Good faith in Canada…
Why is this ruling so important?
In this ground-breaking ruling, the Canadian Supreme Court affirmed the existence of the principle of good faith in contract law. This is a wonderful example of the application of ius cogens, or general principles of law. Since the Supreme Court of Canada had ruled that lower courts may not overrule decisions of higher courts (the so called Stare Decisis doctrine), and the Supreme Court is the highest Canadian court, the principle of good faith in contract law applies fully in all Canadian States.
Two competing sales agents (Bhasin and Hrynew) sell education saving plans for Can-Am. This latter company allows sales agents to sell their investment products under a dealer agreement. This dealer agreement automatically renews every three years, unless a notice of termination was given at least six months before the end of a period. It is no secret that Bhasin and Hrynew do not like each other. Hrynew wants to take over the nice market of Bhasin, and proposes a merger. Not surprisingly, Bhasin rejects the proposal. Can-Am, who will probably benefit from this merger, appoints Hrynew as auditor to review the dealer agreements. This leads to the situation that Hrynew has a biased function (audotor and competitor). As a result,. Bhasin does not want to be transparent regarding the details of his business. This is a reason for Can-Am to terminate the contract, leaving Bhasin on the edge of bankruptcy.
What was decided?
The Supreme Court ruled that a dealer agreement should be understood and used in good faith. The termination clause was abused, since Bhasin could never leave up to the expectaction that he would reveal all his business secrets to his most important competitor (this time acting in his capacity as auditor). After all, that would reduce the value of his business to almost zero.
Important quotes from the verdict
‘I have concluded that Can-Am’s breach of contract consisted of its failure to be honest with Mr. Bhasin about its contractual performance and, in particular, with respect to its settled intentions with respect to renewal. It is therefore liable for damages calculated on the basis of what Mr. Bhasin’s economic position would have been had Can-Am fulfilled that duty. While the trial judge did not assess damages on that basis given her different findings in relation to liability, she made findings that permit this Court to do so.’
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The Court based its findings on an impressive survey of legal literature and case law in various common law countries. The basis for the verdict is not a codified standard, but a general principle of law.