A Promise to Behave: What the Supreme Court Now Says About the ‘Duty of Good Faith’

We all live our lives bound by a series of contracts.  Whether we buy a house, a car, get married, buy something, sell something, there’s usually some sort of contractual relationship at the forefront.  It seems only natural, if not idealistic, that two parties entering into a contract would treat each other honestly, and deal in good faith.  Yet until last month, only a few types of contracts actually required good faith and honesty from the parties.

            Now, in a new decision from the Supreme Court called Bhasin v Hrynew, the Court ruled that all contracts have an implied duty of good faith, and a duty to act honestly.  The decision not only clarifies contract law going forward, but could also have a tremendous impact on any contractual relationships in the future.

The Background

             Harish Bhasin’s company was an enrollment director for Canadian American Financial Corporation (Can-Am), selling educational savings plans.  He was one of the top dealers in Canada and repeatedly recognized by the company for it. While legally under a commercial dealership agreement, he carried on his business similar to a franchisee – he was obligated to sell Can-Am products, and Can-Am owned his client lists. Bhasin had a 3-year contract with Can-Am, which was set to automatically renew every three years.

            Bhasin’s competitor, Larry Hrynew, held a prominent standing with Can-Am in the Alberta market, and was out to capture Bhasin’s business.  He subsequently swayed Can-Am not to renew Bhasin’s contract, and when the Alberta Securities Commission wanted to appoint an overseer, Can-Am awarded Hrynew the title.  Naturally, Bhasin was uncomfortable with Hrynew going through his books.  When Can-Am was planning to restructure, they intended for Bhasin to work for Hrynew’s agency, but did not inform Bhasin of this plan.  Can-Am purposely misled Bhasin by telling him there was no choice but for Hrynew to review his records, and when he refused still, his contract with Can-Am was terminated. Bhasin subsequently lost his business, with most of his sales agents going to work for Hrynew.  He then in turn sued both Hrynew, and Can-Am.

The Ruling

             The Supreme Court agreed with the original trial judge and found in favour of Mr. Bhasin.  Bhasin had argued that even though his was not an employment contract, which does have an inherent duty of good faith, his contract operated on a similar power balance, and thus there should be a duty of good faith and a duty to act honestly.  Previously, contract law had only implied these duties in certain type of contracts, like employment contracts, and contracts with discretionary power.  The Supreme Court however said it was time for the law to stop being piecemeal, and to recognize a duty of good faith in all contracts, as well as a duty to act honestly.

            The Court stated that the law as it stood in fragments was incoherent, and out of step with the expectation of commercial parties (that a duty of good faith was naturally in place).  This is especially true for large commercial entities such as Quebec and the United States. The Court said good faith is not a new concept – it shows up frequently in different contractual issues and different statutes, just never as a widespread principle. With employment contracts for example, the issue was settled in 2008 in a case called Honda v Keays, where the court found that there is a duty of good faith in termination, and specifically that the employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” in terminating an employee.

            This does not mean that companies cannot still compete for business – they must just do so honestly. The Court ruled that, when properly applied, an organizing principle of good faith will serve to clarify the law as it stands, and will not work to undermine it.  The court said that any interference this duty would have with the freedom of contract is “more theoretical than real.”  The principle itself is quite simple – parties should act honestly and in good faith when carrying out contracts.  In simpler terms, parties to a contract are now required to ‘play nice in the sandbox.’

             In Mr. Bhasin’s case, the Court found that Can-Am acted dishonestly, and awarded him $87,000 in damages.

 What It Means for Employers and Employees

             The Courts have already held that there is a duty of good faith inherent within employment contracts, and this case likely will not change matters.  However, for independent contractor agreements, business to business agreements, and any other relationships an employer may engage in through their business, this ruling becomes key.  While the Court insists the decision represents an ‘incremental change’ in the law, the new found clarity now provides guidance for all future contractual arrangements.

            The law affirms what the best employers already know – doing business honestly and with integrity is always advisable, and will lead to better results.  Acting ethically will not be an impediment to business interests – on the contrary, it will often yield positive results.  An employer’s reputation can make or break a business, and creating positive business relationships usually leads to an increase in business.  The moral of the story is simple: play nice and your business will only benefit.

            As workplace experts, we are happy to review your agreements and assist you in creating independent contractor agreements, as well as employment agreements.  Contact us today for more information.

 Blog post by Shaun Bernstein

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