Duty of Honesty and Good Faith; Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71

The way in which the common law will look at contracts has changed dramatically with the decision of the Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71.  The Honorable Justice Cromwell, concurred with by the Honourable Chief Justices McLachlin, Lebel, Abella, Rothstein, Karakatsanis, and Wagner, has found that the duty to perform a contract honestly and in good faith will now be implied as a term of contracts and will, subject to very careful drafting, not be precluded by an entire agreement clause.

 

What follows are quotes from this ground breaking case which will be a welcome relief to many contracting parties frustrated by what are alleged to be dishonest dealing motivated by male fides; two paragraphs, [33], [74] and [86], summarize the new obligations:

 

"[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations."   

 

“[74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at paras. 15_19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, 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. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

 

“[86] 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."

 

Justice Cromwell reflected on three circumstances which historically have attracted the duty of good faith and unpin the manner in which the Court will impose this duty; at paragraph 47 and 48:

 

[47] “By way of example, Professor McCamus has identified three broad types of situations in which a duty of good faith performance of some kind has been found to exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties (pp. 840_56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 O.A.C. 43, at paras. 49_50).

 

[48] While these types of cases overlap to some extent, they provide a useful analytical tool to appreciate the current state of the law on the duty of good faith."

 

Justice Cromwell then went on to make it clear that this obligation will apply to real estate contracts and will be applied to prevent contracting parties who regret a bargain from reneging on the bargain:

 

"[49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase_sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale”: p. 1084."

 

"[51] This Court’s decision in Mason v. Freedman, [1958] S.C.R. 483, falls in the third type of situation in which a duty of good faith arises (where a contractual power is used to evade a contractual duty). In that case, the vendor in a real estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simple because he claimed his wife would not provide a bar of dower. The issue was whether he could take advantage of a clause permitting him to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made no efforts to do so by trying to obtain the bar of dower.  Judson J. held that the clause did not “enable a person to repudiate a contract for a cause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486. On the contrary, “[a] vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner”: p. 487."

 

Justice Cromwell makes it clear that commercial parties reasonably expect what he referred to as a basic level of honesty and good faith in their commercial dealings:

 

"[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties: see Swan and Adamski, at §1.24." 

 

Justice Cromwell also suggests that the duty of honesty and good faith leads to the conclusion that contracting parties should have “appropriate regard” for their contracting parties “legitimate contractual interests and makes it clear that this duty is distinct from a fiduciary duty.  Justice Cromwell makes it clear that it is not okay to lie or mislead contracting parties but such obligation does not create a duty of disclosure:

 

“[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary.  Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.”

 

“[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that 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 forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith.”

 

The Bhasin case will have far reaching implications.  It will be interesting to see how creative lawyers try to limit the scope of the duty of good faith without suggesting that dishonesty is contemplated by the contracting parties.  I query if much of the attempt to exculpate such obligations may simply be unenforceable as against public policy in light of Bhasin.  More significantly litigating parties and their litigators will add this to their pleadings and it will create potential liability even in the face of the well drafted contracts often foisted upon less powerful contracting parties.

Surely you can evict a tenant for prostitution; our Charter of Rights & Freedoms is impacting the landscape of landlord and tenant relations AND Summary Judgment; somethings change but yet might stay the same

One of the more difficult grounds to terminate tenancies for is breach of lease or breach of bylaws by acting in a manner which is criminal.  The reason for this is that the burden of proof in criminal matters is "beyond a reasonable doubt" whereas the civil standard is "on the balance of probabilities".  Notwithstanding this if a condominium corporation or a landlord has evidence of criminal activity related to prostitution by a tenant that an eviction would imminent on application to the Court.


In 1214777 Alberta Ltd v 480955 Alberta Ltd, 2014 ABQB 301 Master Schlosser was asked to terminate a tenancy based on the allegation that the tenant was participating in the criminal activity of prostitution.  He concluded that he could not based on the recent SCC case law which has now confirmed that the rights of prostitutes are protected by our Charter of Rights and Freedoms.  Master Schlosser concluded:

[44] If we put the conflicts in the evidence aside for a moment, the complicating factor about the landlord’s arguments is that the law of selling sex for money is in a state of limbo. Canadian prostitution laws were challenged in the Supreme Court of Canada and found to be unconstitutional. Madam Justice McLachlin said for the Court in Canada (AG) v. Bedford, 2013 SCC72:

3. Three applicants, all current or former prostitutes, brought an application seeking declarations that three provisions of the Criminal Code, R.S.C. 1985, c. C-46, are unconstitutional.

