Download Implied Obligations

Good Faith in
Contractual Relations
Professor Rosalie Jukier
Formation Continue
February 24, 2015
Good Faith

1. What is it that lawyers need to know about
the duty of good faith in:



A. Quebec
B. Common law Canada
2. Examine good faith through the lens of two
important and recent decisions


Bhasin v. Hrynew 2014 SCC 71 (Common Law)
Churchill Falls (Labrador) Corp v. Hydro-Quebec 2014
QCCS 3590
But is it also…


3. To see the evolutionary capacity of law and
the use of creativity in legal argumentation
4. To see the cross-fertilization of ideas:


A. as between legal traditions (civil and common law)
and
B. as between legal systems within a single legal
tradition (the potential influence of German civil law
on Quebec civil law)
Outline


A. Discussion of recent Supreme Court case of
Bhasin v. Hrynew which purportedly brings in a
general duty of good faith in contract
performance in common law Canada (Prof
Jukier)
B. Discussion of good faith in Quebec including
the recent Quebec case of Churchill Falls v.
Hydro Québec (Prof Cumyn)
Mise en contexte


Quebec position on good faith:
« Trilogy » of Supreme Court cases (Que)
pre-dating the CCQ:


Banque National v. Soucisse 1981 2 SCR 339
Banque National du Canada v. Houle 1990 3
SCR 122

Banque du Montréal v. Bail 1992 2 SCR 554
Good Faith in Quebec



Soucisse (1981): SCC (Beetz, J) used former art.
1024 CCLC (now 1434 CCQ) to “imply”, via
“equity” an obligation of good faith into the
performance of the contract
The effect was to add an obligation on the part
of the Bank (which was nowhere explicit in the
contract) to disclose to heirs a suretyship to
which they would otherwise be held
Failure to do this resulted in a fin de non
recevoir
Good Faith in Quebec




Houle (1990): SCC (L’Heureux-Dubé, J) took
Soucisse a few steps further:
1. Brought in the notion of “abuse of rights” making a
party potentially liable in damages even if that party
performed a contractual term to its letter
2. In that sense, good faith could, in effect, override
an express contractual provision (demand loan
becomes loan that requires reasonable notice)
3. Confirmed that good faith requires the reasonable
exercise of contractual rights (not simply malicious
bad faith)
Good Faith in Quebec


Bail (1992): SCC (Gonthier, J) extends the duty of
good faith in the performance of a contract to the
formation of a contract
Codification: CCQ brings in 3 relevant provisions
that codify jurisprudence:


Article 1375: “The parties shall conduct themselves in
good faith both at the time the obligation is created and at
the time it is performed or extinguished”
Articles 6 and 7: Article 7 confirms that the doctrine of
good faith includes both exercising a right “with intent of
injuring another or in an excessive and unreasonable
manner”
Upshot of Good Faith in Quebec




Seen as a “robust” doctrine
Has gone so far as to imply an obligation to
cooperate between franchisor/ee (Provigo
Distribution v. Supermarché ARG [1998] RJQ 47
(C.A.)
Applies in all contractual contexts, even
commercial (unusual for protective doctrines)
How much further can it go? Can it require
parties to renegotiate contracts? Churchill Falls?
Common Law?

Summed up by Angela Swan:


Viewed as “some kind of embarrassing faux
pas or social disease”
Most academic commentators were either
against, or extremely wary, of the doctrine

“It is worth adding a word about an implication which
is not made as a matter of course in English law –
that contractual duties will be performed in good
faith” Stephen Smith, Atiyah’s Introduction to the Law of
Contract
Common Law?



Michael Bridge wrote an article entitled, “Does
Anglo-Canadian Contract Law Need a Doctrine
of Good Faith?” and concluded, generally, no
Shannon O’Bryne (U of Alta) and John
McCamus (Osgoode) are common law
academic proponents of good faith
But the Canadian position was “piecemeal,
unsettled and unclear” (Cromwell, J. in Bhasin
v. Hrynew
Why the resistance?

