12 | LEXPERT • December 2015 | www.lexpert.ca
GOOD FAITH
"You have to wonder how much we're importing a sort of 'good
neighbor' policy into contract law, using the duty of good faith as
a basket into which the rules must fit as they develop," Mark says.
SO WHILE BHASIN may provide certainty in the sense of
putting an end once and for all to the debate about whether a
principle of good faith exists, it creates uncertainty by failing to
clearly establish the limits of that principle. Even with respect to
the enunciated duty of honesty that falls under the principle, the
court provides little guidance on what constitutes the "honesty"
that good faith demands.
"We certainly don't know the parameters of the duty, although
we have a vague idea that contracts must be performed honestly
and reasonably," Berman says. "at means parties can't lie and
mislead, but what else does it mean? at's a question the SCC
has punted back to the provincial appellate courts."
In attempting to limit its ruling, the SCC was careful to say
that the duty of honesty is not a fiduciary duty, a duty of disclosure
or a duty of loyalty and does not imply subordination of a party's
own interests. Instead, it imposes only "a minimum standard of
honest contractual performance," meaning that "parties must
not lie or otherwise knowingly mislead each other about matters
directly linked to the performance of the contract."
Absent a bright line, lawyers are advising their clients to be
more cautious in general and more careful in the answers they
give to specific questions that are asked of them by parties to the
contracts they negotiate.
To be sure, no one is suggesting that the good faith principle
vitiates absolute discretion clauses in contracts as a matter of course.
"e court is clear that parties can't use the duty of good faith to
elevate renewable contracts into perpetual contracts," Mark says.
So financial institutions and other lenders, for example, can
breathe a bit easier.
"For example, Bhasin does not imply that lenders must give
or have reasons for calling demand loans," says Eli Lederman of
Lenczner Slaght Royce Smith Griffin LLP in Toronto. "But if
they do give reasons, the reasons must be truthful."
What is clear is that parties may not contract out of duties
stemming from the organizing principle: they can, however,
that the judgment falls short of its goals.
BHASIN WAS ABOUT a renewal clause in a contract between
an Alberta company that marketed education savings plans to
investors and one of its agents, who sold the company's product
through his own business. e company had an absolute right to
terminate its agreement with the agent aer three years. In doing
so, however, the company acted dishonestly, misleading the plain-
tiff about plans to merge his business with a competing business
and about its efforts to have the plaintiff 's agency audited by the
competing agency. In the end, the plaintiff 's objections to the
merger and attempt to audit his records led to the non-renewal.
Consequently, the plaintiff lost his business, with most of his own
sales force moving to the competing company. When the plain-
tiff sued, the central issue was whether the defendant owed him a
duty of good faith.
In its unanimous decision, the court recognized that Canada's
common-law courts had refrained from enunciating an under-
lying principle of good faith and a duty to act honestly in the
performance of contracts for fear of creating commercial uncer-
tainty and interfering with freedom of contract. But as the court
saw it, it was the haphazard development of the law that had
created the uncertainty. e failure to recognize the duty also
failed to accord with reality, given that commercial parties would
never accept contracts that allowed dishonesty in their perfor-
mance. Finally, the modern trend, manifested in the US and
Québec, was to recognize the obligation of basic honesty.
e "organizing principle," not itself a duty, required parties to
refrain from undermining other parties' interests by acting in bad
faith. e duties of good faith that existed in areas like franchise,
employment, insurance and real estate law were examples of
duties that arose from this principle. Bhasin's twist was to leave
open the possibility that new duties would emerge, the first one
being the duty of honest contractual performance enunciated in
the decision.
e upshot is that the decision is open-ended: think, perhaps,
Donoghue v. Stevenson, the seminal decision in the common law
of negligence that engendered a continuing evolution of new
duties of care and duties of care in new contexts.
Alan Mark Goodmans LLP
"COURTS have been moving away from rule-based
analyses of contractual terms, rights and breaches
toward a contextual analysis. But a contextual analysis
introduces uncertainty, so that the courts have become
a bit of a casino if you're looking to them to determine what
conduct would be sanctioned and how to advise clients."
