Bhasin v. Hrynew: Good faith and duty of honesty in contractual performance

  • October 15, 2015
  • Damon Stoddard

Note: This article originally appeared in Heal & Co.’s e-newsletter Constructive Views and is reprinted with permission. The article has been abridged from the original.

By Damon Stoddard

In its landmark November 2014 decision in Bhasin v. HrynewFootnote1, the Supreme Court of Canada held that there is a general organizing principle of good faith governing the common law of contract in CanadaFootnote2, from which flows a duty of honesty in contractual performance.Footnote3

The SCC wrote that this organizing principle was not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines that may be given different weight in different situations. The SCC held that recognizing a duty of honest performance flowing from this principle was a modest, incremental step.Footnote4

In the author’s view, however, both the organizing principle of good faith and the specific duty of honesty in the performance of contractual obligations could introduce an element of unintended uncertainty into construction contract performance where breaches of these new duties are alleged, potentially leading to less predictable results at trial and at arbitration.

The parties and facts      

The contract at issue in Bhasin was a 1998 commercial dealership agreement between Mr. Bhasin and Can-Am, which markets education savings plans to investors through retail dealers, known as enrolment directors, whose success depends on building a sales force. Bhasin had built his sales force over 10 years, becoming one of Can-Am’s top enrolment directors.

Bhasin’s contract was not a franchise agreement. The statutory duty of fair dealing contained in s. 7 of the Alberta Franchises ActFootnote5 did not apply. The contract contained an entire agreement clause stating that there were no agreements, express, implied or statutory, other than as expressly set out. The term of Bhasin’s contract was three years. The clause that resulted in the litigation was the non-renewal clause, which provided that Bhasin’s contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary.Footnote6

Mr. Hrynew was also a Can-Am enrolment director, and a competitor of Bhasin. Hrynew wanted to capture Bhasin’s business and to that end Hrynew personally approached Bhasin on numerous occasions to propose a merger of their agencies.

In late 1999, Alberta’s Securities Commission required Can-Am to appoint a single provincial trading officer to review its enrolment directors for compliance with securities laws. Can-Am appointed Hrynew. In June 2000, Can-Am outlined its plans to the Commission, which included Bhasin working for Hrynew’s agency. Can-Am failed to make this known to Bhasin and repeatedly misled Bhasin.

When Bhasin continued to refuse to allow Hrynew to audit his records, Can-Am threatened to terminate the 1998 agreement. In May 2001, Can-Am gave notice of non-renewal under the agreement. When the agreement expired, Bhasin lost the value of his business and the majority of his sales force was successfully solicited by Hrynew’s agency. Bhasin then sued Can-Am and Hrynew.

The trial and court of appeal decisions

The trial judge found that it was an implied term of the contract that decisions about whether to renew the contract would be made in good faith, and that Can-Am breached this implied term of good faith by exercising the non-renewal clause in a dishonest and misleading manner.

The Alberta Court of Appeal held that there was no breach of contract by Can-Am since the contract contained an unambiguous non-renewal clause, and that the trial judge erred in implying a duty of good faith in the face of an entire agreement clause.Footnote7

The SCC’s decision

The SCC allowed Bhasin’s appeal as against Can-Am, but for different reasons than the trial judge. The SCC wrote that while commercial parties remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce.Footnote8 The SCC accepted the trial judge’s finding of fact that Can-Am acted dishonestly in exercising the non-renewal clause, and held that as a result Can-Am breached its duty to perform the contract honestly.

More broadly, the SCC enunciated a general organizing principle of good faith that underlies the common law of contract, and that a manifestation of it is a duty to act honestly in the performance of contractual obligations.Footnote9 Specifically, the SCC held that:

  • The organizing principle of good faith is that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily;Footnote10
  • The development of the principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties;Footnote11
  • The new duty of honesty does not impose a duty of fiduciary loyalty, or of disclosure, or require a party to forego advantages flowing from the contract;Footnote12
  • The duty of honesty should be thought of as a general doctrine of contract law that operates irrespective of the intentions of the parties, analogous to the doctrine of unconscionability;Footnote13 and
  • The precise content and scope of honest performance will vary with context,Footnote14 however, parties are not free to exclude the duty of honest performance, and any modification of the duty must be in express terms.Footnote15


The Bhasin decision creates a new common law cause of action between parties to a commercial contract: breach of the duty of honesty. In the context of construction contracts, it is easy to imagine how a subcontractor or contractor could bring a claim for breach of the duty of honesty against a contractor or owner.

Construction companies would be prudent to review and revise their contracts to ensure they meet the minimum core requirements of the new duty of honesty and to properly define and limit the scope and extent of disclosure expected between the parties for certain construction contracts.

Damon Stoddard is a senior associate with Heal & Co. LLP.

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