Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494
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On appeal from the court of appeal for Alberta
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C markets education savings plans to investors through retail dealers, known as enrollment directors, such as B. An enrollment director’s agreement that took effect in 1998 governed the relationship between C and B. The term of the contract was three years. The applicable provision provided that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary.
H was another enrollment director and was a competitor of B. H wanted to capture B’s lucrative niche market and previously approached B to propose a merger of their agencies on numerous occasions. He also actively encouraged C to force the merger. B had refused to participate in such a merger. C appointed H as the provincial trading officer (“PTO”) to review its enrollment directors for compliance with securities laws after the Alberta Securities Commission raised concerns about compliance issues among C’s enrollment directors. The role required H to conduct audits of C’s enrollment directors. B objected to having H, a competitor, review his confidential business records.
During C’s discussions with the Commission about compliance, it was clear that C was considering a restructuring of its agencies in Alberta that involved B. In June 2000, C outlined its plans to the Commission and they included B working for H’s agency. None of this was known by B. C repeatedly misled B by telling him that H, as PTO, was under an obligation to treat the information confidentially. It also responded equivocally when B asked in August 2000 whether the merger was a “done deal”. When B continued to refuse to allow H to audit his records, C threatened to terminate the 1998 Agreement and in May 2001 gave notice of non-renewal under the Agreement. At the expiry of the contract term, B lost the value in his business in his assembled workforce. The majority of his sales agents were successfully solicited by H’s agency.
B sued C and H. The trial judge found C was in breach of the implied term of good faith, H had intentionally induced breach of contract, and both C and H were liable for civil conspiracy. The Court of Appeal allowed the appeal and dismissed B’s lawsuit.
Held: The appeal with respect to C should be allowed and the appeal with respect to H dismissed. The trial judge’s assessment of damages should be varied to $87,000 plus interest.
Canadian common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear. Two incremental steps are in order to make the common law more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second step is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations. Taking these two steps will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.
There is an organizing principle of good faith that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. An organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is 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. It is a standard that helps to understand and develop the law in a coherent and principled way.
The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.
This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. However, this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.
The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide to future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties.
The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.
The objection to C’s conduct in this case does not fit within any of the existing situations or relationships in which duties of good faith have been found to exist. It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.
Under this new general duty of honesty in contractual performance, parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.
This new duty of honest performance is a general doctrine of contract law that imposes as a contractual duty a minimum standard of honesty in contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability. However, the precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.
The duty of honest performance should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.
In this case, the trial judge did not make a reversible error by adjudicating the issue of good faith. C breached the 1998 Agreement when it failed to act honestly with B in exercising the non-renewal clause. The trial judge concluded that C acted dishonestly with B throughout the period leading up to its exercise of the non-renewal clause, both with respect to its own intentions and with respect to H’s role as PTO. The trial judge’s detailed findings amply support this overall conclusion.
C is liable for damages calculated on the basis of what B’s economic position would have been had C fulfilled its duty. While the trial judge did not assess damages on that basis given the different findings in relation to liability, the trial judge made findings that permit this Court to do so. These findings permit damages to be assessed on the basis that if C had performed the contract honestly, B would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to H. It is clear from the findings of the trial judge and from the record that the value of the business around the time of non-renewal was $87,000. B is entitled to damages in the amount of $87,000. The Court of Appeal was correct in finding that there could be no liability for inducing breach of contract or unlawful means conspiracy. As such, it follows that the claims against H were rightly dismissed.
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The judgment of the Court was delivered by
Cromwell J. —
I. Introduction
[1] The key issues on this appeal come down to two straightforward questions: Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? And, if so, did either of the respondents breach that duty? I would answer both questions in the affirmative. Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result.
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(2) Analysis
(a) Overview
[32] The notion of good faith has deep roots in contract law and permeates many of its rules. Nonetheless, Anglo-Canadian common law has resisted acknowledging any generalized and independent doctrine of good faith performance of contracts. The result is 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. This approach is out of step with the civil law of Quebec and most jurisdictions in the United States and produces results that are not consistent with the reasonable expectations of commercial parties.
[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.
[34] In my view, taking these two steps is perfectly consistent with the Court’s responsibility to make incremental changes in the common law when appropriate. Doing so will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.
(b) Good Faith as a General Organizing Principle
(i) Background
[35] The doctrine of good faith traces its history to Roman law and found acceptance in early English contract law. For example, Lord Northington wrote in Aleyn v. Belchier (1758), 1 Eden 132, 28 E.R. 634, at p. 637, 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. 113-14. 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; R. Powell, “Good Faith in Contracts” (1956), 9 Curr. Legal Probs. 16.
[36] However, these broad pronouncements have been, for the most part, restricted by subsequent jurisprudence to specific types of contracts and relationships, such as insurance contracts, leaving unclear the role of the broader principle of good faith in the modern Anglo-Canadian law of contracts: Chitty on Contracts (31st ed. 2012), vol. I, General Principles, at para. 1-039; W. P. Yee, “Protecting Parties’ Reasonable Expectations: A General Principle of Good Faith” (2001), 1 O.U.C.L.J. 195, at p. 195; E. P. Belobaba, “Good Faith in Canadian Contract Law”, in Special Lectures of the Law Society of Upper Canada 1985 — Commercial Law: Recent Developments and Emerging Trends (1985), 73, at p. 75. One leading Canadian contracts scholar went so far as to say that the common law has taken a “kind of perverted pride” in the absence of any general notion of good faith, as if accepting that notion “would be admitting to the presence of some kind of embarrassing social disease”: J. Swan, “Whither Contracts: A Retrospective and Prospective Overview”, in Special Lectures of the Law Society of Upper Canada 1984 — Law in Transition: Contracts (1984), 125, at p. 148.
[37] This Court has not examined whether there is a general duty of good faith contractual performance. However, there has been an active debate in other courts and among scholars for decades over whether there is, or should be, a general or “stand-alone” duty of good faith in the performance of contracts. Canadian courts have reached different conclusions on this point.
