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While ground-breaking and previously unknown to Canadianlaw, the decision brings contract law in this country in-linewith other jurisdictions, including the United States, byexplicitly recognizing that all contracts are subject to aminimum standard of honest performance. Despite being a significant development in Canadian contractlaw, our Supreme Court has played down the potential impactof its ruling on the business community and on contractualperformance more generally, but those who are unaware ofthis important change risk needlessly exposing themselves toliability where previously no such risk existed.
No Longer Just an Issue of Reputation Commercial parties recognize that the manner in whichcontracts are performed can impact relationships with theircustomers, suppliers and other business partners. There areundoubtedly reputational risks to poor performance orexecution of a contractual obligation. Those who live up totheir contracts and exceed client or customer expectations arebetter positioned to succeed over those who do not. Therewards are obvious and include repeat business, referrals andother reputation enhancing plaudits. Often there is a directcorrelation between honest and diligent performance of acontract and commercial success. Until the Bhasin decision, however, the risks associated withdishonest performance of a contract were limited toreputational damage. Simply put, before Bhasin there was noability to sue for bad faith performance of a contract.After Bhasin, however, how and why contractual obligationsand duties are performed can result in a lawsuit for damages.Those who perform contracts dishonestly or deceive theircontracting partners in carrying out their contractualobligations risk more than their reputations, indeed they nowrisk being held liable for this conduct.
The Decision The Bashin case, the first of its kind, demonstrates how and inwhat circumstances liability for bad faith breach of contractcan arise. The Plaintiff in that case, Bhasin, was in a
contractual relationship with Can-Am, a company whomarketed education saving plans to investors through a chainof dealers called “enrolment directors”. Bhasin was anenrolment director who slowly built up a thriving businessselling Can-Am’s products to the investing public. As an enrolment director, Bhasin was in competition withother “enrolment directors” who were also under contract tosell Can-Am’s savings plans. One such competitor, Hrynew,had tried for some time to acquire Bhasin’s business throughvarious means, including directly approaching him to mergehis business with his own. When his direct advances failed, Hrynew pressured Can-Amnot to renew its agreement with Bashin in the hope of acquiringthe business for himself. Can-Am gave in to this pressure anddeclined to renew Bashin’s contract forcing a defacto hostile“merger” of Bhasin’s agency with Hrynew’s. When his contractwith Can-Am lapsed, Bashin lost the value of the businesswhich he had built for the better part of a decade.Not renewing its contract with Bashin was somethingcontemplated by the four corners of Can-Am’s contract andallowing this to happen was not something which, as atechnical matter, could give rise to damages. There was nobreach of contract as the concept had been previouslyunderstood. Where Can-Am went wrong, however, and whatit was ultimately found liable for, was its failure to be truthfulwith Bashin about the circumstances surrounding its decisionto terminate his contract. In the Supreme Court’s words, Can-Am’s failure to be honest with Bashin about its contractualperformance, and in particular with respect to its settledintentions not to renew the agreement, was a breach ofcontract. But for Can-Am’s dishonesty surrounding thereasons for ending the agreement, the Court reasoned, Bashincould have taken steps to retain the value of his agency.
What are the Implications of this Decision?The new duty of honest performance doesn’t prohibit makingcommercially self-interested decisions surroundingcontractual performance. To the contrary, the Supreme Courtwas clear that intentionally causing loss to another contracting
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March 2015
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Commercial Litigation
Contract law doesn’t change very often and it’s for this reason the Supreme Court of Canada’s recent decisionin Bhasin v. Hrynew is so newsworthy. In a first of its kind, landmark decision, Canada’s highest court hasrecognized what it’s called a new general duty of honesty in contractual performance.
New Standard of Honesty in Contractual Performance
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party is not contrary to good faith on its own. Rather, theCourt has said this kind of behaviour has been encouraged attimes because it may be economically efficient and on thisbasis socially desirable. What is prohibited, however, and acivil wrong, is the undermining of the legitimate contractualinterests of the contracting partner in bad faith. The principles in the Bashin decision don’t require a party toa contract to subordinate their interests to those of the othercontracting party and they don’t impose a duty of loyalty orduty of disclosure. They simply require the parties to acontract not to lie or mislead one another about theircontractual performance. It’s now a civil wrong to activelymislead or deceive another contracting party about mattersdirectly and intimately connected to their performance of that
contract. Where this type of conduct deprives a party of a fairopportunity to protect their interests and avoid a loss,offending parties could be on the hook for those losses evenwhere they otherwise complied with the terms of the contract.Many people in the business community will hail thisdevelopment as long overdue and a rational expansion of thelaw to check undesirable behaviour. Others may view this asan unnecessary intrusion on freedom of contract which couldresult, in the words of the Supreme Court, in ad hoc judicialmoralism or “palm tree” justice. Regardless, this new duty ofhonest contractual performance is now the law in Canada andmust be reckoned with when decisions are made about howcontracts are going to be performed.
Marc Whiteleyis a member ofthe CommercialLitigationPractice.
