Subsequently, after internal negotiations with H, C appointed H as the provincial trading officer (‘PTO’) and gave it the task of reviewing all the enrollment directors for compliance with the Alberta securities laws. H’s task included a review of B’s confidential business records. When B objected to H having access to B’s confidential business records,C assured B that H was obligated to treat B’s business records as confidential. Unbeknownst to B however, C had already planned to terminate the relationship with B and hand his book of business over to H. Despite these assurances, when B wouldn’t let H audit his business records, and C sent B a notice of non-renewal. When the contract was terminated, B lost his book of business and a number of B’s sales agents left to join H. As a result, B sustained a significant amount of loss.
At the court of first instance in Alberta (Bhasin (Bhasin & Associates) v. Hrynew, 2011 ABQB 637), the trial judge concluded that C had acted dishonestly in breaching the agreement with B and in not disclosing its true intentions concerning the role H was to play in the saga. The trial judge wrote:
“ CAFC breached the 1998 Agreement. First, CAFC breached the 1998 Agreement when it required Bhasin to submit to an audit by Hrynew, and when it required Bhasin to provide Hrynew with access to his business records for this purpose. Second, CAFC breached the 1998 Agreement when it exercised the non-renewal provision in bad faith. Specifically, CAFC used the non-renewal clause because of Bhasin’s failure to submit to an audit by Hrynew, and used the non-renewal clause to force Bhasin into a position where he had to either merge agencies with Hrynew or leave the organization. CAFC acted dishonestly toward Bhasin in exercising the nonrenewal clause. This conduct amounts to a breach of the implied term of good faith by CAFC.”
The trial judge concluded that B was intentionally induced by H, and C and H were both guilty of a civil conspiracy, the objective of which was to intentionally inflict harm upon B.
The Alberta Court of Appeal on the other hand granted H’s appeal and dismissed B’s action (Bhasin v. Hrynew, 2013 ABCA 98 ).The Court of Appeal interpreted the contract literally and held that there was no implied duty of good faith expressed in the contract. The court stated:
“ However, the contract contains an entire-contract clause:
11.2 This Agreement expresses the entire and final agreement between the parties hereto and supersedes all previous agreements between the parties. There are no representations, warranties, terms, conditions or collateral agreements, express, implied or statutory, other than expressly set out in this Agreement.” (emphasis added)
Concerning the duty of good faith the court stated:
“ A number of fundamental propositions of law are relevant, and much authority can be cited for each. To control the length of this judgment, we simply summarize a number of applicable settled legal rules.
1. There is no duty to perform most contracts in good faith. See Transamerica Life Canada v ING Canada (2004) 68 OR (3d) 457 (para 51). Mesa Operating Partnership v Amoco Canada Resources (1994) 149 AR 187 (CA) and Klewchuk v Switzer, 2003 ABCA 187, 330 AR 40 found no such general duty, and involved very different types of contract.”
The Supreme Court of Canada overturned the Court of Appeal decision in part and in deciding the matter for B, the Supreme Court of Canada relied upon the doctrine of deference and stated that:
“ The trial judge made a clear finding of fact that Can-Am “acted dishonestly toward Bhasin in exercising the non-renewal clause”: para. 261; see also para. 271. There is no basis to interfere with that finding on appeal. It follows that Can-Am breached its duty to perform the Agreement honestly.”
The Court admitted that “ … Canadian common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear…” Therefore, it appears that the Court felt the need to impose the duty of good faith and bring the law in Canada up to date for the following reasons:
“ …First, the current Canadian common law is uncertain. Second, the current approach to good faith performance lacks coherence. Third, the current law is out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law Canada — Quebec and the United States…”
With respect to Quebec, the Court further acknowledged that the Civil Code of Québec articles 6, 7 and 1375 also recognize “…a broad duty of good faith which extends to the formation, performance and termination of a contract and includes the notion of the abuse of contractual rights…”.
As for the United States of America, the Court recognized that§ 1-304 of the Uniform Commercial Code (“U.C.C.”) states that “…[e]very contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement...”. And even though the U.C.C. applies only to commercial contracts, “…§ 205 of the Restatement (Second) of Contracts (1981) provides for a general duty of good faith in all contracts…”.
The good faith requirement is simply that: a minimum standard of honesty where one party does not mislead another into acting to its detriment: “… That organizing principle is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” This duty was not a part of Canadian common law up until now. After Bhasin it is fair to say that now, across Canada, most parties in their contractual relationships will be deterred from taking an unfair advantage of another and from acting in bad faith.
As stated previously, one may wonder why has the Supreme Court of Canada finally decided to act now, and whether the Canada-European Union Comprehensive Economic and Trade Agreement (“CETA”)) has had an influence? It is important to note that the European Union operates under a system of treaties (Article 1(2) of the Treaty on the Functioning of the European Union (TFEU)) and has its own legal order and principles which are derived primarily from the domestic legal regimes of its major signatory States, Germany, France and Italy (Article 4(2) of the Treaty on European Union (TEU)). The common thread in the domestic legal regimes of these States is Roman Law and the Napoleonic Code and good faith is a primary obligation built into the said legal regimes. The Court itself admitted that:
“ The doctrine of good faith traces its history to Roman law and found acceptance in earlier English contract law. For example, Lord Northington wrote in Aleyn v. Belchier (1758), 1 Eden 132, 28 E.R. 634, at p. 138, cited in Mills v. Mills (1938), 60 C.L.R. 150 (H.C.A.), at p. 185, that “[n]o point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void.” Similarly, Lord Kenyon wrote in Mellish v. Motteux (1792), Peake 156, 170 E.R. 113, “in contracts of all kinds, it is of the highest importance that courts of law should compel the observance of honesty and good faith”: p. 157. In Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162, at p. 1910, Lord Mansfield stated that good faith is a principle applicable to all contracts: see also Herbert v. Mercantile Fire Ins. Co. (1878), 43 U.C.Q.B. 384 (Ont.); R. Powell, “Good Faith in Contracts” (1956), 9 Curr. Legal Probs. 16.”
The good faith requirement is imposed upon the parties to a treaty of an international nature by Article 26 of the Vienna Convention on the Law of Treaties (‘Convention’). Article 26 of the Convention states that: “Every treaty in force is binding upon the parties to it and must be performed by them in good faith.”
Article 4(3) TEU itself specifies the “principle of sincere cooperation” which the Union and its Member States are to exercise in the fulfillment of their treaty obligations.
However, CETA Chapter 33, Article 14.16 puts a caveat on the above quoted obligation and upon the incorporation of such obligations into the domestic law. The said Article states that:
“1. Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties.”
Consequently, the good faith requirement would not have become the law in Canada if the Supreme Court of Canada had not acted. Although it is noteworthy that the Court did not make a direct reference to CETA (possibly because the final text of CETA had not been ratified by the signatory parties as yet), it did, however, allude to the fact that a similar treaty does exist between Canada and the United States of America (‘NAFTA’), in addition to the obligation of conduct among the provinces within Canada themselves (para 41 of the Decision).
To read this decision in its entirety, click here.