[38] Some suggest that there is a general duty of good faith: Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 1991 CanLII 2707 (NS SC), 106 N.S.R. (2d) 180 (S.C. (T.D.)), aff’d on narrower grounds (1992), 1992 CanLII 2620 (NS CA), 112 N.S.R. (2d) 180 (S.C. (App. Div.)); McDonald’s Restaurant of Canada Ltd. v. British Columbia (1997), 1997 CanLII 2368 (BC CA), 29 B.C.L.R. (3d) 303 (C.A.), at para. 99; Crawford v. Agricultural Development Board (N.B.) (1997), 1997 CanLII 9539 (NB CA), 192 N.B.R. (2d) 68 (C.A.), at paras. 7-8. They see a broad role for good faith as an implied term in all contracts that establishes minimum standards of acceptable commercial behaviour. As Kelly J. put it in Gateway Realty, at para. 38:
The law requires that parties to a contract exercise their rights under that agreement honestly, fairly and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under the contract. “Good faithˮ conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breached when a party acts in “bad faithˮ — a conduct that is contrary to community standards of honesty, reasonableness or fairness.
[39] Other courts are of the view that there exists no such general duty of good faith in all contracts: Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 2003 CanLII 9923 (ON CA), 68 O.R. (3d) 457 (C.A.), at paras. 53-54; Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 (CanLII), 149 A.R. 187 (C.A.), at paras. 15-19, per Kerans J.A., dubitante; Barclays Bank PLC v. Metcalfe & Mansfield Alternative Investments VII Corp., 2013 ONCA 494 (CanLII), 365 D.L.R. (4th) 15, at para. 131; see G. R. Hall, Canadian Contractual Interpretation Law (2nd ed. 2012), at pp. 338-46. The detractors of such a general duty of good faith have accepted a limited role for good faith in certain contexts but have held that it would create commercial uncertainty and undermine freedom of contract to recognize a general duty of good faith that would permit courts to interfere with the express terms of a contract.
[40] This Court ought 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 and where the ramifications of the development are “not incapable of assessment”: R. v. Salituro, 1991 CanLII 17 (SCC), [1991] 3 S.C.R. 654, at p. 670; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., 1997 CanLII 307 (SCC), [1997] 3 S.C.R. 1210, at para. 93; see also Watkins v. Olafson, 1989 CanLII 36 (SCC), [1989] 2 S.C.R. 750, at pp. 760-64; Hill v. Church of Scientology of Toronto, 1995 CanLII 59 (SCC), [1995] 2 S.C.R. 1130, at para. 85; R.W.D.S.U., Local 558 v. Pepsi-Cola Canada Beverages (West) Ltd., 2002 SCC 8 (CanLII), [2002] 1 S.C.R. 156; British Columbia v. Imperial Tobacco Canada Ltd., 2005 SCC 49 (CanLII), [2005] 2 S.C.R. 473; Grant v. Torstar Corp., 2009 SCC 61 (CanLII), [2009] 3 S.C.R. 640, at para. 46. This is even more appropriate where, as here, what is contemplated is not the reversal of some settled rule, but a development directed to bringing greater certainty and coherence to a complex and troublesome area of the common law.
[41] As I see it, the developments that I propose are desirable as a result of several considerations. 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: see, e.g., Hall, at p. 347. While the developments which I propose will not completely address these problems, they will bring a measure of coherence and predictability to the law and will bring the law closer to what reasonable commercial parties would expect it to be.
(ii) Survey of the Current State of the Common Law
[42] Anglo-Canadian common law has developed a number of rules and doctrines that call upon the notion of good faith in contractual dealings; it is a concept that underlies many elements of modern contract law: S. M. Waddams, The Law of Contracts (6th ed. 2010), at para. 550; J. D. McCamus The Law of Contracts (2nd ed. 2012), at pp. 835-38; OLRC, at p. 165; Belobaba, at pp. 75-76; J. F. O’Connor, Good Faith in English Law (1990), at pp. 17-49; J. Steyn, “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997), 113 Law Q. Rev. 433. The approach, not unfairly, has been characterized as developing “piecemeal solutions in response to demonstrated problems”: Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., [1989] 1 Q.B. 433 (C.A.), at p. 439, per Bingham L.J. (as he then was). Thus we see, for example, that good faith notions have been applied to particular types of contracts, particular types of contractual provisions and particular contractual relationships. It also underlies doctrines that explicitly deal with fairness in contracts, such as unconscionability, and plays a role in interpreting and implying contractual terms. The difficulty with this “piecemeal” approach, however, is that it often fails to take a consistent or principled approach to similar problems. A brief review of the current landscape of good faith will show the extent to which this is the case.
[43] Considerations of good faith are apparent in doctrines that expressly consider the fairness of contractual bargains, such as unconscionability. This doctrine is based on considerations of fairness and preventing one contracting party from taking undue advantage of the other: G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at pp. 329-30; E. Peden, “When Common Law Trumps Equity: the Rise of Good Faith and Reasonableness and the Demise of Unconscionability” (2005), 21 J.C.L. 226; Belobaba, at p. 86; S. M. Waddams, “Good Faith, Unconscionability and Reasonable Expectations” (1995), 9 J.C.L. 55.
[44] Good faith also plays a role in the law of implied terms, particularly with respect to terms implied by law. Terms implied by law redress power imbalances in certain classes of contracts such as employment, landlord-lessee, and insurance contracts: London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC), [1992] 3 S.C.R. 299, at p. 457, per McLachlin J. (as she then was); see also Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, per McLachlin J., concurring. The implication of terms plays a functionally similar role in common law contract law to the doctrine of good faith in civil law jurisdictions by filling in gaps in the written agreement of the parties: Chitty on Contracts, at para. 1-051. In Mesa Operating, the Alberta Court of Appeal implied a term that a power of pooling properties for the purpose of determining royalty payments be exercised reasonably. The court implied this term in order to give effect to the intentions of the parties rather than as a requirement of good faith, but Kerans J.A. stated that “[t]he rule that governs here can, therefore, be expressed much more narrowly than to speak of good faith, although I suspect it is in reality the sort of thing some judges have in mind when they speak of good faith”: para. 22. Many other examples may be found in Waddams, The Law of Contracts, at paras. 499-506.
