Duty of Honest Performance of Contracts Recognized in Canadian Common Law

In a landmark decision, released on November 13, 2014,  (Bhasin v. Hrynew 2014 SCC 71), the Supreme Court of Canada recognized a new common law duty for parties to a contact to perform their contractual obligation honestly and in good faith, i.e. a duty of honest performance.   The recognition of this duty represents a change in the law in Canada. 

 

In this case, the plaintiff, Mr. Bhasin, operated a business in Alberta selling registered education savings plans on behalf of Canadian American Financial Corp.  (“Can-Am”).  After almost 10 years, Mr. Bhasin and Can-Am entered into a new agreement governing their relationship featuring a three year term which renewed automatically unless one party gave 6 months’ notice of termination. 

 

The defendant, Mr. Hrynew, a direct competitor of Mr. Bhasin, began working for Can-Am with a view to merging his business with Mr. Bhasin’s business.  Mr. Hrynew was placed in the position of “auditing” Mr. Bhasin’s business.  Can-Am repeatedly misled Mr. Bhasin about Mr. Hrynew’s duties and obligations as an “auditor” as well as the plan to merge Mr. Hrynew’s business with Mr. Bhasin’s.  Ultimately, Can-Am gave notice that it did not intend to renew Mr. Bhasin’s agreement resulting in the loss of value that Mr. Bhasin had built over a period of almost 10 years.  Mr. Bhasin’s sales force was subsequently assumed by Mr. Hrynew.

 

Mr. Bhasin sued Can-Am and Mr. Hrynew in the Alberta Superior Court alleging, among other things, that they had breached an implied duty of good faith.  His claim was successful at trial but was subsequently dismissed by the Alberta Court of Appeal. 

 

In a unanimous decision (the majority decision was written by Mr. Justice Thomas Cromwell), the Supreme Court of Canada held that the common law in Canada should take an incremental step forward to recognize a general doctrine in contract law that imposes a minimum standard of honest contractual performance.

 

The court recognized that Anglo-Canadian common law has resisted acknowledging any generalized, independent doctrine of good faith performance of contracts which is out of step with civil law of Quebec and most jurisdictions in the United States.  Rather, Canadian common law in that respect was piecemeal, unsettled, unclear and inconsistent with the reasonable expectations of commercial parties. 

 

Justice Cromwell identified the Court’s role to develop the common law to keep pace with the “dynamic and evolving fabric of Canadian society” where it can do so in an incremental fashion.  He contemplated not a wholesale change or a reversal of settled law, but a development directed at bringing greater certainty and coherence to the law.

 

The new doctrine of honest performance is characterized by two incremental steps:

 

1.  the first step is to acknowledge that good faith contractual performance is a general organizing principle of common law of contract which informs varies rules in various situations and types of relationships and recognizes obligations of good faith contractual obligations; and
2. the second step is to recognize as a further manifestation of this organizing principle that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

This new duty of honest performance is not an implied term but a general doctrine.  This means that the duty is operative irrespective of the intentions of the parties and is analogous to any other equitable doctrine such as unconscionability.   Justice Cromwell provided some guidance on how the new doctrine would manifest itself in the day to day performance of the commercial parties.  A general duty of honesty in contractual performance means simply that the parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.  This does not impose a duty of loyalty or of disclosure or require a party to put the other party’s economic interest ahead of its own.

This new principle has the potential to affect the manner in which commercial parties structure agreements, the way that parties to a contract exercise existing rights, negotiate for future rights and generally communicate with each other.

Regards,

Blair

Departing Employees owe duties to Employers

The Supreme Court of Canada has sent a strong message to a group of employees who orchestrated their departure from their employer, resulting in serious harm to the employer's economic interests.

A recent decision released by the Court involved RBC Dominion Securities and Merrill Lynch Canada, competitors in the investment brokerage business. In a move coordinated by RBC's branch manager, virtually all of the investment advisers at RBC left their jobs and went to work for Merrill Lynch. As a result of the departure, only two very junior investment advisors , who Merrill Lynch had not sought to recruit, and two administrative staff members remained at the RBC branch. The employees gave RBC no advance notice and in the weeks preceding their departure they copied RBC's client records and transferred them to Merrill Lynch. The Court found that RBC's office was effectively hollowed out and all but collapsed.

In a 6 to 1 ruling, the Supreme Court restored a trial award of $225,000 against Merrill Lynch, and its manager which were held jointly and severally liable for inducing the breach of the employees' contracts and for unfair competition, as well as $250,000 in punitive damages against Merrill Lynch. The Merrill Lynch manager was individually found liable for punitive damages in the sum of $10,000.

The court awarded $40,000 total damages to RBC against its former employees for failing to give RBC adequate notice of their departure as well as punitive damages of $5,000 each. It awarded over $1.4 million against the former RBC branch manager who had orchestrated the operation for breaching his duty of good faith and $5,000 in punitive damages. The damage award represented five years of lost profits for RBC.

The Court found that damages arising in respect of a breach of contract should arise either naturally, or as reasonably contemplated by both parties at the time they made the contract. In organizing the mass exit, RBC's manager breached his contractual duty of good faith, as an implied term of his employment contract was the retention of RBC employees who were under his supervision. The damages for that breach were the amount of loss it caused to RBC.

Generally individual employees who terminated employment are not prevented from competing with the employer during the notice period. The employer is confined to damages for failure to give reasonable notice. However, a departing employee might be liable for specific wrongs, such as improper use of confidential information during the notice period.

This case is an important one for employees who are concerned about whether they may really be found liable for damages for failing to provide reasonable notice of their departure and the fiduciary obligations of managerial employees and employers who consider hiring employees away from their competitors.

Regards,

Blair