SCC Recognizes Duty of Good Faith in Contractual Obligations

April 28th, 2015 by Elisabeth Colson

The recent supreme court decision of Bhasin v. Hrynew has established an underlying duty of good faith and fair dealing in common law contractual obligations. Although it does not directly relate to Canadian franchising, the implications of the decision are far-reaching. As outlined in its landmark ruling, the Supreme Court of Canada (“SCC“) decided that contracting parties must “perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”. These principles apply to all common law contracts including those of Canadian franchises.

Bhasin v. Hrynew deals with a dispute between Mr. Bahsin, a retail vendor of Registered Education Savings Plans (“RESPs“), and his employer, Canadian American Financial Corporation (“CAF“). CAF was the wholesale vendor of the RESPs.  Bhasin was hired as an “enrollment director” whose contract was automatically renewed every three years unless he received six months’ prior notice of termination. A competing enrollment director, Mr. Hrynew, proposed merging Mr. Bhasin’s sales agency with his own and conspired with CAF to force the merger despite Mr. Bhasin’s objections. After unsuccessfully but purposefully misleading and pressuring Mr. Bhasin to accept the merger, CAF provided him with notice that it would not be renewing his contract upon expiry of its then-current term. As a result, Mr. Bhasin’s business lost substantial value and Mr. Hrynew poached sales personnel from Mr. Bhasin’s defunct agency.

At trial, the judge found that CAF had breached an implied duty of good faith by deceiving Mr. Bhasin during the events leading up to the non-renewal of his contract. The Alberta Court of Appeal overturned this decision.  Among its stated reasons was the absence of any explicit mention regarding a duty of good faith. The SCC took issue with the appeal court’s decision, recognizing for the first time a “general organizing principle” of the duty of good faith inherent in contract law. This duty of good faith encompasses a duty of honesty requiring all contracting parties not to lie or otherwise to knowingly mislead each other about matters directly linked to the performance of the contract.

What this means for Canadian businesses, including franchises, is that by agreeing to a commercial contract, you make a commitment of honesty regarding matters related to the performance of that contract. Dishonesty and deception can result in your liability for damages. Don’t wait to be taken advantage of by a disingenuous counter-party. Ensure piece of mind and gain expert insight into all franchise law matters by contacting DSF’s corporate law team today.


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