[45] Considerations of good faith are also apparent in contract interpretation: Chitty on Contracts, at para. 1-050; Hall, at p. 347. The primary object of contractual interpretation is of course to give effect to the intentions of the parties at the time of contract formation. However, considerations of good faith inform this process. Parties may generally be assumed to intend certain minimum standards of conduct. Further, as Lord Reid observed in Schuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), at p. 251, “[t]he more unreasonable the result the more unlikely it is that the parties can have intended it”. As A. Swan and J. Adamski put it, the duty of good faith “is not an externally imposed requirement but inheres in the parties’ relation”: Canadian Contract Law (3rd ed. 2012), at §§ 8.134-8.146.
[46] Good faith also appears in numerous contexts in a more explicit form. The concept of “good faith” is used in hundreds of statutes across Canada, including statutory duties of good faith and fair dealing in franchise legislation and good faith bargaining in labour law: S. K. O’Byrne, “Good Faith in Contractual Performance: Recent Developments” (1995), 74 Can. Bar Rev. 70, at p. 71.
[47] There have been many attempts to bring a measure of coherence to this piecemeal accretion of appeals to good faith: see, among many others, McCamus, at pp. 835-68; S. K. O’Byrne, “The Implied Term of Good Faith and Fair Dealing: Recent Developments” (2007), 86 Can. Bar Rev. 193, at pp. 196-204; Waddams, The Law of Contracts, at paras. 494-508; R. S. Summers, “‛Good Faith’ in General Contract Law and the Sales Provisions of the Uniform Commercial Codeˮ (1968), 54 Va. L. Rev. 195; S. J. Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faithˮ (1981), 94 Harv. L. Rev. 369. By way of example, Professor McCamus has identified three broad types of situations in which a duty of good faith performance of some kind has been found to exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties (pp. 840-56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 2006 CanLII 20837 (ON CA), 215 O.A.C. 43, at paras. 49-50).
[48] While these types of cases overlap to some extent, they provide a useful analytical tool to appreciate the current state of the law on the duty of good faith. They also reveal some of the lack of coherence in the current approach. It is often unclear whether a good faith obligation is being imposed as a matter of law, as a matter of implication or as a matter of interpretation. Professor McCamus notes:
Although the line between the two types of implication is difficult to draw, it may be realistic to assume that implied duties of good faith are likely, on occasion at least, to slide into the category of legal incidents rather than mere presumed intentions. Certainly, it would be difficult to defend the implication of terms on each of the cases considered here on the basis of the traditional business efficiency or officious bystander test. In the control of contractual discretion cases, for example, it may be more realistic to suggest that the implied limitation on the exercise of the discretion is intended to give effect to the “reasonable expectations of the parties.ˮ [pp. 865-66]
[49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., 1978 CanLII 215 (SCC), [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase-sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. (as he then was) put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale”: p. 1084. It is not completely clear whether this duty was imposed as a matter of law or was implied based on the parties’ intentions: see p. 1083; see also Gateway Realty and CivicLife.com.
[50] Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, 1995 CanLII 87 (SCC), [1995] 2 S.C.R. 187, is an example of the second type of situation (exercise of contractual discretion). The lease of a helicopter included an option to buy at the “reasonable fair market value of the helicopter as established by Lessor”: para. 2. This Court held, at para. 34, that, “[c]learly, the lessor is not in a position, by virtue of clause 32, to make any offer that it may feel is appropriate. It is contractually bound to act in good faith to determine the reasonable fair market value of the helicopters, which is the price that the parties had initially agreed would be the exercise price of the option.” The Court did not discuss the basis for implying the term, but suggested that in the absence of a reasonableness requirement, the option would be a mere agreement to agree and thus would be unenforceable, which means that the implication of the term was necessary to give business efficacy to the agreement.
[51] This Court’s decision in Mason v. Freedman, 1958 CanLII 7 (SCC), [1958] S.C.R. 483, falls in the third type of situation in which a duty of good faith arises (where a contractual power is used to evade a contractual duty). In that case, the vendor in a real estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simple because he claimed his wife would not provide a bar of dower. The issue was whether he could take advantage of a clause permitting him to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made no efforts to do so by trying to obtain the bar of dower. Judson J. held that the clause did not “enable a person to repudiate a contract for a cause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486. On the contrary, “[a] vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner”: p. 487.
[52] The jurisprudence is not always very clear about the source of the good faith obligations found in these cases. The categories of terms implied as a matter of law, terms implied as a matter of intention and terms arising as a matter of interpretation sometimes are blurred or even ignored, resulting in uncertainty and a lack of coherence at the level of principle.
[53] Apart from these types of situations in which a duty of good faith arises, common law Canadian courts have also recognized that there are classes of relationships that call for a duty of good faith to be implied by law.
[54] For example, this Court confirmed that there is a duty of good faith in the employment context in Honda Canada Inc. v. Keays, 2008 SCC 39 (CanLII), [2008] 2 S.C.R. 362. Mr. Keays was diagnosed with chronic fatigue syndrome and was frequently absent from work. Honda grew concerned with the frequency of the absences. It ordered Mr. Keays to undergo an examination by a doctor chosen by the employer, required him to provide a doctor’s note for any absences, and discouraged him from retaining outside counsel. The majority held that in all employment contracts there was an implied term of good faith governing the manner of termination. In particular, the employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” when dismissing an employee: para. 57, citing Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, at para. 98. Good faith in this context did not extend to the employer’s reasons for terminating the contract of employment because this would undermine the right of an employer to determine the composition of its workforce: Wallace, at para. 76.
