par
Rizwan Ahmad Khan Gondal
Articles du même auteur
22 Jan 2015

What is the importance of Bhasin v Hrynew?

Par Rizwan Ahmad Khan Gondal

By Rizwan Ahmad
Khan Gondal.

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.

Context

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:

“[261] 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:

“[23]     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:

“[27]   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.”

Decision

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:

“[94] 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 “[59] … 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:

“[41] …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 “[83]…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 “[84]…[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, “[84]…§ 205 of the Restatement
(Second) of Contracts
(1981) provides for a general duty of good faith in
all contracts…”.

Commentary

The good faith requirement is simply that: a minimum standard of honesty
where one party does not mislead another into acting to its detriment: “[63]…
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:

“[35] 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

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