Good Faith in Contractual Relations

Professor Rosalie JukierFormation ContinueFebruary 24, 2015

Good Faith

1. What is it that lawyers need to know about the duty of good faith in: A. Quebec B. Common law Canada

2. Examine good faith through the lens of two important and recent decisions Bhasin v. Hrynew 2014 SCC 71 (Common Law) Churchill Falls (Labrador) Corp v. Hydro-Quebec

2014 QCCS 3590

But is it also…

3. To see the evolutionary capacity of law and the use of creativity in legal argumentation

4. To see the cross-fertilization of ideas: A. as between legal traditions (civil and

common law) and B. as between legal systems within a single

legal tradition (the potential influence of German civil law on Quebec civil law)

Outline

A. Discussion of recent Supreme Court case of Bhasin v. Hrynew which purportedly brings in a general duty of good faith in contract performance in common law Canada (Prof Jukier)

B. Discussion of good faith in Quebec including the recent Quebec case of Churchill Falls v. Hydro Québec (Prof Cumyn)

Mise en contexte

Quebec position on good faith: « Trilogy » of Supreme Court cases

(Que) pre-dating the CCQ: Banque National v. Soucisse 1981 2 SCR

339 Banque National du Canada v. Houle 1990 3 SCR 122

Banque du Montréal v. Bail 1992 2 SCR 554

Good Faith in Quebec

Soucisse (1981): SCC (Beetz, J) used former art. 1024 CCLC (now 1434 CCQ) to “imply”, via “equity” an obligation of good faith into the performance of the contract

The effect was to add an obligation on the part of the Bank (which was nowhere explicit in the contract) to disclose to heirs a suretyship to which they would otherwise be held

Failure to do this resulted in a fin de non recevoir

Good Faith in Quebec

Houle (1990): SCC (L’Heureux-Dubé, J) took Soucisse a few steps further:

1. Brought in the notion of “abuse of rights” making a party potentially liable in damages even if that party performed a contractual term to its letter

2. In that sense, good faith could, in effect, override an express contractual provision (demand loan becomes loan that requires reasonable notice)

3. Confirmed that good faith requires the reasonable exercise of contractual rights (not simply malicious bad faith)

Good Faith in Quebec

Bail (1992): SCC (Gonthier, J) extends the duty of good faith in the performance of a contract to the formation of a contract

Codification: CCQ brings in 3 relevant provisions that codify jurisprudence: Article 1375: “The parties shall conduct

themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished”

Articles 6 and 7: Article 7 confirms that the doctrine of good faith includes both exercising a right “with intent of injuring another or in an excessive and unreasonable manner”

Upshot of Good Faith in Quebec

Seen as a “robust” doctrine Has gone so far as to imply an obligation

to cooperate between franchisor/ee (Provigo Distribution v. Supermarché ARG [1998] RJQ 47 (C.A.)

Applies in all contractual contexts, even commercial (unusual for protective doctrines)

How much further can it go? Can it require parties to renegotiate contracts? Churchill Falls?

Common Law?

Summed up by Angela Swan: Viewed as “some kind of embarrassing

faux pas or social disease” Most academic commentators were

either against, or extremely wary, of the doctrine “It is worth adding a word about an implication

which is not made as a matter of course in English law – that contractual duties will be performed in good faith” Stephen Smith, Atiyah’s Introduction to the Law of Contract

Common Law?

Michael Bridge wrote an article entitled, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?” and concluded, generally, no

Shannon O’Bryne (U of Alta) and John McCamus (Osgoode) are common law academic proponents of good faith

But the Canadian position was “piecemeal, unsettled and unclear” (Cromwell, J. in Bhasin v. Hrynew

Why the resistance?

Uncertainty “…concern that [it] will bring an unattractive

degree of uncertainty to the law” (McCamus) and increase the cost of litigating contract disputes

Autonomy of the Will and Freedom of Contract Judicially imposing this obligation would permit

courts to interfere with the express terms of a contract (Transamerica Life v. ING Canada 2003 68 OR 457 (C.A.))