[55] This Court has also affirmed the duty of good faith which requires an insurer to deal with its insured’s claim fairly, both with respect to the manner in which it investigates and assesses the claim and to the decision whether or not to pay it: Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 (CanLII), [2006] 2 S.C.R. 3, at para. 63, citing 702535 Ontario Inc. v. Lloyd’s London, Non-Marine Underwriters (2000), 2000 CanLII 5684 (ON CA), 184 D.L.R. (4th) 687 (Ont. C.A.), at para. 29. The breach of this duty may support an award of punitive damages: Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 595. This duty of good faith is also reciprocal: the insurer must not act in bad faith when dealing with a claim, which is typically made by someone in a vulnerable situation, and the insured must act in good faith by disclosing facts material to the insurance policy (para. 83, citing Andrusiw v. Aetna Life Insurance Co. of Canada (2001), 289 A.R. 1 (Q.B.), at paras. 84-85, per Murray J.).
[56] This Court has also recognized that a duty of good faith, in the sense of fair dealing, will generally be implied in fact in the tendering context. When a company tenders a contract, it comes under a duty of fairness in considering the bids submitted under the tendering process, as a result of the expense incurred by parties submitting these bids: Martel Building Ltd. v. Canada, 2000 SCC 60 (CanLII), [2000] 2 S.C.R. 860, at para. 88; see also M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII), [2010] 1 S.C.R. 69, at paras. 58-59; A. C. McNeely, Canadian Law of Competitive Bidding and Procurement (2010), at pp. 245-54.
[57] Developments in the United Kingdom and Australia point to enhanced attention to the notion of good faith, mitigated by reluctance to embrace it as a stand-alone doctrine. Good faith in contract performance has received increasing prominence in English law, despite its “traditional . . . hostility” to the concept: Yam Seng Pte Ltd. v. International Trade Corporation Ltd., [2013] EWHC 111, [2013] 1 AII E.R. (Comm.) 1321 (Q.B.), at para. 123, citing E. McKendrick, Contract Law (9th ed. 2011), at pp. 221-22; see also Chitty on Contracts, at para. 1-039. In Yam Seng, Leggatt J. held that a number of specific duties embodying good faith can be implied based on the presumed intentions of the parties according to the traditional approach for implying terms: para. 131. Leggatt J. identified a number of these implied duties, including honesty, fidelity to the parties’ bargain, cooperation, and fair dealing: paras. 135-50. Leggatt J. stated that “[a] paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty. That expectation is essential to commerce, which depends critically on trust”: para. 135; see D. Campbell, “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014), 77 Mod. L. Rev. 475. The Court of Appeal considered the Yam Seng decision in Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Ltd., [2013] EWCA Civ 200 (BAILII), where it confirmed that good faith was not a general principle of English law, but that it could be an implied term in certain categories of cases: paras. 105 and 150.
[58] Australian courts have also moved towards a greater role for good faith in contract performance: Cheshire and Fifoot’s Law of Contract (9th Australian ed. 2008), at paras. 10.43-10.47. The duty of good faith in its modern form was recognized by Priestley J.A. in Renard Constructions (ME) Pty Ltd. v. Minister for Public Works (1992), 26 N.S.W.L.R. 234 (C.A.). There is no generally applicable duty of good faith, but one will be implied into contracts in certain circumstances. The duty of good faith can be implied as a matter of law or as a matter of fact, although the cases are not always clear on the basis on which the term is being implied. Australian courts have taken a broad view of what constitutes good faith: see, e.g., Burger King Corporation v. Hungry Jack’s Pty Ltd., [2001] NSWCA 187, 69 N.S.W.L.R. 558. The law of good faith performance in Australia is still developing and remains unsettled: E. Peden, “Good faith in the performance of contract law” (2004), 42 L.S.J. 64, at p. 64. However, it is clear that the duty of good faith requires adherence to standards of honest conduct: A. Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000), 116 Law Q. Rev. 66, at p. 76; Burger King, at paras. 171 and 189.
(iii) The Way Forward
[59] This selective survey supports the view that Canadian common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear: Belobaba; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 95; B. J. Reiter, “Good Faith in Contractsˮ (1983), 17 Val. U.L. Rev. 705, at pp. 711-12. It also shows that in Canada, as well as in the United Kingdom and Australia, there is increasing attention to the notion of good faith, particularly in the area of contractual performance. Opponents of any general obligation of good faith prefer the traditional, organic development of solutions to address particular problems as they arise: see, e.g., M. G. Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?” (1984), 9 Can. Bus. L.J. 385; D. Clark, “Some Recent Developments in the Canadian Law of Contracts” (1993), 14 Advocates’ Q. 435, at pp. 436 and 440. However, foreclosing some incremental development of the law at the level of principle would go beyond what prudent caution requires and evidence an almost “perverted pride” — to use Swan’s term, at p. 148 — in the law’s failings.
[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties: see Swan and Adamski, at §1.24.
[61] The fact that commercial parties expect honesty on the part of their contracting partners can also be seen from the fact that it was the American Bar Association’s Section of Corporation, Banking and Business Law that urged the adoption of “honesty in fact” in the original drafting of the Uniform Commercial Code (“U.C.C.ˮ): E. A. Farnsworth, “Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Codeˮ (1963), 30 U. Chicago L. Rev. 666, at p. 673. Moreover, empirical research suggests that commercial parties do in fact expect that their contracting parties will conduct themselves in good faith: see, e.g., S. Macaulay, “Non-contractual Relations in Business: A Preliminary Study” (1963), 28 Am. Soc. Rev. 55, at p. 58; H. Beale and T. Dugdale, “Contracts Between Businessmen: Planning and the Use of Contractual Remedies” (1975), 2 Brit. J. Law & Soc. 45, at pp. 47-48; S. Macaulay, “An Empirical View of Contract”, [1985] Wis. L. Rev. 465; V. Goldwasser and T. Ciro, “Standards of Behaviour in Commercial Contracting” (2002), 30 A.B.L.R. 369, at pp. 372-77. It is, to say the least, counterintuitive to think that reasonable commercial parties would accept a contract which contained a provision to the effect that they were not obliged to act honestly in performing their contractual obligations.
