On November 13, the Supreme Court in Bhasin v. Hrynew, 2014 SCC 71 (CanLII) changed the law of contract in Canada by imposing duties of good faith and honesty on all contractual relations. Until now, the duties have been applied to agreements in situations of power imbalance, notably insurance, employment and franchises.
The plaintiff, Mr. Bhasin, was a dealer in education savings plans, a type of consumer investment, offered by the corporate defendant. At the end of the three-year contract, the corporate defendant decided to invoke a notice provision blocking the automatic renewal of the contract. The reason for its decision not to renew was the favouring of another dealer, the other defendant and a competitor of the plaintiff. The facts resembled that of franchise, regulated by provincial legislation, but fell short of the statutory definition of franchise.
In siding with the plaintiff’s claim for damages, Justice Cromwell stated on behalf of a unanimous court three elements to the new state of contract law:
(1) There is a general organizing principle of good faith that underlies many facets of contract law.
(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.
(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.
A ‘Fair Opportunity’ Doctrine
The Bhasin court has been honest in recognizing, albeit implicitly, that there is no such thing as a contract without a power imbalance. For example, an insurance company represents pooled community resources and is usually the Goliath in the David v. Goliath standoff. However, what if the insured is a company worth twice the insurance company, with twice the number of lawyers in its legal department? The free market is all about exchange of mutual advantages, and arguably does not work very well if all parties are put on the same footing. How does the doctrine of honesty and good faith address the inherent informational disparities of the market? Justice Cromwell seemed to have this question at the back of his mind when he tried to insert the new doctrine between traditional contract law and other more onerous legal obligations:
The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests. That said, a dealership agreement is not a contract of utmost good faith (uberrimae fidei) such as an insurance contract, which among other things obliges the parties to disclose material facts: Whiten. But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.
If the contract does not work out ….
It should be observed that the new doctrine of ‘fair opportunity’ is one of contractual performance: it does not address the relationship of the parties while they are negotiating the bargain, but rather ‘if the contract does not work out.’ Therefore, the Supreme Court’s ruling does not deal with lop-sided bargains entered into because of one party being able to extract more favourable terms. There, rules of construction can be employed to require Goliath to play strictly by the rules it has imposed on David. Rather, the ‘fair opportunity’ principle deals with the application of the terms of the bargain and parties’ performance under the agreement at the moment one of the parties wants the agreement to stop governing their relations. This legal superstructure applies despite the absence of rules reduced to writing by the parties, or despite rules that are reduced to writing.
The notion that parties owe each other an implicit exit strategy or soft landing after the termination or frustration of a contract beyond the written contractual remedies is more than an incremental change in contract law. It is a limitation on the ability of the parties to rely on the bargain as reduced to writing. One can readily foresee litigation arising from the grievances of parties who rely on automatic renewals of contracts against those who invoke contractual provisions to stop the renewals.
From a wider perspective, one can also foresee parties invoking the ‘fair opportunity’ doctrine to pursue benefits under contracts beyond the written word, on the basis that the other party was less than honest about its intentions. If a vendor has entered into a more advantageous provisional deal and is waiting for non-fulfillment of a purchaser’s condition, is a vendor in breach if he invokes termination of the first sale agreement one minute after midnight of the agreed date, in order to enter into the more profitable deal? Should the vendor have offered an extra day for the original purchaser to comply?
How can one argue against honesty?
On reflection, it is not that hard. It is a virtue whose absolute standing in law is not, in fact, guaranteed in our civilization. Compared with wrongs against God or human life (idolatry and homicide), a wrong committed against the truth is usually articulated as a logical device to achieve consistency in trade or the integrity of judicial process.
Jewish law famously permits the telling of a ‘white lie’ in order to exhibit modesty, to prevent harm or to preserve a matrimonial relationship, all considered to be more socially important than the untold ‘black truth.’
The 3,800 year-old Code of Hammurabi contained this law #265: ‘If a herdsman, to whose care cattle or sheep have been entrusted, be guilty of fraud and make false returns of the natural increase, or sell them for money, then shall he be convicted and pay the owner ten times the loss.’ Honesty in trade was clearly considered worthy of the magistrate’s protection, not so much because it was tied to the relationship of trust between the owner and the herdsman, but because growth of commercial agriculture relied on livestock owners’ ability to function without personally tending to the animals in the hills.
Honesty in the Ten Commandments is subsumed into a more specific prohibition against false testimony against one’s neighbour. With TARDIS-like logic of the Ninth Commandment being bigger on the inside than on the outside, we often mistakenly believe that there is a commandment that says, Thou shalt not lie.
Oscar Wilde, in his essay, The Decay of Lying, argued that deception, the basis of all good art, occupied a plane higher than truth because deceptions peeled away the surface knowledge of things and human interactions. Although one would not promote such logic for the purpose of a Supreme Court ruling on the state of Canadian Common Law, Wilde’s tongue-in-cheek thesis reminds us that disparities in information (a common dramatic device, as in Wilde’s The Importance of Being Earnest, A Trivial Comedy for Serious People) are inextricably operative in human dealings.
In the 21st century, the idea of the ‘bargain’ during the Black Friday or Boxing Day retail sales is a backbone of the North American economy, and relies on the perception that goods and services are being offered for less than what they are worth. A mortgage ‘holiday’ offered by an institutional lender may appear to the homeowner as a free month, but in amortized terms can be more advantageous to the lender as a managed boost in interest converted into principal. Indeed, parties to a contract can enter into it with their eyes wide open, knowing that an important premise may not be true. So the Supreme Court’s premise that honesty is an underpinning of peaceful civil relations appears to be terribly naïve. In the reality of human interaction, honesty and dishonesty are parts of the chaos that provides growth and advancement, as well as victims such as Mr. Bhasin.
Unintended Consequences of Bhasin
As argued in The Role of a Judiciary in a Coalescing Democracy, our Supreme Court is undergoing a time of judicial activism against the freedom of the constituents of our democracy to organize their affairs in accordance with written terms. Bhasin adds to a body of law in which the courts require contractual bargaining and performance to adhere to unwritten legal norms. In the case of unfair terms, the courts are reluctant to enforce them. Here, in introducing a ‘fair opportunity’ doctrine, the court has imposed duties upon contract termination or dissolution beyond traditional power-imbalance situations such as employment and insurance, and beyond the elected legislature’s definition of franchise law. A business that has organized its affairs outside the application of franchise law’s written statute may, in some respects, be subject to a judge-made law similar to certain aspects of the statute.
Those familiar with the legislative process know that subject matter inclusion and exclusion from a statute is a matter of close deliberation among stakeholders. If elected officials and their delegates excluded from regulation the arrangement to which Mr. Bhasin signed on, should the court decide he is entitled to treatment as if the scheme were included? Does this fall into the jurisdiction of the judicial branch of government to arbitrate disputes and to express legislative intent?
A serious problem with filling legislative gaps in this manner is that judge-made law is inevitably uncertain. If the ‘fair opportunity’ is not a duty of disclosure and is not a fiduciary duty, what is it? Perhaps in trying to extend judicial control over private contracts, the court will cause the drafters of contracts to revisit their existing agreements and wonder how to make them comply with the new doctrine, if that is possible. Bhasin will either provide contract lawyers with more work, or make business give up on contracts and lawyers even more.