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Duty of Good Faith – Breach of Contract Resulting in Significant Damage to Business

March 10, 2016

A case before the Supreme Court of Canada in 2014, Bhasin v. Hrynew, dealt with a breach of contract resulting in significant damages. 

The facts of the case are as follows – Bhasin owned a business, Bhasin & Associates, where he was also an enrollment director for Canadian American Financial Corp. (Can-Am). Bhasin and Can-Am entered into a contract in 1989. Their working relationship ended messily a decade later, after which Bhasin took his case to the courts. 

Bhasin, as an enrollment director, marketed education savings plans to sell through his business. There was a financial incentive to selling the savings plans as well. The terms of the contract between Bhasin and Can-Am were that Bhasin had a fiduciary duty – essentially, a relationship of trust – to Can-Am, that Can-Am owned the client lists, branding, and policies for the enrollment director, and that Bhasin could not back out of the operation in any way without Can-Am’s approval. This approval and consent could not be refused for no good reason. The contract was to last for three years, unless there was a written notice provided to terminate. If there was no written notice of a termination, the contract would automatically renew at the end of the three year term. 

The respondent, Hrynew, was a competitor of Bhasin’s and reportedly collaborated with Can-Am to Bhasin’s detriment. Hrynew allegedly wanted to merge with Bhasin, but Bhasin did not want him to have access to his clients. When he approached Bhasin directly on multiple occasions, his offers were rejected. Hrynew allegedly convinced Can-Am not to renew their contract with Bhasin, and attempted to get them to force the merger. 

Can-Am was then asked by the Alberta Securities Commission to review its enrollment directors for compliance with security laws; in order to do so, they needed to appoint a provincial trading officer to perform the review, and they appointed Hrynew. Bhasin and another enrollment director, Hon, did not want Hyrnew to review their confidential business records. Can-Am made plans without notifying Bhasin of restructuring its agencies, which included Bhasin and Hrynew working together. They also gave Bhasin false information about the level of confidentiality Hrynew was obligated to maintain in looking at Bhasin’s records. Bhasin still refused to allow Hrynew to audit his records, leading to the termination of their agreement. 

Following the contract’s termination, Bhasin’s business lost value, and his workforce was taken by Hrynew. 

This lead to Bhasin’s action against Can-Am and Hrynew. The judge at trial felt that Can-Am did not fulfill the agreement with Bhasin or act in good faith; instead, they acted dishonestly, misled him and did not notify him about the merger with Hrynew even though he asked. This prevented him from taking steps to preserve his business since, if Can-Am had acted honestly and in good faith, Bhasin could have prepared himself for the loss incurred by the agreement being terminated. The Alberta Court of Appeal overturned this decision, but the Supreme Court of Canada found that Can-Am acted dishonestly. They dismissed the appeal as it related to Hrynew, and awarded Bhasin $87,000 in damages against Can-Am.

From the court document:

[72] … 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), 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), 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.

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