Defeat the essence of negotiation It will “hobble the marketplace” (Iacobucci, J in

Martel Building Ltd v Canada 2000 SCC 60)

Result…

Good Faith applied in the common law only in exceptional circumstances:

In certain kinds of contracts (eg insurance, employment, franchise)

In certain kinds of situations Where parties must cooperate to achieve

objects of the contract Where one party exercises discretionary power

under the contract Where one party seeks to evade contractual

duties

For example

McKinlay Motors Ltd. v. Honda Canada (1989) 46 B.L.R. 62 (Nfld SCTD)

McKinlay Motors has a long-term Honda car dealership

Contract gave Honda discretion in the allocation of cars

Honda proceeded to execute a “downward allocation spiral” because it wasn’t satisfied with the level of “pizzazz” of the dealership

Held (Trial level Nfld): Honda acted in bad faith in the exercise of its discretion to allocate cars

There is an “implied term…that parties act toward each other in their business dealings in good faith”

For example

Gateway Realty v. Arton Holdings (1991) 106 NSR (2d) 180

2 competing shopping centres Zellers is anchor tenant of Gateway Centre Arton convinces Zellers to relocate to its Centre Zellers has 17 years left on its lease in Gateway

Centre and has assignment of lease clause Zellers assigns lease to Arton and Arton proceeds to

leave premises vacant! Obligation not to exercise the contract in a harmful

manner Contracting parties must respect community

standards of honesty, reasonableness or fairness

Bhasin v. Hrynew November 2014

B: enrollment director for Can-Am since 1989. The parties have a commercial dealership agreement (3 year term but renewable unless 6 months notice given to terminate)

H: a competitor enrollment director who wants to capture B’s lucrative market share

H proposes a merger which B rejects H and Can-Am work in tandem Can-Am appoints H to be trading officer to review

enrollment directors’ compliance with securities law (B alleges this is a conflict of interest and refuses to cooperate)

Can-Am misled B about its ultimate intention (to merge the 2 businesses) and when B refused to allow H to audit his records, Can-Am gives notice to terminate the agreement.

What is wrong with that?

Trial Judge: Contract was analogous to a franchise contract

and therefore court could apply duty of good faith. Here, there was a lack of good faith because the exercise of the non-renewal clause was done in a dishonest and misleading manner and for an improper purpose Alberta C.A. reversed:

No general duty of good faith Court cannot imply a duty that goes against an

express term of the contract (entire agreement clause)

Motive for triggering non-renewal was not restricted under the contract

Supreme Court of Canada

1. Acknowledges good faith contractual performance as a “general organizing principle” in Canadian common law

2. Recognizes a common law duty which applies to all contracts to act honestly in the performance of contractual obligations

3. This will be: a. just b. accord with the reasonable expectations of

commercial parties and c. won’t detract from commercial certainty

English Law: Yam Seng Pte Ltd v. International Trade Corp [2013] EWHC 111 (QB)

“Never underestimate the influence of football” In the contract of distribution of Manchester

United branded fragrances Leggatt, J stated: “the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”

Refusing to recognize the doctrine is “swimming against the tide” (civil law countries and the U.S.)

There is a “general norm” = expectation of honesty

No “improper, commercially unacceptable or unconscionable” conduct.

Unpacking the Decision – What exactly does Bhasin v Hrynew do? Academic opinion is divided Some herald it as a landmark decision that

radically changes the law for the better Others are less favourable. One academic

said, “we see good faith raising its ugly head again, courtesy of the SCC in Bhasin v Hrynew, and trying as ever to commingle focused argument with vacuous verbiage”

Others limit its scope to the narrow duty of honesty

Questions

What is the scope of the new general duty of good faith?

On what basis does it make its way into Canadian common law?

How to meet arguments of autonomy of the will and freedom of contract?

Can parties contract out of it? How will it not bring uncertainty into the

law?

