Bhasin (Bhasin & Associates) v. Hrynew, 2011 ABQB 637

Court of Queen ’ s Bench of Alberta Citation: Bhasin (Bhasin & Associates) v. Hrynew, 2011 ABQB 637 Date: 20111104 Docket: 0203 02295 Registry: Edmonton Between: Harish Bhasin Carrying on Business as Bhasin & Associates Plaintiff - and - Larry Hrynew, Canadian American Financial Corp. (Canada) Limited, a Subsidiary of Allianz Life Insurance Company of North America, Allianz Education Funds Inc. Defendant Corrected judgment: A corrigendum was issued on June 29, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment.

Corrected judgment: A corrigendum was issued on November 9, 2011; the corrections have been made to the text and the corrigendum is appended to this judgment. Corrected judgment: A corrigendum was issued on November 8, 2011; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________

Memorandum of Decision of the Honourable Madam Justice A.B. Moen _______________________________________________________ I. Introduction.......................................................................................................................... 3 II. Discussion............................................................................................................................ 5 A. Did Bhasin plead sufficiently to make out his claims?.............................................. 5 III.

Liability.............................................................................................................................. 10 A. Did CAFC breach the contract?.............................................................................. 10 1. Duty of Good Faith..................................................................................... 11

a) Implied-in-law terms of good faith................................................. 12

b) Implied by the Parties’ intentions.................................................... 15 2. Entire agreement clause.............................................................................. 19 3. Parol Evidence Rule................................................................................... 21 4. Conclusion as to Duty of Good Faith.......................................................... 23 5. Did CAFC Breach the implied term of good faith?..................................... 23

a) Scope of Duty of Good Faith &

Interpretation of Contract ............. 23

b) Breach of duty of good faith ......................................................... 26

i) Events surrounding PTO appointment and audit of Bhasin’s agency 26 ii) Conclusion about PTO appointment and audit of Bhasin’s agency 36 iii) The non-renewal of the 1998 Agreement........................... 38 6. Conclusion as to breach of the implied term of good faith.......................... 43 B. Inducement of Breach of Contract.......................................................................... 43 1. The existence of a contract......................................................................... 44 2.

Breach of the contract................................................................................. 44 3. Inducement................................................................................................. 44 4. Knowledge & Intent................................................................................... 48 5. The defendant acted without justification................................................... 51 6. The plaintiff suffered damages................................................................... 52 C.

Civil Conspiracy..................................................................................................... 52 IV. Damages............................................................................................................................. 55 A. Loss of income and loss of business ..................................................................... 56

1. Loss of Income........................................................................................... 57 2. Loss of the Business................................................................................... 66

a) Discount Rate................................................................................. 68

b) Marketability Factor........................................................................ 72

c) Conclusion on discount rate........................................................... 74

d) Conclusions.................................................................................... 74 B. Mitigation............................................................................................................... 74 C. Damages for mental distress................................................................................... 81 D. Punitive Damages................................................................................................... 83 V. Conclusion......................................................................................................................... 84 I.

Introduction [ 1 ] This case revolves around a business operated by the plaintiff, Harish Bhasin, which sold Education Savings Plans ( “ ESPs ” ). [ 2 ] In 1989 when he was about 44 years old, Bhasin changed careers. He decided to start his own small business, which he could build to provide the security his family would need into his retirement. Bhasin determined that Canadian American Financial Corp. (Canada) Limited ( “ CAFC ” ) was the company he wanted to become affiliated with. [ 3 ] CAFC was in the business of selling ESPs.

To do so, CAFC contracted with Enrollment Directors across the country, who were expected to establish their own small businesses in order to sell only the ESP products available under CAFC. All Enrollment Directors were expected to be loyal to CAFC; Enrollment Directors were in a fiduciary relationship with CAFC under the contract; Enrollment Directors could not sell other products of any description. [1] CAFC prohibited Enrollment Directors and their employees from working at any other job, including any unrelated job such as selling hamburgers.