[62] I conclude from this review that enunciating a general organizing principle of good faith and recognizing a duty to perform contracts honestly will help bring certainty and coherence to this area of the law in a way that is consistent with reasonable commercial expectations.
(iv) Towards an Organizing Principle of Good Faith
[63] The first step is to recognize that there is an organizing principle of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance. That organizing principle is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.
[64] As the Court has recognized, an organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is 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: see, e.g., R. v. Jones, 1994 CanLII 85 (SCC), [1994] 2 S.C.R. 229, at p. 249; R. v. Hart, 2014 SCC 52 (CanLII), [2014] 2 S.C.R. 544, at para. 124; R. M. Dworkin, “Is Law a System of Rules?”, in R. M. Dworkin, ed., The Philosophy of Law (1977), 38, at p. 47. It is a standard that helps to understand and develop the law in a coherent and principled way.
[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.
[66] This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.
[67] This approach is consistent with that taken in the case of unjust enrichment. McLachlin J. outlined the approach in Peel (Regional Municipality) v. Canada, 1992 CanLII 21 (SCC), [1992] 3 S.C.R. 762, at pp. 786 and 788:
This case presents the Court with the difficult task of mediating between, if not resolving, the conflicting views of the proper scope of the doctrine of unjust enrichment. It is my conclusion that we must choose a middle path; one which acknowledges the importance of proceeding on general principles but seeks to reconcile the principles with the established categories of recovery . . . .
. . .
The tri-partite principle of general application which this Court has recognized as the basis of the cause of action for unjust enrichment is thus seen to have grown out of the traditional categories of recovery. It is informed by them. It is capable, however, of going beyond them, allowing the law to develop in a flexible way as required to meet changing perceptions of justice.
[68] The flexible approach that was taken in Peel recognizes that “[a]t the heart of the doctrine of unjust enrichment, whether expressed in terms of the traditional categories of recovery or general principle, lies the notion of restoration of a benefit which justice does not permit one to retain”: p. 788. In that case, this Court further developed the law through application of an organizing principle without displacing the existing specific doctrines. This is what I propose to do with regards to the organizing principle of good faith.
[69] The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide to future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. For example, the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange: Swan and Adamski, at § 1.24; B. Dixon, “Common law obligations of good faith in Australian commercial contracts — a relational recipe” (2005), 33 A.B.L.R. 87.
[70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12 (CanLII), [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.
[71] Tying the organizing principle to the existing law mitigates the concern that any general notion of good faith in contract law will undermine certainty in commercial contracts. In my view, this approach strikes the correct balance between predictability and flexibility.
(v) Should There Be a New Duty?
[72] In my view, the objection to Can-Am’s conduct in this case does not fit within any of the existing situations or relationships in which duties of good faith have been found to exist. The relationship between Can-Am and Mr. Bhasin was not an employment or franchise relationship. Classifying the decision not to renew the contract as a contractual discretion would constitute a significant expansion of the decided cases under that type of situation. After all, a party almost always has some amount of discretion in how to perform a contract. It would also be difficult to say that a duty of good faith should be implied in this case on the basis of the intentions of the parties given the clear terms of an entire agreement clause in the Agreement. The key question before the Court, therefore, is whether we ought to create a new common law duty under the broad umbrella of the organizing principle of good faith performance of contracts.
[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith: see Swan and Adamski, at § 8.135; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 78; Belobaba; Greenberg v. Meffert (1985), 1985 CanLII 1975 (ON CA), 50 O.R. (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 69. For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts: Wallace, at para. 98; Honda Canada, at para. 58.
[74] 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: see Mesa Operating, at paras. 15-19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence. I am at this point concerned only with a new duty of honest performance and, as I see it, 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. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.
[75] Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it: see CivicLife.com, at para. 52.
[76] It is true that the Anglo-Canadian common law of contract has been reluctant to impose mandatory rules not based on the agreement of the parties, because they are thought to interfere with freedom of contract: see Gateway Realty, per Kelly J.; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 95; Farnsworth, at pp. 677-78. As discussed above, however, the 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.
[77] That said, I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements. The approach I outline here is similar in principle to that in § 1-302(b) of the U.C.C. (2012):
The obligations of good faith, diligence, reasonableness, and care . . . may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.
[78] Certainly, any modification of the duty of honest performance would need to be in express terms. A generically worded entire agreement clause such as cl. 11.2 of the Agreement does not indicate any intention of the parties to depart from the basic tenets of honest performance: see GEC Marconi Systems Pty Ltd. v. BHP Information Technology Pty Ltd., [2003] FCA 50 (AustLII), at para. 922, per Finn J.; see also O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 96.
[79] Two arguments are typically raised against an increased role for a duty of good faith in the law of contract: see Bridge; Clark; and Peden, “When Common Law Trumps Equity: the Rise of Good Faith and Reasonableness and the Demise of Unconscionability”. The first is that “good faith” is an inherently unclear concept that will permit ad hoc judicial moralism to undermine the certainty of commercial transactions. The second is that imposing a duty of good faith is inconsistent with the basic principle of freedom of contract. I do not have to decide here whether or not these points are valid in relation to a broad, generalized duty of good faith. However, they carry no weight in relation to adopting a rule of honest performance.
[80] Recognizing a duty of honesty in contract performance poses no risk to commercial certainty in the law of contract. A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance. The duty is also clear and easy to apply. Moreover, one commentator points out that given the uncertainty that has prevailed in this area, cautious solicitors have long advised clients to take account of the requirements of good faith: W. Grover, “A Solicitor Looks at Good Faith in Commercial Transactions”, in Special Lectures of the Law Society of Upper Canada 1985 — Commercial Law: Recent Developments and Emerging Trends (1985), 93, at pp. 106-7. A rule of honest performance in my view will promote, not detract from, certainty in commercial dealings.
