In any event, a contract has implied and express terms. Express terms are easy to decipher, and they constitute the substantive part of the contract. Often, contracts impute binding obligations to the parties and violation of any term attracts liability. Implied terms of a contract operate in the underground. In an event of a claim of infringement, the court has to analyze both express and implied terms of the contract. Often, courts allocate liability depending on what term of the contract is in violation. In a practical scenario, some terms are more relevant than others. In the past, courts have held that some terms are so fundamental that their infringement gives the other party a right to rescission. Such has never been the positions of implied terms because some contracts are oral. The parties hope that the other party will fulfill their duty in good faith, which constitutes an important component in a contract.
Although unwritten, they operate in the consensual spirit of the contract (Tarr, 2015). Good faith imputes honest dealing and fairness in a contract and it is an important element in both written and unwritten contracts. The US legal system acknowledges that the doctrine of good faith and fair dealing as an important element in the contract law. This concept came to the attention of the US courts in the year 1933 in the case of Kirke Shelle company v the Paul Armstrong Company. In this case, the courts found that for every contract, there is an implied covenant to avoid any action that operates to deny the other person’s right in a contract. This fact sounds good faith overtones. Courts in other states have slowly used the decision as prudence to reform their law (Stoddard, 2015). However, the scope of the doctrine has been an area of contention internally. The Bhasin and Hynew case is a landmark case on the operation of the principle of good faith. A thorough analysis of the case would be important to appreciate the input of the decision in the Canadian common law.
The Legal Context of the Case
Historically, the Canadian common law did not recognize good faith as a duty between contracting parties. The practice was so striking and leaving much burden on the courts in enforcing contractual bindings. Regardless, the courts always contrived to hatchways of instilling discipline among contractors. The aggregate practice led to the courts to mark certain conducts as a general breach of good faith. For instance, in Holdings Ltd. v. Alma Mater Society of the University of British Columbia, the court prohibited a property owner who had led a tenant into believing that the application of the tenancy would expand, from alleging that she had failed to renew the contract on time. In some other cases, the courts consider it an abuse of good faith by seeking to enforce an amendment effected without the knowledge of the other party. The court took this position in the case of AMJ Campbell Inc. v. Kord Products Inc. Here, the court estopped the defendant from enforcing an amendment he had effected into a contract without informing the other party.
With time, these piecemeal solutions constituted a body of inconsistent law on cases that violated good faith. To add to the confusion was the fact that the courts could recognize the duty of good faith. However, the finding was limited to specific contracts whose execution depended solely on it as a fundamental term. Such involved cases where one party had discretionary power over something. Despite this case, consensus on the scope of bad faith was a distant dream. Many courts, especially made decisions depending on the result of bad faith. In some cases, the courts were only motivated to take action when an infringement crossed to the level of fraud. This was a high very high threshold and would eventually leave many cases unpunished and victims without a remedy. The efforts to recognize the duty as a statutory obligation failed to yield. Until the decision in Bhasin v. Hrynew case, the manner of the recognition of the doctrine has been fraught with much inconsistency. Among other things, the decision led to the development of the principle of organizational good faith and set duty of care as the minimum threshold of good faith (Mummé, 2016).
Bhasin v. Hrynew was a Supreme Court appeal, from the trial court decision. Here, the applicant would market would market education savings for can AM a financial institution to the investors. The contract between was based on a dealership interactions. The conflict emerged when the Can-AM refused to extend the period of a dealership. The contractual agreement provided for an automatic renewal of periodically after three years unless a party is seeking to avoid it gave a notice of termination in six months. Hrynew a competitor to the appellant unduly influenced the company not to approve the renewal. Shortly afterward, Alberta Securities raised concerns on the code of practices within Can-AM. This move prompted the company to appoint Hrynew as the provincial trading officer to analyze confidential documents of other dealers, a move that the appellant rejected aggressively. Can AM decided that it would, in fact, force the two agencies to merge, but made Bhasin believe that it would not happen. The notice issued expired, and the appellant lost all the value in the business. Hrynew succeeded in soliciting Bhasin’s sales agents. The questions of determination were whether the Canadian law recognized a duty to act honestly and if yes, whether the applicant responded was in breach of that duty (Bhasin v. Hrynew, 2014]. The trial court observed that the company was in breach of good faith for acting dishonestly and affirmed the trial court award.