CAFC said that the prohibition on outside employment was a requirement of the Alberta Securities Commission (ASC). [ 4 ] In 1989, Bhasin signed a contract with CAFC. For many years, he worked successfully with CAFC under this contract building his small agency. [ 5 ] The defendant, Larry Hrynew, was also an Enrollment Director with CAFC. Hrynew ’ s agency sold ESPs in the Alberta market. It is clear that Hrynew and Bhasin were competitors. [ 6 ] In 1998, CAFC decided that it wanted to enter into a standard contract with all of its Enrollment Directors across Canada.

CAFC consulted with some of the best Enrollment Directors across the country, including Bhasin and Hrynew. One clause, which is central to this decision, was the subject of much discussion but the Enrollment Directors were reassured by CAFC that the clause would be interpreted in a certain way.

[ 7 ] Bhasin signed the standard contract as did most Enrollment Directors across Canada. Hrynew did not sign the standard contract, nor did it appear that CAFC required him to sign. [ 8 ] In 2001, Bhasin ’ s decision to sign the standard contract came back to haunt him. The very clause the Enrollment Directors had been reassured would not be interpreted strictly was used by CAFC to end the contractual relationship with Bhasin. CAFC did not renew Bhasin ’ s contract, and did not provide a reason for the non-renewal.

Bhasin ’ s hopes and dreams for the future were destroyed by CAFC. [ 9 ] CAFC protests that it simply exercised its rights under the contract. Bhasin says that CAFC breached its contract with him by breaching an implied term of good faith. Further, Bhasin says that Hrynew urged CAFC to force Bhasin out of CAFC or to force him to merge with CAFC. [ 10 ] Bhasin says that CAFC and Hrynew conspired to take away Bhasin ’ s business so that Hrynew could benefit from the lucrative community of Southeast Asians living in Edmonton and Alberta.

The members of this community cared about their children ’ s education and were the source of most of Bhasin ’ s business. [ 11 ] Finally, the defendants say that Bhasin did not plead with sufficient particularity to support his claims. [ 12 ] This case then must address the following questions: 1. Did Bhasin plead with sufficient particularity to support his claims? 2. Did CAFC breach the contract? Can this Court look behind the words in the contract to determine if CAFC properly and fairly terminated its contract with Bhasin? 3. Did Hrynew intentionally induce CAFC to breach the contract with Bhasin? 4.

Did the behaviour of Hrynew and CAFC amount to civil conspiracy? Bhasin claims damages for loss of income, loss of the value of his business, loss of customer base, loss of sales representatives and organizational structure, and emotional stress and depression. II. Discussion [ 13 ] Before beginning my discussion of the issues, I will put the parties in context. [ 14 ] Canadian Financial Corporation (CAFC) was the Canadian subsidiary of Allianz Life Insurance Company of North America.

Early, in the 1980's, the American company distributed the educational savings plans in Canada as the Canadian Scholarship Trust Fund. Then in 1988 the Canadian company split from the American company and formed a company called Heritage Education Fund or Heritage Scholarship Trust Plan, and that name is referred to from time to time in the evidence and in the experts ’ reports. In these reasons, I always refer to the corporate entity as CAFC to avoid confusion as the same corporate entity changed its name from time to time.

[15] Allianz Education Funds Inc. is now the name under which the parent company sells scholarship plans in Canada. [16] One of Bhasin’s allegations is that Hrynew and CAFC conspired to take away his business. In doing so, Bhasin alleges thateach committed an unlawful act - CAFC wrongfully breached the contract and Hrynew intentionally induced CAFC to breach itscontract with Bhasin. [17] I shall deal first with each of the alleged unlawful acts of each of the alleged co-conspirators and then I shall deal with theissue of whether those acts properly form the basis for a civil conspiracy.

