The facts of this case are particularly important because the doctrine of good faith is understood to be highly fact-driven. Canadian American Financial Corp (“Can-Am”) markets education savings plans to investors through dealers titled enrollment directors. Bhasin was one such enrollment director and so was Hrynew; Bhasin and Hrynew were therefore competitors. The agreement between Can-Am and the enrollment directors was for 3-years and set to automatically renew unless 6-months notice was given.
Hrynew wanted Bhasin’s market and proposed a merger but Bhasin refused, so Hrynew encouraged Can-Am to force Bhasin into a merger. Perhaps due to luck or deliberate maneuvering, Hrynew was appointed to be the provincial trading officer to review compliance with securities laws among enrollment directors. Naturally, Bhasin objected to having a competitor review his business records.
Can-Am seemingly sided with Hrynew and misled Bhasin in order to have Bhasin work for Hrynew. Can-Am told Bhasin that Hrynew’s role as the provincial trading officer required confidentiality and that the securities commission rejected the proposal to have somebody other than Hrynew. Both of these statements were false. When asked explicitly by Bhasin, Can-Am also failed to communicate that Hrynew’s proposed merger was proposed to the commission and the decision was already made.
Bhasin continued to refuse an audit from Hrynew whereby Can-Am threatened to terminate their agreement and gave notice of non-renewal. Upon non-renewal, Bhasin’s sales agents were solicited by Hrynew. Bhasin then sued both Can-Am and Hrynew.
The trial judge found that Can-Am was in breach of an implied term of good faith, and Hrynew intentionally induced a breach of contract. The appeal court allowed the appeal and dismissed Bhasin’s suit. The Supreme Court of Canada (“SCC”) allowed the appeal against Can-Am but dismissed the appeal against Hrynew. The SCC recognized good faith as a general organizing principle of contract law and that this principle can manifest in a duty of honest contractual performance. The damages were approximately 87k plus interest, per the expectation damage measure.
There were four issues outlined by the SCC. First, did Bhasin properly plead good faith? In short, deference was given to the trial judge on this point. Second, was a duty of good faith owed between Bhasin and Can-Am, and was this duty breached? Third, is Hrynew liable for the tort of inducing breach of contract or civil conspiracy? In short, no. Fourth, if there are any breaches, what are the appropriate measure of damages? The court was split on this; the majority agreed that it was an expectation damage measure, while the minority argued that the reliance measure was more appropriate. Clearly, the most ink is spilled on the third issue.
The trial judge understood the agreement between Can-Am and Bhasin as analogous to a franchise or employment agreement, so good faith was understood as an implied term. Good faith is built into the statutes for employment, franchise, and insurance contracts. The rationale is that Bhasin is in a position of inherent vulnerability to Can-Am. The trial judge noted that, in the alternative, good faith can be implied by the intentions of the party. The SCC, in their reasoning, did not address whether good faith is an implied term and instead focused on the structure of the principle of good faith and how it is realized as a duty.
In short, the SCC concluded that the non-renewal clause was exercised in bad faith because it was contrary to its purpose and carried out dishonestly. In general terms, a duty of good faith goes beyond strict contractual rights. A duty of good faith prevents conduct “while consonant with the letter of a contract, exhibits dishonesty, ill will, improper motive or similar departures from reasonable business expectations.” (para 29)
The SCC notes the unsettled nature of the doctrine of good faith in Anglo-Canadian common law. While the “notion of good faith has deep roots in contract law and permeates many of its rules,” it remains “an “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze”: Ontario Law Reform Commission (“OLRCˮ), Report on Amendment of the Law of Contract (1987), at p. 169. (para 32)
The SCC takes this opportunity to explicitly acknowledge good faith in order “to develop the common law to keep in step with the “dynamic and evolving fabric of our society” where it can do so in an incremental fashion.” (para 40) This move has the following motivations: “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” (para 41) The current piecemeal approach is too arbitrary or ad hoc, and the court thought it necessary to enumerate this doctrine for clarity and consistency.
The SCC starts by laying the groundwork with some contextual factors. They note commercial realities whereby parties “reasonably expect a basic level of honesty and good faith in contractual dealings.” (para 60) The two poles are an arm’s length relationship on one end and a fiduciary relationship on the other; good faith, understood as “a basic level of honest conduct,” falls somewhere between these two poles. The SCC understands that sharp practices are not reflective of commercial realities. There is an emergence of “longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance.” (para 60) But even discrete transactions require a level of honesty, and this honesty is regulated by the reasonable expectations of parties.
The SCC notes that they must first establish “an organizing principle of good faith underlies and manifests itself in various more specific doctrines governing contractual performance.” (para 63) This is prior to any specific duties of good faith. This organizing principle states that parties must perform all contractual duties honestly and not arbitrarily; in other words, “parties must have appropriate regard to the legitimate contractual interests of the contracting partner.” (para 65) An organizing principle is understood to be “not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations…” (para 64)
The regard for another party’s interests is highly fact-dependent, especially with respect to the contractual relationship itself. Depending on the relationship, there are different standards and specific legal doctrines may be given more weight, and it is in principle possible to go beyond the existing doctrines. This also implies that there are some cases where one is not required to act to serve the other party’s interest, as the SCC properly notes, contract law “great weight on the freedom of contracting parties to pursue their individual self-interest.” (para 70) It is clear that there is no duty of disclosure or fiduciary duty from the principle of good faith; rather, “it is a simple requirement not to lie or mislead the other party about one’s contractual performance.” (para 73)
After establishing the principle of good faith, the second step of the inquiry is whether they “ought to create a new common law duty under the broad umbrella of the organizing principle of good faith performance of contracts.” (para 72) In the facts at hand, the general principle was not sufficient to protect Bhasin because it involved the contentious topic of implying good faith into the terms based on the intentions of the parties. The SCC recognizes that there “is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law” (para 74) and wishes to avoid this debate. The new doctrine (not principle) of good faith “imposes as a contractual duty a minimum standard of honest contractual performance” and “operates irrespective of the intentions of the parties.” (para 74)
When applying the new doctrine of good faith to the facts, the SCC notes that there is no unilateral duty to disclose information relevant to termination in a dealership agreement. The SCC does not apply a fiduciary standard to the agreement between Can-Am and Bhasin which would obligate Can-Am to disclosure the material fact of termination. What the SCC focuses on is the active dishonesty on the part of Can-Am and its active deception of Bhasin.