4. The three impugned provisions criminalize various activities related to prostitution. They are primarily concerned with preventing public nuisance, as well as the exploitation of prostitutes. Section 210 makes it an offence to be an inmate of a bawdy-house, to be found in a bawdy-house without lawful excuse, or to be an owner, landlord, lessor, tenant, or occupier of a place who knowingly permits it to be used as a bawdy-house. Section 212(1)(j) makes it an offence to live on the avails of another’s prostitution. Section 213(1)(c) makes it an offence to either stop or attempt to stop, or communicate or attempt to communicate with, someone in a public place for the purpose of engaging in prostitution or hiring a prostitute.
5. However, prostitution itself is not illegal. It is not against the law to exchange sex for money. Under the existing regime, Parliament has confined lawful prostitution to two categories: street prostitution and “out-calls” – where the prostitute goes out and meets the client at a designated location, such as the client’s home. This reflects a policy choice on Parliament’s part. Parliament is not precluded from imposing limits on where and how prostitution may be conducted, as long as it does so in a way that does not infringe the constitutional rights of prostitutes.

[45] Although these laws were found to be inconsistent with the Charter and void, the declaration of invalidity was suspended for one year. (The date of the Judgment was December, 2013).
[46] The old laws are still on the books but in a kind of legal limbo. Some of the activities at 50th Street Massage Centre might technically constitute crimes but neither 50th Street Massage Therapy nor its inmates or proprietors have been convicted, or pleaded guilty to any municipal or federal offences, much less offences under the Criminal Code of Canada.
[47] The commercial lease speaks to legality not morality. I am not willing to terminate this commercial lease on the basis of this state of the law and evidence. 

The case was also noteworthy to see how the recent judicial pronouncements with respect to Summary Judgment applications are being applied in Applications to Masters ; Master Schlosser commented:

[14] The Hryniak approach was recently endorsed by our Court of Appeal in Windsor v Canadian Pacific Railway Ltd., 2014 ABCA 108. Although that case was a ‘law case’, not ‘a facts case’, and the remarks in that decision are obiter with respect to whether there are any enhanced fact-finding powers now enjoyed by judges in this province, the Court did observe that the approach chosen by the Supreme Court of Canada in Hryniak was consistent with the Alberta rules. Rule 7.3 uses the very wide term, ‘merit’, and Rule 6.11, which lists the types of evidence that can be considered on a motion, includes oral evidence (6.11(g)). Our Court of Appeal has now also endorsed this approach for rule 3.68 applications (O’Connor Associates Environmental Inc. v. MEC OP LLC, 2014 ABCA 140 ).

[15] It remains to be seen whether a judge sitting in chambers in Alberta can now find facts or determine credibility based on Affidavit evidence. As was noted in the Ontario Civil Justice Reform Project, there are many layers of decisions against it (and see Beier v. Proper Cat Construction Ltd., 2013 ABQB 351,at para. 68, O’Hanlon Paving Ltd. v. Serengetti Develoments Ltd., 2013 ABQB 428 and Schaffer v. Lalonde, 2014 ABQB 222 (M)). Like the case in Ontario, a rule change, or a legislative change might be necessary.

[16] If we put these decisions together, the approach that now ought to be taken toward summary determination is as follows. I am drawing remarks of Master MacLeod in the Pammett decision and those of Wakeling, J., (as he then was) in the Proper Cat case. The new approach has been described as the “roadmap approach”. As I see it, the Alberta roadmap is as follows:

[17] The starting point (as found in the Windsor decision para. 13 and Hryniak at para. 49) is ‘to examine the record to see if a disposition that is fair and just to both parties can be made on the existing record’. The court is to look at the record and the dispute to decide whether it is essential to the resolution of the dispute that the court see the witnesses. If the answer is yes, the matter must go to trial. If the initial answer is ‘no’, the court is to engage in a six step process:

