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 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 not to invoke a provision blocking the automatic renewal of the contract. The reason for its decision was the favouring of another dealer, the other defendant and a competitor of the plaintiff.
On behalf of a unanimous court, Justice Cromwell stated three elements to the new state of contract law in siding with the plaintiff’s claim for damages:
(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.
In one respect, 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?
In treading a fine line between the contractual duty and that of a fiduciary or a duty of disclosure, Justice Cromwell introduced the concept of affording the other party the ‘fair opportunity’ to protect their interests in the event ‘the contract does not work out’:
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.
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. The notion that parties owe each other an implicit exit strategy or soft landing after the termination or frustration of a contract is more than an incremental change in contract law. In this sense, 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.
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