Here I note that each of those unlawful acts, if found,constitutes a separate tort capable of resulting in damages. [18] First, I must address whether Bhasin has pleaded with sufficient particularity to make out each of these claims. A. Did Bhasin plead sufficiently to make out his claims? [19] Bhasin in his pleadings and in his argument claims a number of potential causes of action: 1. Breach of contract by CAFC; 2. Intentional inducement of breach of contract by Hrynew; 3. Civil Conspiracy against CAFC & Hrynew as follows:

a) Conspiracy to injure; and

b) Unlawful means conspiracy, with the following conduct constituting unlawful means:

i) breach of 1998 Agreement by CAFC; ii) breach of Competition Act, s. 45 by CAFC and Hrynew; and iii) intentional inducement of breach of contract by Hrynew. 4. Interference with economic interest (mentioned in Certificate of Readiness). [20] Interference with economic interest was not argued so I will not deal with that issue. [21] The defendants, Hrynew and CAFC, say that this Court cannot consider all of those issues because Bhasin did not properlyplead all of those issues: Rodaro v Royal Bank of Canada (2002), (ON CA), 59 OR (3d) 74, 2002 CarswellOnt1047 at para 61 (CA).

The defendants argue that the statement of claim only supports causes of action for conspiracy to injure andinfliction of mental stress against CAFC and Hrynew. [22] Therefore we must ask: does the statement of claim support a cause of action for:

i) breach of contract by CAFC? ii) intentional inducement of breach of contract by Hrynew? iii) unlawful means conspiracy by CAFC & Hrynew? [23] The rationale behind the law relating to sufficiency of pleadings rests in the theory of natural justice. Defendants must havenotice of allegations made against them and must not be subject to ambush at trial. I note the defendants do not argue that their strategyat trial would have changed had the pleadings been framed differently.

[24] It is not necessary for a plaintiff to plead a cause of action, or a legal conclusion. Rather, a plaintiff uses the statement ofclaim to allege a platform of facts. To support a cause of action, the plaintiff must plead material facts sufficient to give rise to the causeof action. If the facts alleged in the statement of claim are true, would these facts satisfy the essential elements of the cause of action?

Ifyes, the cause of action is properly pleaded: Ed Miller Sales & Rentals Ltd v Caterpillar Tractor Co (1994), (ABKB), 17 Alta LR (3d) 251 (QB). [25] Two principles emerge which guide issues relating to sufficiency of pleadings: 1. The plaintiff must plead material facts, not causes of action; and 2. The defendant(

s) have the right to know the case to meet and a fair opportunity to meet that case. [26] The facts pleaded in this case must support all of the causes of action set out above. [27] First, does the statement of claim disclose a breach of contract by CAFC? [28] The defendants take the position that the statement of claim frames the action in conspiracy against the defendantscollectively and that Bhasin has not pleaded an action for breach of contract by CAFC independent of the tort of conspiracy.

Thedefendants also argue that Bhasin has not pleaded breach of the 1998 Enrollment Director’s Agreement (“1998 Agreement”) by CAFCwith respect to breach of an implied term of good faith. [29] Where a statement of claim frames the action in conspiracy and properly discloses an independent cause of action againstone alleged conspirator for inducing breach of contract, the allegation of conspiracy “does not make it any less of an allegation ofinducement of breach.

There is nothing which prevents the two torts from overlapping.”: Tree Savers International Ltd v Savoy (1992), (AB CA), 87 DLR (4th) 202 (Alta CA) at 207. [30] Bhasin argues that paragraphs 7(h), 8 and 10 of the Statement of Claim support a cause of action against CAFC for breach ofcontract. Bhasin clearly alleges in paragraph 10 of the statement of claim that CAFC wrongfully terminated the 1998 Agreement and, as aresult, he suffered damages. [31] Those paragraphs are as follows: 7(h).

Upon the wrongful termination of the plaintiff’s Enrollment Director contract, the first working day thereafter, Bruce Elliott, anemployee of CAFC (Allianz Life Insurance Company of North America), solicited the salespeople of the plaintiff for benefit of the LarryHrynew Agency. He reversed the transfers of the salespeople from Scholarship Consultants of North America Ltd. back to Allianz forthe direct benefit of Larry Hrynew and his agency.