The Supreme Court Decision
The Supreme Court could not help allowing an appeal against the company. The presiding judge Cromwell noted that good faith as a general organizational principle, which governs the common law of contract, informs other rules in relations that elicit contractual performance. In his judgment, Justice Cromwell reasoned that insisting on certainty in commercial dealings would take the Canadian contract law closer to US uniform commercial code and Quebec civil code. The decision implied duty to act in good faith by refraining from lies that have a direct impact on the performance of a contract. In addition to that, the court argued that the principle is highly-contextual, and any future claim on the infraction of good faith should be founded on the existing common law doctrines.
Striking Conclusions in The Case
At the appeal, the court allowed the appeal in part, making a finding that there was no intention of the parties in a perpetual contract. A finding whether the clause was validly invoked was a question that the court had to determine. Whether a duty of good faith stood or not, was connected to the answers raised in this issue. In the two cases, the trial and the appeal case, there was consensus on several points of developing law and fact. First, that the operation of good faith is limited to the performance of the contract and not in the negotiation of the contract. This proposition has the implication of reducing the relevance of the respondent-plaintiff argument in alleging inequality in the bargaining of the contract. Extending the theory to practical scenarios dispenses with the fact that, termination and the renewal clause could have been validly argued to construe a perpetual contract, a move that would have created much uncertainty making it difficult to make a finding on the duty of good faith. In this case, the appeal court focused and purposed to infuse certainty in the operation of the doctrine (Kestenberg, Kravetsky, & Reine, 2015). As already noted, it is not that it was never there, but was invoked in an ad hoc manner incapable of defining its tenets.
Secondly, both courts recognized that the general organizing principle of good faith as a contextual principle. This acknowledgment is important in practical contractual scenarios. Contracts differ fundamentally. Likewise, each contract varies in terms of wording and parties designate words in contemplation of its spirits. As a question of fact, in each contract, interparty expectations defer invariably. In some contracts, for instance, the expectations of good faith are higher to an extent they could be deemed to constitute an operational term. The acknowledgment is in line with two indisputable facts. First, good faith should be a tool for contract performance efficacy, and should not be construed as a self-defining term. Secondly, parties to a contract reserve some freedom to decide on the binding terms of a contract (Kestenberg, Kravetsky, & Reine, 2015). As such, parties should never be subjected to overbearing and unsolicited facts as that would take away one of the fundamental aspect of a contract, freedom of contracting parties.
Thirdly, in the circumstances, the court recognized that there ought to be a duty of honest performance in law. The reasoning of this court was necessary for certainty of Canadian common law. The court took notice that the law was by far inconsistent in its findings and provided a remedy in an ad hoc manner. The proposition of the court was not to require parties to maintain a fiduciary duty that they would fulfill the contract in good faith, but a simple requirement not to lie or act in a manner that compromises reasonable expectations of other part’s interests arising from the operation of the contract (Tarr, 2015). Lastly, the Court noted that the parties control the scope of honest performance, only that in some instances, courts could infer the intent of good faith from the wording of the contract.
Important Contributions in Common Law
Common Law Duty of Honest Performance
Here the court proposed a common law obligation to act honestly in all contractual obligations. This was a new common law duty. For the first time, the courts recognized the need to have a specific law defining what this duty is and give it some legal force. It refused to recognize a general duty of good faith and adopted a narrower approach for reasons of certainty. The shift would help to cure the implications of the court’s decisions such as Transamerica Life Canada Inc. v. ING Canada Inc, where the court remained categorical that a general duty of good faith was too wide to enforce. However, this was not to imply that courts were indeed proposing a fiduciary duty between the contracting parties, but a duty not to lie or mislead the other on a material fact fundamental to the performance of the contract. The sope of this duty can be modified because it varied with the context of every case and parties can be free to relax the requirements in every case as long as the basic requirements are met.