1. The court is to presume that the best evidence from both sides is before the court. (e.g. Canada v. Lameman, 2008 1 SCR 372, at 378 and 382). The decided cases tell us that summary judgment applications have to be decided on the evidence before the court and not on what the evidence might be. Parties are required to put their best foot forward. This
   reinforces the importance of treating summary judgment applications advisedly and with due caution. The only caveat that might apply here is that if the summary judgment application is before a Master and the losing party does not like the Master’s opinion, it is not so difficult to patch up the evidence on appeal.
2. As a corollary to number 1, the court is to ask whether a negative inference can be drawn from the absence of evidence on certain points.
3. Next, the court should look at the complete package and ask whether all of the evidence is admissible. Rule 13.18 (3), for example, tells us that we can’t use hearsay for a final application.
4. Next, the court should ask whether there is a conflict in the evidence and, if so, whether, (a) the conflict has been resolved on cross examination: Janvier v 834474 Alberta Ltd., 2010 ABQB 800, or, (b), whether the evidence giving rise to the conflict is purely self-serving and is otherwise unsupported: Guaranty v. Gordon, 1999 SCC. Self serving evidence does not give rise to a triable issue.
5. The next step is to examine the evidence. As Master MacLeod said in the Pammett decision:
   
   
   

   [28] There are subtle distinctions here. The court may assess the sufficiency of the evidence admissibility of evidence and reliability of evidence without access to enhanced fact finding powers. The court may also apply the law to the facts without deciding a genuine question of law.

   
   

   (emphasis added).   Assessing the sufficiency of the evidence will also involve considering whether the issue can fairly be decided on the factual record before the court (Tottrup v. Clearwater Municipal District (99) (2007) 68 Alta L.R. (4th) 237 at 242 and Gayton v. Lacasse, 2010 ABCA 123 at para. 11).
6. Having performed that evidentiary exercise, as Master MacLeod further says in the Pammett case: (and see Proper Cat at paras. 61-64, 69):

   
   

    [31] A plaintiff will be entitled to judgment if the plaintiff can prove all elements of the cause of action and the defendant either has no defence or is missing critical elements of proof necessary to maintain that defence. A defendant will be entitled to judgment if the plaintiff cannot prove an essential element of its cause or if the defendant has a complete defence.

[18] In a sense, much of the above is not truly new. It is more like a field guide to the principles summarized in Proper Cat and elsewhere. The main change is that the concept of proportionality urges the court to give summary remedies where it can.

[19] None of this affects the well established legal burdens. The legal or persuasive burden is on the Applicant throughout. The Respondent is not obliged to furnish evidence. However, if an Applicant discharges the evidentiary burden imposed upon it on a balance of probabilities, the evidentiary burden then falls to the Respondent to show that there is arguable merit to the case: Murphy Oil Company Ltd. v. Predator Corporation Ltd., 2006 ABCA 69, Proper Cat at paras. 66-7, 70, and Dasilva v McLean, 2011 ABQB 618 (M), and, now, that there is a compelling reason that it should go to trial.

[20] As noted in Schaffer v. Lalonde, Masters have an additional power under section 9(3)(b) of the Court of Queen’s Bench Act. If the evidence leads to something that cannot be resolved on the basis set out above, the parties can agree to have the court determine the issue, which would be fully in keeping with the concept of proportionality and would be consistent with embracing the culture shift noted by the Supreme Court of Canada in Hryniak.

[21] There is one last issue. And it requires guidance from above. The Hryniak case suggests that the threshold for granting summary judgment may be at the civil standard (balance of probability), rather than ‘plain and obvious’, or ‘beyond doubt’, which is closer to the criminal standard. The Supreme Court of Canada did not directly address this issue, or for that matter, any of the cases that establish the standard. It was not necessary to the decision as a chambers judge found that the outcome ‘was clear’, which seems to imply that the higher standard was met.

[22] Nevertheless, there is a tension between the language used in the Hryniak case and the well established standard for granting summary remedies. Until this issue is dealt with, when the court asks whether there is ‘any issue of merit that genuinely requires a trial’ (Windsor at para. 16), or whether a fair and just determination can be made on the merits, the threshold remains ‘plain and obvious’, ‘or beyond doubt’. In the meantime, this court is not free to conduct ‘paper trials’ on the civil standard.


[23] The concept of proportionality does not mean, as some hopeful plaintiff’s seem to think, that plaintiff’s now have a license to railroad the defendant. The concept cuts both ways. 

I have taken the comments from Master Schlosser to reflect that though much has changed not much has changed.  This was also reflected to me on a recent Special Application to Master Robertson.  The Court will continue to expect a high standard of proof to conclude that Summary Judgment should be granted but the Hryniak and Windsor cases will work to extol Masters and Justices to take one last look at the evidence to see if an equitable result can be achieved without the burden of trial.