The plaintiff states that Larry Hrynew at all material times knew, or was aware, thatCAFC (Allianz) employees were improperly assisting and encouraging salespeople from the plaintiff to join Larry Hrynew’s Agency. 8. The plaintiff states that as a result of the wrongful conduct of the defendants and each of them referred to in para. 7 of theStatement of Claim, he has suffered damages. The plaintiff states that as a result of the wrongful conduct of the defendants, and each ofthem, his business has been shut down and he has lost his customer files as well as salespeople. 10.

The plaintiff states that for several years prior to November of 2001, he expended time and monies in developing a large customerbase for the purpose of selling scholarship plans to residents in the Province of Alberta. When his Enrollment Director Agreement waswrongfully terminated in November of 2001 as a result of the wrongful actions of the defendants, and each of them, he has suffereddamages estimated at $65,000.00 per year in lost income for nine years for a total $595,000.00.

[ 32 ] Further, Bhasin argues that CAFC breached its duty of good faith which, the plaintiff says, is an implied term in the 1998 Agreement. Bhasin says that the facts which have been pleaded in the statement of claim, specifically paragraphs 5(b), 6, and 7, are sufficient facts upon which the Court may reach the legal conclusion that there has been a breach of an implied term of good faith in the 1998 Agreement. Also, Bhasin has pleaded facts which could lead to a conclusion that CAFC acted in bad faith when it terminated Bhasin: paragraphs 7, 10 and 11. [ 33 ] Whether the contract includes an implied term of good faith is a matter of contractual

interpretation and a legal conclusion. [ 34 ] I find that it is not necessary for Bhasin to have pleaded breach of contract by CAFC independently from the tort of civil conspiracy. Bhasin has properly pleaded a cause of action against CAFC for breach of contract with respect to a breach of an implied term of good faith. [ 35 ] The second cause of action to consider is the alleged inducement of breach of contract by Hrynew. [ 36 ] The defendants argue that Bhasin has not pleaded facts sufficient to support this cause of action.

The defendants argue, in the alternative, if the pleadings do factually support a cause of action for intentional inducement of breach of contract by Hrynew, Bhasin has framed the action in civil conspiracy and not pleaded an independent action for intentional inducement of breach of contract separate from the tort of civil conspiracy.

My comments above apply here. [ 37 ] Bhasin takes the position that the facts which give rise to a cause of action for intentional inducement of breach of contract by Hrynew came to light during the trial, particularly with respect to Hrynew ’ s intent to induce CAFC ’ s termination of the 1998 Agreement. Thus, Bhasin argues that

section 7(

j) of the statement of claim, which takes the “ catch-all ” approach in pleading generally any further wrongful acts which may be disclosed at trial, is sufficient to support the cause of action for intentional inducement of breach of contract by Hrynew. [ 38 ] Paragraph 10 of the statement of claim alleges that the 1998 Agreement was wrongfully terminated as a result of the wrongful actions of Hrynew. Paragraph 11 alleges that Hrynew (and CAFC) attempted to force Bhasin to merge agencies and wrongfully used the termination provision to secure an improper purpose, resulting in the loss of Bhasin ’ s business.

Paragraph 12 alleges that the conduct of Hrynew was deliberate and with an intent to wrongfully force Bhasin out of business. [ 39 ] Again, it is not necessary for Bhasin to have pleaded intentional inducement of breach of contract by Hrynew separately from the tort of civil conspiracy. If the facts pleaded are true, Hrynew is liable for inducing breach of contract.

Therefore, the pleadings properly raise an independent cause of action against Hrynew for inducing breach of contract. [ 40 ] The third cause of action to consider is unlawful means conspiracy by CAFC and Hrynew. [ 41 ] The defendants argue that Bhasin has not pleaded facts sufficient to support a finding of “ unlawful means ” by Hrynew.

Bhasin argues that pleading conspiracy generally is sufficient to support a cause of action for both branches of civil conspiracy. [ 42 ] More specifically, the defendants argue that Hrynew is not privy to the contract, and Bhasin has not properly pleaded intentional inducement of breach of contract by Hrynew. The defendants argue, therefore, that the pleadings do not support an action for conspiracy by unlawful means.