In his reasoning, the appeal judge was steadfast that honesty duty did not imply a duty to disclose but a requirement that a person shall not participate actively in misleading the other party as this could be utterly unfair in commercial dealings (Bhasin v. Hrynew, 2014]. Secondly, the court reasoned that it was not a duty of loyalty to place the interests of the other party first, but an emphasis of fair dealing during the operation of the contract. Such acts as one that deliberately serve to deny the other party a chance to enjoy the benefits of contract contrast the requirement of good faith. Lastly, the court noted that the requirement of fairness operated in a similar manner to civil fraud and estoppel. However, it was quick to draw the distinction between them in that honest performance operated differently and not subsumed by them. This distinction was necessary as it introduced a new extension of common law under which a claimant could recover (Stoddard, 2015). It was a narrower approach that took cognizance of other circumstances in the commercial world where persons’ rights could be infringed without sufficient grounds to plead fraud. Under the previous regime, a person could only recover in circumstances tantamount to fraud. This was a higher threshold and inadvertently denied a remedy in deserving cases. In addition to that, under the old law, the definition of good faith was too vague and lacked clear scope. Courts could only entertain a case on the same when an act closed lanes to bad faith or when the gravity was too high to constitute a clear case of fraud.
Good Faith as an Organizing Principle
At first instance, justice, Cromwell recognized the organizing principle of good faith as a necessary extension underlying the existing common law doctrines in contractual performance. Expounding, the application of the doctrine, the court found that the parties should contrive to perform their duties in a manner that is reasonable and fair (Mummé, 2016). This statement has the effect of outlawing, capricious and arbitrary performances. The seating judge had more to expound more on the operation of the doctrine. First, that the principle is not a freestanding rule, but operates as an underlying standard manifest in the existing common law doctrines that defines relationships and situations that good faith constitute an important element.
In this proposition, the court was recognizing that the concept was intended to operate as a supplementary condition to infuse efficacy in the existing common law doctrines. Before this decision, the courts recognized that in certain cases, the law recognized good faith but the application was ad hoc and largely inconsistent. The organizing principle was in practice a scope-defining rule for the operation of the good faith doctrine. As an organization principle, one could not rely on it to create a different duty other than on honest deliberation for the efficacy of the contract. However, the decision was only a start of recognition of good faith (Stoddard, 2015). The presiding judge noticed that it was a growing section of the law and courts could imply other duties in future.
In the case Bhasin v Hrnew the Canadian supreme court made a harmonization of the incoherent and unsettled manner in case law in the application of the doctrine of good faith. The supreme court rejected the ‘wholesale application’ in the use of the good faith doctrine, where the presiding judge described the issue as an incremental change to the presiding law. As part of the judgment, the judge acknowledged that commercial parties require a basic level of honesty and good faith in their business dealings and contracts (Kestenberg, Kravetsky, & Reine, 2015). For instance, when dealing with long term contracts, the element of trust and honesty highly determines the outcome of the performance. As such, misleading and deceitful acts will be against the general expectations of the contracting parties.
However, it is essential to acknowledge that the doctrine of good faith has to be applied in a consistent manner and it should not contradict or affect the freedom of the parties in a contract. For instance, in some instances, one party in a contract might engage in activities that are to the detriment of the other contracting party for the purpose of their selfish economic interests. As such, exemplifying such a conduct is against the principle of good faith. However, it is essential to note that the principle of good faith should not be taken as an implied in the contract, but as a general doctrine that can be applied in any contract for the purpose of imposing a standard level of trust and honesty in contractual performances (Stoddard, 2015). As such, the duty of honest performance is treated as a general doctrine with little interference on the freedom of contract because all parties expect the other party to exhibit honesty in the performance of their obligations in a contract.
In this decision, the intent of the court was to compel a more consistent and principled use of the doctrine. In addition to that, the doctrine implores the courts to develop the law incrementally where it finds the law defective. Of importance is that any construction of the law must be relative to other common law commitments such as freedom of the contracting parties to pursue personal interests. The focus of the case was to set a higher degree of predictability and coherence in the application of common law.