Uncertainty


Autonomy of the Will and Freedom of Contract


“…concern that [it] will bring an unattractive degree of
uncertainty to the law” (McCamus) and increase the
cost of litigating contract disputes
Judicially imposing this obligation would permit courts
to interfere with the express terms of a contract
(Transamerica Life v. ING Canada 2003 68 OR 457 (C.A.))
Defeat the essence of negotiation

It will “hobble the marketplace” (Iacobucci, J in Martel
Building Ltd v Canada 2000 SCC 60)
Result…



Good Faith applied in the common law only
in exceptional circumstances:
In certain kinds of contracts (eg insurance,
employment, franchise)
In certain kinds of situations



Where parties must cooperate to achieve objects of
the contract
Where one party exercises discretionary power under
the contract
Where one party seeks to evade contractual duties
For example






McKinlay Motors Ltd. v. Honda Canada (1989) 46 B.L.R.
62 (Nfld SCTD)
McKinlay Motors has a long-term Honda car dealership
Contract gave Honda discretion in the allocation of cars
Honda proceeded to execute a “downward allocation
spiral” because it wasn’t satisfied with the level of
“pizzazz” of the dealership
Held (Trial level Nfld): Honda acted in bad faith in the
exercise of its discretion to allocate cars
There is an “implied term…that parties act toward each
other in their business dealings in good faith”
For example

Gateway Realty v. Arton Holdings
(1991) 106 NSR
(2d) 180







2 competing shopping centres
Zellers is anchor tenant of Gateway Centre
Arton convinces Zellers to relocate to its Centre
Zellers has 17 years left on its lease in Gateway Centre and
has assignment of lease clause
Zellers assigns lease to Arton and Arton proceeds to leave
premises vacant!
Obligation not to exercise the contract in a harmful manner
Contracting parties must respect community standards of
honesty, reasonableness or fairness
Bhasin v. Hrynew
November 2014






B: enrollment director for Can-Am since 1989. The parties have
a commercial dealership agreement (3 year term but renewable
unless 6 months notice given to terminate)
H: a competitor enrollment director who wants to capture B’s
lucrative market share
H proposes a merger which B rejects
H and Can-Am work in tandem
Can-Am appoints H to be trading officer to review enrollment
directors’ compliance with securities law (B alleges this is a
conflict of interest and refuses to cooperate)
Can-Am misled B about its ultimate intention (to merge the 2
businesses) and when B refused to allow H to audit his records,
Can-Am gives notice to terminate the agreement.
What is wrong with that?

Trial Judge:
Contract was analogous to a franchise contract and
therefore court could apply duty of good faith. Here, there was
a lack of good faith because the exercise of the non-renewal
clause was done in a dishonest and misleading manner and for
an improper purpose

Alberta C.A. reversed:



No general duty of good faith
Court cannot imply a duty that goes against an express
term of the contract (entire agreement clause)
Motive for triggering non-renewal was not restricted under
the contract
Supreme Court of Canada



1. Acknowledges good faith contractual performance as
a “general organizing principle” in Canadian common
law
2. Recognizes a common law duty which applies to all
contracts to act honestly in the performance of
contractual obligations
3. This will be:
 a. just
 b. accord with the reasonable expectations of
commercial parties and
 c. won’t detract from commercial certainty
English Law: Yam Seng Pte Ltd v. International
Trade Corp [2013] EWHC 111 (QB)





“Never underestimate the influence of football”
In the contract of distribution of Manchester United
branded fragrances Leggatt, J stated: “the traditional
English hostility towards a doctrine of good faith in the
performance of contracts, to the extent that it still
persists, is misplaced”
Refusing to recognize the doctrine is “swimming against
the tide” (civil law countries and the U.S.)
There is a “general norm” = expectation of honesty
No “improper, commercially unacceptable or
unconscionable” conduct.
Unpacking the Decision – What
exactly does Bhasin v Hrynew do?




Academic opinion is divided
Some herald it as a landmark decision that
radically changes the law for the better
Others are less favourable. One academic said,
“we see good faith raising its ugly head again,
courtesy of the SCC in Bhasin v Hrynew, and
trying as ever to commingle focused argument
with vacuous verbiage”
Others limit its scope to the narrow duty of
honesty
Questions





What is the scope of the new general duty of
good faith?
On what basis does it make its way into
Canadian common law?
How to meet arguments of autonomy of the will
and freedom of contract?
Can parties contract out of it?
How will it not bring uncertainty into the law?
Scope of Good Faith




Cromwell, J is careful to limit the scope of
his judgment
“Incremental change”
“Highly context specific”
Focus on dishonesty: “there is a general
duty of honesty in contractual
performance”
Divided Academic Opinion


“Don’t be a scumbag” and “behave
decently”
“(Merely) a general duty of honesty”

It only requires that “parties must not lie or
otherwise knowingly mislead each other about
matters directly linked to the performance of
the contract” (Justice Cromwell)
Compare with Quebec’s Duty of
Good Faith




While honesty is part of the duty, it is not limited
to it
Houle and article 7 CCQ: extends to
unreasonable behaviour
Arguably the facts of Soucisse could fall within
the dishonesty standard
Hard to construct the facts of Houle in a similar
way (actions were sudden, impulsive and
harmful but not dishonest)
Legal Basis of the Duty of Good Faith