The defendants implicitly take the position that pleading a cause of action for civil conspiracy generally is not necessarily sufficient to support a cause of action for both branches of civil conspiracy. [ 43 ] I have dealt above with the issue of pleadings for intentional inducement of breach of contract by Hrynew and will not repeat it here.

[ 44 ] Bhasin further argues that

section 7(

j) of the Statement of Claim, which sets out any further “ wrongful acts ” as may be disclosed at trial, is sufficient to support any tort being the unlawful means element of the tort of conspiracy. [ 45 ] Once again, it is not necessary to plead a cause of action. It is certainly not necessary to plead each individual branch of a single cause of action. It is irrelevant that the statement of claim frames the action as one of conspiracy to injure, not unlawful means conspiracy. [ 46 ] It is necessary that the statement of claim include material facts which support a cause of action for unlawful means conspiracy.

The defendants ’ main argument is that the “ unlawful means ” element of unlawful means conspiracy is not met with respect to Hrynew. Paragraph 9 of the statement of claim clearly alleges that Hrynew breached the Competition Act . If true, the unlawful means element with respect to Hrynew is satisfied. Furthermore, given the conclusion (above) that the statement of claim discloses a cause of action for intentional inducement of breach of contract by Hrynew, this (if true) also satisfies the unlawful means element with respect to Hrynew.

Therefore, the facts pleaded in the statement of claim support a cause of action for unlawful means conspiracy. [ 47 ] Bhasin ’ s statement of claim frames the action as conspiracy to injure; however, how the plaintiff frames the cause of action is irrelevant. The factual matrix which has been pleaded discloses each cause of action which is raised by Bhasin, including unlawful means conspiracy and independent actions for breach of contract by CAFC and inducing breach of contract by Hrynew. [ 48 ] The defendants seek to rely on highly technical arguments, not natural justice.

Ultimately, the plaintiff need only plead material facts, not causes of action. The facts pleaded by Bhasin support each cause of action. III. Liability A. Did CAFC breach the contract? [ 49 ] On November 17, 1989, Bhasin entered into an Enrollment Director ’ s Agreement with CAFC (the 1989 Agreement).

The 1989 Agreement provided that Bhasin would receive compensation and bonuses for obtaining subscribers for scholarship agreements with the Heritage Scholarship Trust Plan (the Plan), which is the product of CAFC. [ 50 ] On November 5, 1998, Bhasin entered into a subsequent Enrollment Director ’ s contract with CAFC (the 1998 Agreement), which is the subject of the dispute before this court. The 1998 Agreement was for a term of three years, automatically renewable for three year periods. [ 51 ] However, starting in 1999, things did not go well between Bhasin and CAFC.

Prior to that, Bhasin was the subject of numerous awards and prizes given by CAFC for their top Enrollment Directors across Canada of which Bhasin was one. [ 52 ] In 2000, CAFC appointed Bhasin ’ s competitor, Hrynew, to the position of Provincial Trading Officer (PTO) and directed that Hrynew was to audit Bhasin ’ s operation. Bhasin objected (as did Peter Hon, who owned an agency situated in Calgary). [ 53 ] Bhasin further says that CAFC tried to coerce him to join another agency operated by CAFC ’ s co-defendant, Hrynew.

When Bhasin would not merge, Bhasin says that CAFC wrongfully ended the 1998 Agreement to put him in a vulnerable position leaving him no choice but to merge with Hrynew, or to leave CAFC. Further, Bhasin says that CAFC scooped all his sales team and deprived him of commissions that he would otherwise have received. Left without a contract and without a sales team, Bhasin had to start over again. He joined a competitor of CAFC. Bhasin says he suffered damages as a result. [ 54 ] Thus, Bhasin lost income and lost his business.

[55] The defendant CAFC says that its actions in not renewing the 1998 Agreement were taken for legitimate business reasons. [56] There are two breaches of the 1998 Agreement alleged by Bhasin. First, Bhasin says that there was an implied duty of goodfaith which, although not an explicit term of the contract, ought to be read into the contract. Bhasin alleges that the conduct of CAFC inappointing a competitor as PTO and the non-renewal of the contract by CAFC breached that good faith term.