An important contention with many people is whether the move should be in fact be construed to imply additions to common law. While noting that it would be important to admit its significance, it does not advocate substantive provisions nor does it propose alterations of common law provisions. However, this is not to say that the case did not imply significant input. The doctrine of good faith has been in existence since the immemorial, but the application was fraught with much inconsistency, a legal gap the case sought to fill (Kestenberg, Kravetsky, & Reine, 2015). In the judgment, the presiding judge presented that the case did not fall into a relationship or an existing situation and it was established that duty of honesty was breached.
Potential Future Challenges
The challenges evident in implementing this decision fall in three parts. First, the courts contemplated that the scope of good faith could be expanded in the future, but the court did not opine how and in what ways it might be expanded in the future. The situation, in this case, was easy to solve by invoking minimum standards of honest practice. However, this is just one case. The court sheds some insight that the duty of honesty operates in contextual cases. Such instances may include situations where the court encourages a person to inflict a loss on another for economic efficiency. In such contexts, the concept of good faith does not exist, and this effectively dispenses with the organizing principle since it is a dependent construction (Stoddard, 2015). This means that the future could be even vaguer, and deserving cases could pass without a remedy in law.
Secondly, reconciling the idea of prohibition of active dishonesty and the lack of duty of disclosure may be hassling task and eventually compromises efficiency in the operation of a contract. In a practical setting, a person may opt to remain silent to avoid making a statement that could be untrue. In light of the decision in Bhasin case, an aggrieved party cannot plead breach of the duty of honest dealing, as one has to demonstrate infraction of one of the common law doctrines (Tarr, 2015). Lastly, it leaves it unclear whether good faith is actionable. In the wording of the court, good faith is not a freestanding rule; a person has to plead one of the rules under it. Some courts have adopted this approach while others have ruled directly on the violation of good faith.
Concluding Sentiments
The elements of a contractual agreement could be either express or implied. Express terms are easily ascertainable, and courts do not have trouble in attaching liability in case of infringement. Unwritten terms often present a significant dilemma. The courts have to contrive to interpreted the contract to imply other terms that could have been necessary for efficient operation of the contract. The concept of good faith comes under this category. The challenge that comes in a discourse, whether the same is infringed was discussed in the case Bhasin v. Hrynew.
It was a common law changing the case to guide the courts in the interpretation of contracts. It takes a special position in the development of Canadian by making two significant contributions. It recognized the organizing principle of good faith and honesty duty as the minimum threshold in contractual agreements. The two define the scope of application of good faith in the common law. The object of the decision was to promote coherence and predictable use of the doctrine. However, future developments need to explain whether good faith in itself is actionable and to reconcile the idea of honest dealing with the duty of disclosure.
References
Bhasin v. Hrynew, [2014] 3 SCR 494, 2014 SCC 71 (CanLII), <http://canlii.ca/t/gf84s>, retrieved on 2016-07-23
Kestenberg, M., Kravetsky, M., & Reine, D. (2015, June 9). Good Faith and Honesty: Bhasin v Hrynew. Retrieved July 24, 2016, from Norton Rose Fulbright: https://www.acc.com/chapters/ontario/upload/FINAL-slide-deck-June-9-15-2.pdf
Mummé, C. (2016). Bhasin v. Hrynew: A New Era for Good Faith in Canadian Employment Law, or Just Tinkering at the Margins? International Journal of Comparative Labour and Industrial Relations.
Tarr, J. A. (2015). A growing good faith in contracts. Journal of Business Law, 2015(5), 410-415.
Stoddard, D. (2015, Summer ). A case comment on Bhasin v. Hrynew and the new organizing principle of good faith and duty of honesty in contractual performance. Retrieved July 24, 2016, from Heal & Co. LLP: http://www.healandco.com/resources/enewsletter/summer-2015/a-case-comment-on-bhasin-v-hrynew-and-the-new-organizing-principle-of-good-faith-and-duty-of-honesty-in-contractual-performance/