[81] Any interference by the duty of honest performance with freedom of contract is more theoretical than real. It will surely be rare that parties would wish to agree that they may be dishonest with each other in performing their contractual obligations.
[82] Those who fear that this modest step would create uncertainty or impede freedom of contract may take comfort from experience of the civil law of Quebec and the common and statute law of many jurisdictions in the United States.
[83] The Civil Code of Québec recognizes 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: see arts. 6, 7 and 1375. While this is not the place to expound in detail on good faith in the Quebec civil law, it is worth noting that good faith is seen as having two main aspects. The first is the subjective aspect, which is concerned with the state of mind of the actor, and addresses conduct that is, for example, malicious or intentional. The second is the objective aspect which is concerned with whether conduct is unacceptable according to the standards of reasonable people. As J.-L. Baudouin and P.-G. Jobin explain, [translation] “a person can be in good faith (in the subjective sense), that is, act without malicious intent or without knowledge of certain facts, yet his or her conduct may nevertheless be contrary to the requirements of good faith in that it violates objective standards of conduct that are generally accepted in society”: Les obligations (7th ed. 2013), by P.-G. Jobin and N. Vézina, at para. 132. The notion of good faith includes (but is not limited to) the requirement of honesty in performing the contract: ibid., at para. 161; Bank of Montreal v. Kuet Leong Ng, 1989 CanLII 30 (SCC), [1989] 2 S.C.R. 429, at p. 436.
[84] In the United States, § 1-304 of the U.C.C. provides that “[e]very contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.” The U.C.C. has been enacted by legislation in all 50 states. While the provisions of the U.C.C. apply only to commercial contracts, § 205 of the Restatement (Second) of Contracts (1981) provides for a general duty of good faith in all contracts. This provision of the Restatement has been followed by courts in the vast majority of states. The notion of “good faith” in the Restatement substantially followed the definition proposed by Robert Summers in an influential article, where he proposed that “good faith” is best understood as an “excluder” of various categories of bad faith conduct: p. 206; see § 205, comment a. The general definition of “good faith” in the U.C.C. is also quite broad, encompassing honesty and adherence to “reasonable commercial standards”: § 1-201(b)(20). This definition was originally limited to “honesty in fact”, that is, a duty of honesty in performance, and was only later expanded: A. D. Miller and R. Perry, “Good Faith Performance” (2013), 98 Iowa L. Rev. 689, at pp. 719-20. Honesty in performance is also a key component of “good faithˮ under the Restatement: § 205, comments a and d.
[85] Experience in Quebec and the United States shows that even very broad conceptions of the duty of good faith have not impeded contractual activity or contractual stability: see, e.g., J. Pineau, “La discrétion judiciaire a-t-elle fait des ravages en matière contractuelle?”, in La réforme du Code civil, cinq ans plus tard (1998), 141. It is also worth noting that in both the United States and Quebec, judicial developments preceded legislative action in codifying good faith. In the United States, courts had recognized the existence of a general duty of good faith before the promulgation of the U.C.C.: see, e.g., Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79 (1933). Similarly, though there was no express provision of “good faith” in the Civil Code of Lower Canada, the Court implied such a general duty from more specific provisions of the Code: see National Bank of Canada v. Soucisse, 1981 CanLII 31 (SCC), [1981] 2 S.C.R. 339; Houle v. Canadian National Bank, 1990 CanLII 58 (SCC), [1990] 3 S.C.R. 122; Bank of Montreal v. Bail Ltée, 1992 CanLII 71 (SCC), [1992] 2 S.C.R. 554. The duty of good faith was subsequently included in the revisions leading to the enactment of the Civil Code of Québec.
[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests. That said, a dealership agreement is not a contract of utmost good faith (uberrimae fidei) such as an insurance contract, which among other things obliges the parties to disclose material facts: Whiten. But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.
[87] This distinction explains the result reached by the court in United Roasters, Inc. v. Colgate-Palmolive Co., 649 F.2d 985 (4th Cir. 1981). The terminating party had decided in advance of the required notice period that it was going to terminate the contract. The court held that no disclosure of this intention was required other than what was stipulated in the notice requirement. The court stated:
. . . there is very little to be said in favor of a rule of law that good faith requires one possessing a right of termination to inform the other party promptly of any decision to exercise the right. A tenant under a month-to-month lease may decide in January to vacate the premises at the end of September. It is hardly to be suggested that good faith requires the tenant to inform the landlord of his decision soon after January. Though the landlord may have found earlier notice convenient, formal exercise of the right of termination in August will do. [pp. 989-90]
United Roasters makes it clear that there is no unilateral duty to disclose information relevant to termination. But the situation is quite different, as I see it, when it comes to actively misleading or deceiving the other contracting party in relation to performance of the contract.
[88] The duty of honest performance has similarities with the existing law in relation to civil fraud and estoppel, but it is not subsumed by them. Unlike promissory estoppel and estoppel by representation, the contractual duty of honest performance does not require that the defendant intend that his or her representation be relied on and it is not subject to the uncertainty around whether estoppel can be used to found an independent cause of action: Ryan v. Moore, 2005 SCC 38 (CanLII), [2005] 2 S.C.R. 53, at para. 5; Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), [1991] 2 S.C.R. 50; Waddams, The Law of Contracts, at paras. 195-203; B. MacDougall, Estoppel (2012), at pp. 142-44. As for the tort of civil fraud, breach of the duty of honest contractual performance does not require the defendant to intend that the false statement be relied on, and breach of it supports a claim for damages according to the contractual rather than the tortious measure: see, e.g., Parna v. G. & S. Properties Ltd., 1970 CanLII 25 (SCC), [1971] S.C.R. 306, cited with approval in Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 (CanLII), [2014] 1 S.C.R. 126, at para. 19.