Second, Bhasin says thatthere is an implied term of the contract that CAFC would not terminate the contract without a valid reason. [57] Given that there are some facts that occur before the execution of the 1998 Agreement, I shall also consider the applicationof the parol evidence rule. [58] I will deal with each of these arguments. But first, what is an implied duty of good faith? 1.

Duty of Good Faith [59] I have found the analysis of O’Byrne concerning implied terms of good faith in contracts to be particularly helpful: ShannonKathleen O'Byrne, “The Implied Term of Good Faith and Fair Dealing: Recent Developments” (2007), 86 CBR 193. [60] In that article, O’Byrne does a thorough review of the case law in this area and suggests a means by which we can organizethat case law to make sense of this difficult area of contract law. She also refers to analytical work by Professor John McCamus in thisarea.

In particular, she summarizes McCamus’ work in identifying several possibilities as to how good faith might be defined: at pp 199-200. [61] It is clear that good faith is not a generalized term to be applied to all contracts. Unlike in the Province of Quebec and theUSA where statute explicitly recognizes a general, independent duty of good faith in the performance of commercial contracts, in Albertathere is no such legislation. [62] Therefore, we must look to the common law to determine if the courts have recognized such a duty in Canada and in Albertain particular.

To date, Canadian common law courts have not recognized a stand-alone, general duty of good faith between commerciallycontracting parties: Transamerica Life Canada Inc. v ING Canada Inc., (ON CA), [2004] 68 OR (3d) 457 at para 51(Ont CA) (Transamerica). They do, however, recognize such a duty in specific cases and in certain categories of cases. [63] Courts have implied a duty of good faith to ensure that “parties do not act in a way that eviscerates or defeats the objectives ofthe agreement”: Transamerica at para. 53; see also Ceapro Inc. v.

Saskatchewan (Government), 2008 SKQB 237 at para 209. [64] Canadian jurisprudence “has not produced a comprehensive, authoritative account of when the good faith term will beimplied” into a contract. O’Byrne identifies two sources in Canadian jurisprudence as to when this occurs: first, by operation of law andsecond, by virtue of the parties’ intentions: O’Byrne at pp 200-201. [65] O’Byrne also says that commercially contracting parties have been held to a standard of good faith in three areas: contractualnegotiation; contractual performance; and contractual enforcement.

In this case, we focus on the duty of good faith in the context ofcontractual performance. This is also the area where most of the case law is found. [66] Here I will determine if the 1998 Agreement has an implied term of good faith by operation of law or by the parties’intentions.

a) Implied-in-law terms of good faith [67] For certain classes of contracts, a good faith term is implied (by operation of law, legislated or common-law) because thecourt or legislature deems it to be appropriate as a matter of public policy. In these cases, a term of good faith is implied due to the natureof the relationship between the parties, which typically involves one inherently vulnerable party at the time of entering into the contract.The parties are held to a standard of good faith in order to correct the imbalance of power.

An example in Alberta of the legislatureimplying a term of good faith into a contract is the Franchises Act, RSA 2000, c F-23, s 7. [68] The courts have characterized contracts of certain classes as good faith contracts - for example, employment, franchise, andinsurance contracts, which prima facie have a good faith term implied - because an imbalance of power is inherent in the nature of thecontract: O’Byrne at 208. Examples of case law where a good faith term has been implied in a class of contracts are; employment law -Wallace v United Grain Growers Ltd (c. o. b.

Public Press), (SCC), [1997] 3 SCR 701; and insurance law - Sun LifeAssurance Company of Canada v Fidler, 2006 SCC 30, [2006] 2 SCR 3. [69] In Wallace the SCC described three characteristics that set apart the class of contracts which attract an implied term of goodfaith from ordinary commercial contracts: (1) the formation of the contract is not the result of the exercise of bargaining power between two equals; (2) the person in the weaker position is unable to achieve more favourable contractual terms because, for example, of that person'sinability to access information; and (3) the power imbalance continues to affect other facets of the relationship after the contract has been entered into. as cited in Shelanu Inc v Print Three Franchising Corp (2003), (ON CA), 64 OR (3d) 533 (CA) at para 64. [70] In Shelanu, the Ontario Court of Appeal followed the reasoning of the Supreme Court of Canada in Wallace but applied thatreasoning to a franchise agreement, expanding the categories: Shelanu at para 65. [71] Clearly, the 1998 Agreement does not fall within any of these categories - it is not an employment contract, nor an insurancecontract, nor a franchise agreement.

