The Duty to Perform a Contract in Good Faith

The Supreme Court case Bhasin v. Hrynew is a landmark case that imposed a common law doctrine of good faith on parties to a contract, which requires them to act honestly in performing their contractual obligations.

In Bhasin v. Hrynew, Mr. Bhasin was a director of the Canadian American Financial Corporation (“Can-Am”). He was very successful and granted awards and prizes recognizing him as one of Can-Am’s top performers.

In 1998, Mr. Bhasin and Can-Am signed an agreement that included a paragraph that their contract would automatically renew at the end of the term of the three-year period, provided that either party did not provide six-months’ notice to the contrary.

Mr. Hrynew was another director of Can-Am and a competitor of Mr. Bhasin. Mr. Hrynew actively approached Mr. Bhasin to propose a merger of their agencies and encouraged Can-Am to force the merger. Mr. Bhasin refused to merge.

In 1999, the Alberta Securities Commission (the “Commission”) raised concerns about compliance among Can-Am’s directors. As a result, the Commission required Can-Am to appoint an officer to conduct audits of its directors for compliance with securities law. Can-Am appointed Mr. Hrynew.

As part of this new position, Mr. Hrynew was required to conduct audits of all Can-Am’s directors, including Mr. Bhasin. Mr. Bhasin refused the audit as he believed it was a conflict of interest to have Mr. Hrynew conduct an audit on his agency.

Can-Am, in fear of losing its licence, planned to restructure and proposed to the Commission that Mr. Bhasin would work for Mr. Hrynew’s agency. Can-Am did not tell Mr. Bhasin about the proposal. Can-Am also misled Mr. Bhasin by stating that Mr. Hrynew was required to treat all information he received for the purposes of the audit as confidential and stated that the Commission refused to allow an outside auditor to conduct the audit. Mr. Bhasin continued to refuse to allow Mr. Hrynew to audit his agency. As a result, Can-Am terminated its agreement with Mr. Bhasin by providing six-months’ notice that the contract would not renew. As a result of the terminated agreement, Mr. Bhasin lost significant value in his company and many of his agents were solicited by Mr. Hrynew’s company.

Mr. Bhasin brought a lawsuit against Can-Am and Mr. Hrynew claiming that Can-Am failed to perform their contract in good faith by continuously falsifying information about the performance of their contract.

Prior to this decision, many courts suggested that there was a general duty on parties to perform a contract in good faith. Other courts found that there was no such duty of good faith or that it was only required for specific types of contracts and relationships.

The Supreme Court put all uncertainty to rest, as it created a new common law duty to perform a contract honestly, meaning that parties to a contract should not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract.

The Supreme Court held that Can-Am’s breach of contract consisted of a failure to be honest with Mr. Bhasin about its contractual performance and Mr. Bhasin was awarded damages in the amount of $87,000 plus interest.

THE DUTY OF GOOD FAITH WAS RECENTLY CITED IN A 2020 DECISION

The Supreme Court decision in Bhasin v. Hrynew was most recently cited in a 2020 Ontario Court of Appeal case, Quickie Convenience Stores Corp. v. Parkland Fuel Corp. In this case, Quickie Convenience Stores Corp. (“Quickie”) was the owner and operator of fifty-two convenience stores located in Ontario and Quebec. Parkland Fuel Corp. (“Parkland”) was a large fuel supply company which provided fifteen Quickie stores with fuel.

Quickie sought to sell the fifteen stations that were provided fuel by Parkland. To do so, Quickie had to assign the leases and credit/debit agreements that it had with Parkland to a new owner. In all but one, the leases required written consent from Parkland to assign the leases to a new owner. Parkland agreed to provide its consent on the condition that Quickie agree to a five-year extension of its current leases and credit/debit agreements. Quickie declined and sought an order from the court declaring that Parkland had acted unreasonably by withholding consent and an order compelling Parkland to provide its consent.

The Court of Appeal agreed with Quickie and found that provisions in a contract that require one party to consent to the assignment of the contract by another party has an implicit requirement not to withhold that consent for an improper purpose and that this is consistent with the approach taken to contracts as decided in Bhasin.

The Court of Appeal granted Quickies request for declaratory relief, required Parkland to provide its consent, and to pay costs in the amount of $35,000.

Tags : Contract Disputes , Civil Litigation Law

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