Quebec: implied (by law) obligation of the
contract, now codified
Common Law: unclear
Is it a duty imposed by law?
Or is it one that is implied in fact
according to the reasonable intentions of
the parties?
Implied Obligation versus
Imposed Duty



Yam Seng decision in the UK: “basis…is
the presumed intention of the parties”
“Parties bind themselves in order to cooperate to their mutual benefit”
According to one Canadian commentator:

“it’s impossible to conceive of any contractual
relation as not being infused with obligations
of good faith”
Bhasin v. Hrynew



“Commercial parties reasonably expect a
basic level of honesty and good faith in
contractual dealings” (para 60)
On the other hand…
“this should not be thought of as an
implied term, but a general doctrine of
contract law that imposes as a contractual
duty a minimum standard of honest
contractual performance” (para 74)
Freedom of Contract concerns

Note difference in approach of L’Heureux-Dubé,
J. in Houle and Cromwell, J. in Bhasin v. Hrynew
 “While the doctrine may represent a
departure from the absolutist approach of
previous decades, consecrated in the wellknown maxim "la volonté des parties fait loi"
(the intent of the parties is the governing
factor), it inserts itself into today's trend
towards a just and fair approach to rights and
obligations” L’Heureux-Dubé in Houle
Freedom of Contract concerns

“[T]he duty of honest performance
interferes very little with freedom of
contract, since parties will rarely expect
that their contracts permit dishonest
performance of their obligations”
Cromwell, J in Bhasin v. Hryew (para 76)
So can parties contract out of
the duty?


Alberta CA held this duty was contrary to
the express terms of the parties’ contract
and that they implicitly contracted out of
it.
Cromwell (SCC): “I would not rule out
any role for the agreement of the parties
in influencing the scope of honest
performance in a particular context”
Ability to contract out



Cromwell (SCC): “parties should be free… to
relax the requirements of the doctrine as long as
they respect its minimum core requirements”
However a “generically worded entire agreement
clause” does not suffice
Leggett, J.: “in practice it is hardly conceivable
that contracting parties would attempt expressly
to exclude the core requirement to act
honestly”. Yam Seng (Cromwell, J. concurs)
Concerns of Uncertainty



“There is nothing unduly vague or unworkable
about the concept. Its application involves no
more uncertainty than is inherent in the process
of contractual interpretation” Yam Seng
Cromwell in Bhasin: “no risk to commercial
certainty”…”the duty is clear and easy to apply”
AND
“take comfort from experience of the civil law of
Quebec and…the United States”
Comparative Law Justification




Both Yam Seng (UK) and Bhasin v.
Hrynew look to foreign law
Sources: Civil law countries/Quebec and
the U.S.
Yam Seng: the Common Law is
“swimming against the tide”
Bhasin v. Hrynew: explicit reference to
Quebec (code and jurisprudence) and U.S.
Comparative law provides
comfort


“Experience in Quebec and the U.S. shows
that even very broad conceptions of the
duty of good faith have not impeded
contractual activity or contractual stability”
Result: Can-Am was held to have
breached its agreement “when it failed to
act honestly with Mr. Bhasin in exercising
the non-renewal clause”
Cross-Fertilization




Quebec civil law gives Court confidence to
move the common law forward
Raises a number of counter-currents
On the one hand, we want to maintain the
distinctiveness of Canada’s legal traditions
(message of the Nadon Reference)
One of the key take-aways from Justice
LeBel’s 14 years on the Supreme Court
Cross-Fertilization


On the other hand, while the duality of
Canada’s legal traditions should be
maintained and jealously protected, it
need not prevent each of the traditions
from learning from the other.
Rather, careful and respectful comparative
judicial methodology can only influence
the development of the law in a positive
way.
Value of Dialogue between
Legal Traditions



LeBel, J. recognized in Globe and Mail (2010 SCC) that
certain areas of law are more conducive to convergence
given their globalized context
Why should parties be allowed to act differently in the
performance of their contract in different Canadian
provinces?
Bhasin is a good example of a decision that seeks to
preserve the duality of Canada’s legal traditions while at
the same time acknowledging the mutual influence these
traditions can have on each other.
Legal Creativity: Using Good Faith in the
Face of No Imprévision





Can the duty of good faith in contract
performance extend as far as requiring parties
to renegotiate their contract in the face of
extreme changing circumstances?
Churchill Fall v. Hydro Quebec
German courts have accepted this scope for
good faith.
French and Quebec academics have as well
What will Quebec courts ultimately say?