Is there a legal duty to be honest in performing a contract?
As strange as it may seem, Canadian courts had no clear answer to the question until the Supreme Court of Canada’s recent decision in Bhasin v. Hrynew. The answer to the question could impact many potential areas of dispute between dealers and factories involving many different scenarios, ranging from dealership terminations and transfers to renewal of a dealership and encroachment scenarios.
(I wrote on the subject of encroachment in the January 2014 issue of Canadian Autoworld.)
The Bhasin decision involved a dealer who hired sales agents and marketed education savings plans on behalf of an RESP company. Bhasin’s dealer contract was for three years. Ultimately, at the end of the term, his contract was not renewed.
He lost the value in his business and others solicited the majority of his sales agents.
The Supreme Court affirmed the trial judge’s decision to award damages to Bhasin even though he had no contractual expectation that his contract would ultimately be renewed. Renewal was entirely at the company’s discretion.
The court concluded the RESP company did not act in good faith and did not act honestly in performing its contractual obligations. It concluded the duty to act honestly is a general principle applicable to all contracts.
There was a very complex factual background involved in the case, but the Supreme Court’s decision to award damages ultimately depended significantly on the fact that the company lied in a number of ways to Bhasin about important issues that impacted his business (including the non-renewal).
For example, the court found the company was considering a significant reorganization of its activities but said nothing to Bhasin. When he found out about the reorganization and asked questions, the company did not tell the truth even though it was a “done deal.”
Even though he could point to no express language in the agreement that had been breached, the Supreme Court found that the company’s lack of honesty warranted an award of damages for the breach of the duty to act honestly.
There are many different areas in which the principles from the Bhasin decision are potentially applicable. It is clear that situations involving dealer renewals are susceptible to such arguments.
Of particular note, Bhasin was an inquisitive business owner. He asked important questions at critical moments around the time of the renewal. The company’s answers to his questions, which ultimately proved to be untrue, were critical in the court’s decision that there was a breach of the duty to act honestly.
So, what is the moral of the decision? Be engaged.
It is clear from the court’s detailed factual findings that the company acted poorly by misleading Bhasin, who had acted reasonably throughout.
As a dealer, ask sensible questions. As a manufacturer, give honest answers. For both, keep written records. Above all, be reasonable.
Jean-Marc Leclerc is a litigation lawyer at Sotos LLP. He represents clients in the automotive industry in a wide variety of commercial litigation disputes, tribunal hearings and appeals. For more information please contact Jean-Marc at Sotos LLP at 416-977-6857 or by email at email@example.com