Essentials: Duty of Honesty in the Performance of Contracts

Update by Volodymyr Burlachenko and Erin Brandt, Cofounder

The Bhasin v Hrynew, 2014 SCC 71 court decision is a landmark ruling by the Supreme Court of Canada that established that parties have a duty of honesty in performing contractual obligations. The case involved a business dispute between Canadian American Financial Corp (“Can-Am) and two of its retail dealers, Harish Bhasin and Larry Hrynew.

Background

Mr. Bhasin and Mr. Hrynew both sold Can-Am’s education savings plans. As independent retail dealers of Can-Am, Mr. Bhasin and Mr. Hrynew were in direct competition with one another. Mr. Hrynew had previously made efforts to merge businesses with Mr. Bhasin in order to capture Mr. Bhasin’s lucrative business, but Mr. Bhasin refused.

Separately, Can-Am asked Mr. Hrynew to review the business records of all its retail dealers, including Mr. Bhasin, to ensure the retail dealers were complying with securities law. Mr. Bhasin objected to having Mr. Hrynew, his competitor, review his confidential business records.

When Mr. Bhasin’s contract with Can-Am was ending, Can-Am refused to renew it, which caused Mr. Bhasin to lose most of his sales agents to Mr. Hrynew and significant business value.

Decision

The Court found that Can-Am repeatedly misled Mr. Bhasin and breached its duty of honest performance in not renewing Mr. Bhasin’s contract. This failure to deal honestly with Mr. Bhasin caused his business significant damage.

While some of Mr. Bhasin’s claims were rejected, the Court did order Can-Am to pay Mr. Bhasin $87,000 in damages plus interest.

Key Takeaway

The Court's ruling confirmed that there is a general organizing principle of good faith that underlies many facets of contract law. The Court established that this general organizing principle of good faith includes a new duty of honest performance. This means that companies and people must be honest with each other in performing contractual obligations.

Although Bhasin v Hrynew was about a commercial dispute, it is nevertheless an important ruling for Canadian employment law. The principles established in this case mean that employees and employers must be truthful and transparent in employment contracts. They also can’t deceive one another within the employment relationship. This is particularly important for employers to keep in mind when terminating an employee’s employment.