Honesty Counts in Contracts!

Mar 25, 2021

Background

In 2014, the Supreme Court of Canada reviewed the case of Bhasin v Hrynew, on appeal from the Court of Appeal for Alberta.

Mr. Bhasin and Mr. Hrynew were competitors.  Similar to franchises, both sold education savings plans in Alberta for a company called Can-Am.  Mr. Bhasin had been remarkably successful in this endeavour over the ten years he ran his small business.  Mr. Bhasin’s agreement with Can-Am gave him a three-year term, with an option to renew after those three years and would automatically renew without six months’ written notice from either person.

Mr. Hrynew sold the same product to consumers.  He had connections in the field which gave him a strong market advantage, especially to Can-Am.  Years earlier, Mr. Hrynew had agreed to sell only Can-Am products and in exchange, Can-Am agreed to provide consideration – a promise for money or property – for any mergers Mr. Hrynew may be involved in.

It was no secret that Mr. Bhasin and Mr. Hrynew were not on good terms.  Mr. Hrynew asked Mr. Bhasin many times over the ten years that Mr. Bhasin’s business operated to merge, but Mr. Bhasin would not agree.  Because Mr. Hrynew had such a large market for Can-Am, he would threaten to pull his business from their products if they did not pressure Mr. Bhasin to agree to a merger.

In 1999, things changed on the Alberta securities scene.   The Alberta Securities Commission raised some concerns regarding the staff, called enrollment directors, that were selling Can-Am’s products.  One of the demands made by the Alberta Securities Commission was that Can-Am was to appoint a single provincial trading officer to ensure the enrollment directors were compliant with the provincial legislation.  Can-Am appointed none other than Mr. Hrynew.  This change would have allowed Mr. Hrynew to review Mr. Bhasin’s business financial records, to which Mr. Bhasin strongly objected.

Can-Am went on to falsely tell the Alberta Securities Commission that Mr. Bhasin had merged with Mr. Hrynew and even that the Commission would not allow them to hire an outside provincial trading officer.  And because Mr. Bhasin refuse to allow Mr. Hyrnew to review his records, Mr. Bhasin was not given the option to renew his agreement with Can-Am and lost most of his staff to Mr. Hyrnew.

Going to court

Mr. Bhasin sued Can-Am indicating they had breached their contract and had a duty to act in honesty and good faith when executing the terms of their contract.  Mr. Bhasin also suggested that Mr. Hyrnew was guilty of “civil conspiracy.”  The trial judge did agree with Mr. Bhasin, and Mr. Bhasin won his case. This was then appealed to the Court of Appeal for Alberta.  The Court of Appeal did not agree and reversed the decision of the trial judge.

Mr. Bhasin took the matter to the Supreme Court.  The Court agreed with Mr. Bhasin.  They noted that the current state of the law is unclear and unsettled and their ruling on this case is an attempt to provide some clarity to this area of law, stating at paragraph 66 of Bhasin v. Hrynew, 2014 SCC 71, 3 SCR 494:

“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.”

What is more interesting, is that the Court created a new duty in common law – meaning judge made law – that states that there is a general duty of honesty in a contractual performance.  What is a duty of honesty?  In paragraph 73 of the decision Bhasin v. Hrynew, 2014 SCC 71, 3 SCR 494, Cromwell, J. states:

“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.”

The highest court in the land agreed with Mr. Bhasin apart from the argument of “civil conspiracy” where the Court felt that Mr. Bhasin had not made its case.  The Court of Appeal for Alberta’s decision was overturned and Mr. Bhasin’s award was reinstated.

This decision stands for the principle that honesty and good faith needs to prevail in the execution of contracts.  It is equally important that the Supreme Court created a new duty upon those entering a contract to uphold those principles during contract performance.

If you have a contract where a party has not performed its portion in good faith, call us at Dean Cservenyi LLP to discuss whether you may have a claim.