[89] Mr. Bhasin, supported by many judicial and academic authorities, has argued for wholesale adoption of a more expansive duty of good faith in contrast to the modest, incremental change that I propose: A.F., at para. 51; Summers, at p. 206; Belobaba; Gateway Realty. In many of its manifestations, good faith requires more than honesty on the part of a contracting party. For example, in Dynamic Transport, this Court held that good faith in the context of that contract required a party to take reasonable steps to obtain the planning permission that was a condition precedent to a sale of property. In other cases, the courts have required that discretionary powers not be exercised in a manner that is “capricious” or “arbitrary”: Mason, at p. 487; LeMesurier v. Andrus (1986), 1986 CanLII 2623 (ON CA), 54 O.R. (2d) 1 (C.A.), at p. 7. In other contexts, this Court has been reluctant to extend the requirements of good faith beyond honesty for fear of causing undue judicial interference in contracts: Wallace, at para. 76.
[90] It is not necessary in this case to define in general terms the limits of the implications of the organizing principle of good faith. This is because it is unclear to me how any broader duty would assist Mr. Bhasin here. After all, the contract was subject to non-renewal. It is a considerable stretch, as I see it, to turn even a broadly conceived duty of good faith exercise of the non-renewal provision into what is, in effect, a contract of indefinite duration. This in my view is the principal difficulty in the trial judge’s reasoning because, in the result, her decision turned a three year contract that was subject to an express provision relating to non-renewal into a contract of roughly nine years’ duration. As the Court of Appeal pointed out, in my view correctly, “[t]he parties did not intend or presume a perpetual contract, as they contracted that either party could unilaterally cause it to expire on any third anniversary”: para. 32. Even if there were a breach of a broader duty of good faith by forcing the merger, Can-Am’s contractual liability would still have to be measured by reference to the least onerous means of performance, which in this case would have meant simply not renewing the contract. Since no damages flow from this breach, it is unnecessary to decide whether reliance on a discretionary power to achieve a purpose extraneous to the contract and which undermined one of its key objectives might call for further development under the organizing principle of good faith contractual performance.
[91] I note as well that, even in jurisdictions that embrace a broader role for the duty of good faith, plaintiffs have met with only mixed success in alleging bad faith failure to renew a contract. Some cases have treated non-renewal as equivalent to termination and thus subject to a duty of good faith: Shell Oil Co. v. Marinello, 294 A.2d 253 (N.J. Super. Ct. 1972), aff’d 307 A.2d 598 (N.J. 1973); Atlantic Richfield Co. v. Razumic, 390 A.2d 736 (Pa. 1978), at pp. 741-42. Other courts have seen non-renewal as fundamentally different, especially where the express terms of the contract contemplate the expiry of contractual obligations and leave no room for any sort of duty to renew: J.H. Westerbeke Corp. v. Onan Corp., 580 F.Supp. 1173 (D. Mass. 1984), at p. 1184; Pitney-Bowes, Inc. v. Mestre, 517 F.Supp. 52 (S.D. Fla. 1981), cert. denied, 464 U.S. 893 (1983).
[92] I conclude that at this point in the development of Canadian common law, adding a general duty of honest contractual performance is an appropriate incremental step, recognizing that the implications of the broader, organizing principle of good faith must be allowed to evolve according to the same incremental judicial approach.
[93] A summary of the principles is in order:
(1) There is a general organizing principle of good faith that underlies many facets of contract law.
(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.
(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.
(3) Application
[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.
[95] The immediate dispute in this case centred on the non-renewal clause contained in cl. 3.3 of the 1998 Agreement which Mr. Bhasin entered into in November 1998. It provided that the Agreement was for a three-year term and would be automatically renewed unless one of the parties gave notice to the contrary at least six months before the end of the initial or any renewed term:
3.3 The term of this Agreement shall be for a period of three years from the date hereof (the “Initial Term”) and thereafter shall be automatically renewed for successive three year periods (a “Renewal Term”), subject to earlier termination as provided for in section 8 hereof, unless either [Can-Am] or the Enrollment Director notifies the other in writing at least six months prior to expiry of the Initial Term or any Renewal Term that the notifying party desires expiry of the Agreement, in which event the Agreement shall expire at the end of such Initial Term or Renewal Term, as applicable.
[96] The factual matrix in which the judge made her finding of dishonest performance is complicated and I will only outline it in very broad terms in order to put that finding in context. There were two main interrelated story lines.
[97] The first concerns Mr. Hrynew’s persistent attempts to take over Mr. Bhasin’s market through a merger — in effect a takeover by him of Mr. Bhasin’s agency. The second concerns the difficulties, beginning in early April 1999, that Can-Am was having with the Alberta Securities Commission, which regulated its business and its enrollment directors in Alberta. The Commission insisted that Can-Am appoint a full-time employee to be a PTO responsible for compliance with Alberta securities law. Can-Am ultimately appointed Mr. Hrynew, with the result that he would audit his competitor agencies, including Mr. Bhasin’s, and therefore have access to their confidential business information. Mr. Bhasin’s refusal to allow Mr. Hrynew access to this information led to the final confrontation with Can-Am and its giving notice of non-renewal in May 2001. Can-Am, for its part, wanted to force a merger of the Bhasin agency under the Hrynew agency, effectively giving Mr. Bhasin’s business to Mr. Hrynew. It was in the context of this situation that the trial judge made her findings of dishonesty on the part of Can-Am.
[98] The trial judge concluded that Can-Am acted dishonestly with Mr. Bhasin throughout the period leading up to its exercise of the non-renewal clause, both with respect to its own intentions and with respect to Mr. Hrynew’s role as PTO. Her detailed findings amply support this overall conclusion.
[99] By early 2000, Can-Am was considering a significant reorganization of its activities in Alberta; by June of that year, it sent an organizational chart to the Commission showing that Mr. Bhasin’s agency was to be merged under Mr. Hrynew’s. But it had said nothing of this to Mr. Bhasin: trial reasons, at paras. 167-68. The trial judge found that these representations made by Can-Am to the Commission were clearly false if, as she concluded, they intended to refer to Mr. Bhasin: para. 246. She also found that Can-Am, by June 2000, was fearful that the Commission was going to pull its licence in Alberta and that it was prepared to do whatever it could to forestall that possibility. “However, it was not dealing honestly with [Mr.] Bhasin about the realities of the situation as [it] saw them”: para. 246.