Scope of Good Faith

Cromwell, J is careful to limit the scope of his judgment

“Incremental change” “Highly context specific” Focus on dishonesty: “there is a

general duty of honesty in contractual performance”

Divided Academic Opinion

“Don’t be a scumbag” and “behave decently”

“(Merely) a general duty of honesty” It only requires that “parties must not lie

or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (Justice Cromwell)

Compare with Quebec’s Duty of Good Faith

While honesty is part of the duty, it is not limited to it

Houle and article 7 CCQ: extends to unreasonable behaviour

Arguably the facts of Soucisse could fall within the dishonesty standard

Hard to construct the facts of Houle in a similar way (actions were sudden, impulsive and harmful but not dishonest)

Legal Basis of the Duty of Good Faith

Quebec: implied (by law) obligation of the contract, now codified

Common Law: unclear Is it a duty imposed by law? Or is it one that is implied in fact

according to the reasonable intentions of the parties?

Implied Obligation versus Imposed Duty

Yam Seng decision in the UK: “basis…is the presumed intention of the parties”

“Parties bind themselves in order to co-operate to their mutual benefit”

According to one Canadian commentator: “it’s impossible to conceive of any

contractual relation as not being infused with obligations of good faith”

Bhasin v. Hrynew

“Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings” (para 60)

On the other hand… “this should not be thought of as an

implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance” (para 74)

Freedom of Contract concerns

Note difference in approach of L’Heureux-Dubé, J. in Houle and Cromwell, J. in Bhasin v. Hrynew “While the doctrine may represent a

departure from the absolutist approach of previous decades, consecrated in the well-known maxim "la volonté des parties fait loi" (the intent of the parties is the governing factor), it inserts itself into today's trend towards a just and fair approach to rights and obligations” L’Heureux-Dubé in Houle

Freedom of Contract concerns

“[T]he duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations” Cromwell, J in Bhasin v. Hryew (para 76)

So can parties contract out of the duty?

Alberta CA held this duty was contrary to the express terms of the parties’ contract and that they implicitly contracted out of it.

Cromwell (SCC): “I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context”

Ability to contract out

Cromwell (SCC): “parties should be free… to relax the requirements of the doctrine as long as they respect its minimum core requirements”

However a “generically worded entire agreement clause” does not suffice

Leggett, J.: “in practice it is hardly conceivable that contracting parties would attempt expressly to exclude the core requirement to act honestly”. Yam Seng (Cromwell, J. concurs)

Concerns of Uncertainty

“There is nothing unduly vague or unworkable about the concept. Its application involves no more uncertainty than is inherent in the process of contractual interpretation” Yam Seng

Cromwell in Bhasin: “no risk to commercial certainty”…”the duty is clear and easy to apply” AND

“take comfort from experience of the civil law of Quebec and…the United States”

Comparative Law Justification

Both Yam Seng (UK) and Bhasin v. Hrynew look to foreign law

Sources: Civil law countries/Quebec and the U.S.

Yam Seng: the Common Law is “swimming against the tide”

Bhasin v. Hrynew: explicit reference to Quebec (code and jurisprudence) and U.S.

Comparative law provides comfort

“Experience in Quebec and the U.S. shows that even very broad conceptions of the duty of good faith have not impeded contractual activity or contractual stability”

Result: Can-Am was held to have breached its agreement “when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause”

Cross-Fertilization

Quebec civil law gives Court confidence to move the common law forward

Raises a number of counter-currents On the one hand, we want to

maintain the distinctiveness of Canada’s legal traditions (message of the Nadon Reference)

One of the key take-aways from Justice LeBel’s 14 years on the Supreme Court

Cross-Fertilization

On the other hand, while the duality of Canada’s legal traditions should be maintained and jealously protected, it need not prevent each of the traditions from learning from the other.

Rather, careful and respectful comparative judicial methodology can only influence the development of the law in a positive way.

Value of Dialogue between Legal Traditions

LeBel, J. recognized in Globe and Mail (2010 SCC) that certain areas of law are more conducive to convergence given their globalized context

Why should parties be allowed to act differently in the performance of their contract in different Canadian provinces?

Bhasin is a good example of a decision that seeks to preserve the duality of Canada’s legal traditions while at the same time acknowledging the mutual influence these traditions can have on each other.

Legal Creativity: Using Good Faith in the Face of No Imprévision

Can the duty of good faith in contract performance extend as far as requiring parties to renegotiate their contract in the face of extreme changing circumstances?

Churchill Fall v. Hydro Quebec German courts have accepted this scope

for good faith. French and Quebec academics have as

well What will Quebec courts ultimately say?