Good faith: It’s the law

Business transactions often involve contracts, where one party undertakes something in exchange for something from the other party.

By Edwin Upenieks

The contract spells out both parties’ obligations, but not necessarily how the parties should act while discharging those obligations. While the common law requires parties to act honestly when fulfilling contractual obligations, a recent decision of the Supreme Court of Canada (Bhasin v. Hrynew, 2014 SCC 71) has further defined that principle to include “acting in good faith” as a standard of contractual performance.

The case

A company formerly known as Canadian American Financial Corp. (“Can-Am”) marketed education savings plans (“ESPs”) to investors through retail dealers. One of those dealers, Harish Bhasin, had had contracts with Can-Am for 10 years and had built up a thriving business with a substantial sales force.

The term of his latest contract was three years and would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary. Another dealer, Larry Hyrnew, was a competitor of Mr. Bhasin’s and had proposed that they merge their agencies. Mr. Bhasin refused. Mr. Hyrnew pursued the merger proposal with Can-Am, threatening to leave if the merger did not occur.

Can-Am developed a restructuring plan under which the two agencies would be merged, but denied to Mr. Bhasin that they were planning the merger, even though they had submitted the plan to the Alberta Securities Commission. Meanwhile, the Commission raised compliance concerns and required Can-Am to appoint an officer to audit all of the company’s dealers in Alberta.

Can-Am appointed Mr. Hrynew, telling Mr. Bhasin that Mr. Hyrnew was obliged to keep all information confidential and that the Commission would not allow them to appoint an outsider as auditor, neither of which was true. Mr. Bhasin objected to Mr. Hrynew’s appointment and refused to give Mr. Hrynew access to his confidential business records. Can-Am threatened to terminate Mr. Bhasin’s contract.

When they gave the required notice of non-renewal, Mr. Hrynew solicited most of Mr. Bhasin’s sales force, causing Mr. Bhasin to lose the value of his business. Mr. Bhasin sued Can-Am and Mr. Hrynew. The trial judge granted judgment to Mr. Bhasin, finding that the contract implied decisions about renewing the agreement would be made in good faith.

The Alberta Court of Appeal held that the trial judge erred by implying a term of good faith and the case went to the Supreme Court of Canada, which awarded Mr. Bhasin judgment against Mr. Hrynew, but not against Can-Am.

In so doing, it acknowledged “that good faith contractual performance is a general organizing principle of the common law of contract” which “recognizes obligations of good faith contractual performance.”

Further, it recognized that “there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.”

Unfortunately for Mr. Bhasin, this legal battle took over 13 years.

So seek the moral high ground in all your commercial activities, and assume that a judge is looking over your shoulder.

Ed Upenieks chairs Lawrences’ Litigation Group and is certified by the Law Society of Upper Canada as a Specialist in Civil Litigation. He can be reached at (905) 452-6873 or eupenieks@lawrences.com.

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