[100] In August 2000, Mr. Bhasin first heard of Can-Am’s merger plans for him during a meeting with Can-Am’s regional vice-president. But when questioned about Can-Am’s intentions with respect to the merger, the official “equivocated” and did not tell him the truth that from Can-Am’s perspective this was a “done deal”. The trial judge concluded that the official was “not honest with [Mr.] Bhasin” at that meeting: para. 247.
[101] When Mr. Bhasin complained about Mr. Hrynew’s conflict of interest in being both auditor and competitor, Can-Am in effect blamed the Commission, claiming that the Commission had rejected its proposal to appoint a third party PTO. This was not truthful. Can-Am failed to mention that it had proposed to appoint a non-resident of Alberta who was clearly not qualified according to the Commission’s criteria or that it had decided to appoint Mr. Hrynew even though he did not meet the Commission’s criteria either: trial reasons, at paras. 195 and 221. It also misrepresented — repeatedly — to Mr. Bhasin that Mr. Hrynew was bound by duties of confidentiality and segregation of activities in the course of an audit, when in fact there was no such requirement. Can-Am did not even finalize its PTO contract with Mr. Hrynew until March 2001 and, notwithstanding its assurances to Mr. Bhasin, it failed to include such a provision in the contract: paras. 190-221. As the trial judge found, Can-Am “could not possibly have missed this honestly in the PTO agreement, given that [Mr. Bhasin’s] very protests about [Mr.] Hrynew’s appointment as PTO were about confidentiality and segregation of activities”: para. 221. The judge also found that Can-Am repeated these “lies” about Mr. Hrynew’s supposed obligations of confidentiality even after the PTO agreement, without these protections, had been signed: para. 204.
[102] Can-Am pushed on with the requirement that Mr. Hrynew audit Mr. Bhasin’s agency as if it were required to do so by the Commission even though it had arranged to have one of its employees conduct the audit of Mr. Hrynew’s agency: trial reasons, at para. 198.
[103] As the trial judge found, this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of the Agreement with Mr. Bhasin and its exercise of the non-renewal provision. I conclude that Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.
- Liability for Civil Conspiracy and Inducing Breach of Contract
[104] In light of this conclusion, I agree with the Court of Appeal’s rejection of Mr. Bhasin’s claims based on the torts of inducing breach of contract and unlawful means conspiracy.
[105] The trial judge specifically found that Mr. Hrynew did not encourage Can-Am to act dishonestly in its dealings with Mr. Bhasin and that Can-Am’s dishonest conduct was not fairly attributable to Mr. Hrynew: paras. 271 and 287. It follows that Mr. Hrynew did not induce Can-Am’s breach of its contractual duty of honest performance.
[106] The trial judge dismissed the claim for conspiracy to injure and there is no basis to interfere with that finding. However, the trial judge held the respondents liable for unlawful means conspiracy, with the unlawful means being the breach of contract and inducing breach of contract: para. 326. Because, in light of my conclusions, the only relevant breach of contract in this case is the breach of the duty of honest performance and there was no inducement of breach of contract, the only relevant unlawful means pertained to Can-Am alone and not Mr. Hrynew. Accordingly, there can be no liability for civil conspiracy: see Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460 (CanLII), 106 O.R. (3d) 427, at para. 43.
[107] I therefore agree with the result reached by the Court of Appeal that there could be no liability for inducing breach of contract or unlawful means conspiracy: para. 36. It follows that the claims against Mr. Hrynew were rightly dismissed.
- What Is the Appropriate Measure of Damages?
[108] I have concluded that Can-Am’s breach of contract consisted of its failure to be honest with Mr. Bhasin about its contractual performance and, in particular, with respect to its settled intentions with respect to renewal. It is therefore liable for damages calculated on the basis of what Mr. Bhasin’s economic position would have been had Can-Am fulfilled that duty. While the trial judge did not assess damages on that basis given her different findings in relation to liability, she made findings that permit this Court to do so.
[109] The trial judge specifically held that but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to “retain the value in his agency”: paras. 258-59. In reaching this conclusion, the trial judge was well aware of the difficulties that Mr. Bhasin would have in selling his business given the “almost absolute controls” that Can-Am had on enrollment directors and that it owned the “book of business”: para. 402. She also heard evidence and made findings about what the value of the business was, taking these limitations into account. These findings, in my view, permit us to assess damages on the basis that if Can-Am had performed the contract honestly, Mr. Bhasin would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to Mr. Hrynew.
[110] It is clear from the findings of the trial judge and from the record that the value of the business around the time of non-renewal was $87,000. The defendants’ expert at trial valued Mr. Bhasin’s business as of 2001 (the time of non-renewal) as approximately $87,000. While there is some confusion in the record about the date of evaluation and the relevance of discount rates, I am persuaded that the trial judge found that the business was worth $87,000 at the time that the Agreement expired and that she made this finding fully alive to the difficulties standing in the way of a sale of the business given the contractual arrangements between Can-Am and its enrollment directors: see, e.g., para. 451. In addition, we have had no suggestion in argument that this figure should be reassessed. In fact, the defendants, as appellants before the Court of Appeal, submitted to that court that if damages were payable, they should be assessed at the value of the business at the time of the expiry of the Agreement and noted that the trial judge had accepted the evidence of their expert witness, Mr. Bailey, that the value was $87,000.
[111] I conclude therefore that Mr. Bhasin is entitled to damages in the amount of $87,000.
- Disposition
[112] I would allow the appeal with respect to Can-Am and dismiss the appeal with respect to Mr. Hrynew. I would vary the trial judge’s assessment of damages to $87,000 plus interest. Mr. Bhasin should have his costs throughout as against Can-Am. There should be no costs at any level in favour of or against Mr. Hrynew.
Excerpted from Source: Canadian Legal Information Institute: www.canlii.org