However, there is nothing in the case law to suggest that these classes of contracts are closed.Further, a contract that falls outside of these classes may well be so similar to these classes that it cannot on a principled basis beexcluded as a contract which has a good faith term imposed by operation of law. [72] Here, the type of agreement with which we are dealing is close in character to both an employment contract and a franchisecontract. [73] In Markakis v Yuck, 2003 ABQB 122 at para 31, Martin J held that the defendant breached a term of good faith implied bylaw and as a matter of contractual

interpretation, finding that “the law should more readily impose the obligation of good faith where theconduct of one party is wanting, as is the conduct of the defendants in this case.” In the case before me, the defendants’ conduct iscertainly wanting. [74] An underlying principle that governs the implication of a good faith term by operation of law is the test of “necessity” asarticulated by McLachlin J. (as she then was) in a case involving an employment contract: Machtinger v HOJ Industries, (SCC), [1992] 1 SCR 986 at para 52.

This test was articulated by the House of Lords in Liverpool City Council v Irwin, [1976] 1QB 319 (CA) as cited in Machtinger at para 52: “that ‘such obligation should be read into the contract as the nature of the contractimplicitly requires, no more, no less: a test, in other words of necessity’ (p. 254)”. McLachlin J. explains the test as “not whether the termis ‘necessary’ for the very existence of the contract” but rather as “necessary in a practical sense to the fair functioning of the agreement,given the relationship between the parties.”

[ 75 ] That is the situation before me. The very nature of this contract was not balanced from its inception. The 1998 Agreement was drafted by CAFC for use across Canada. CAFC expected all Enrollment Directors to execute the contract. When the Enrollment Directors expressed concern about clause 3.3 during the consultation between CAFC and the Enrollment Directors, the Enrollment Directors were not able to get more favourable terms with respect to non-renewal.

The Enrollment Directors had already invested significant resources into building their agencies, and were not in a position to refuse to sign the new Agreement or walk away from CAFC. The Enrollment Directors lacked equal bargaining power, because they needed the contractual relationship with CAFC to continue. [ 76 ] To determine the nature of the 1998 Agreement and in particular the relationship of the parties to the Agreement, we look to the words of the contract and the conduct of the parties in implementing the Agreement, as was practised over time. [ 77 ] The

preamble to the 1998 Agreement describes the Enrollment Director as “ a self-employed contractor operating his/her own business and is not an employee of CAFC. ” The

preamble also suggests that the Enrollment Director will devote all necessary time and effort to ensure success of his/her own business, while at the same time, expanding the market for CAFC. CAFC did not guarantee that the Enrollment Director would generate net revenue. [ 78 ] The 1998 Agreement requires that Enrollment Directors and their sales representatives sell only the product of CAFC [clause 3.2]. The only income available to the Enrollment Director was from sales of the CAFC product.

Although it was not set out in the 1998 Agreement, CAFC treated any other employment by the Enrollment Directors or their sales representatives as a breach of contract. Enrollment Directors were not even permitted to attend university. Therefore, all Enrollment Directors were at the mercy of CAFC. [ 79 ] The Enrollment Director could not offer for sale financial products or services for any other individual or company other than CAFC. Further, CAFC imposed a fiduciary duty on the Enrollment Director to protect CAFC ’ s business interests from loss to competitors [clause 3.2].

A fiduciary must, of course, act only in accordance with CAFC ’ s interests. Therefore, by the 1998 Agreement, Bhasin could not ever act in his own interest, he had to act only in the interest of CAFC. This must be an indicium that the parties to the 1998 Agreement had a duty of good faith. If the Enrollment Director had a fiduciary duty, surely it would have been grossly imbalanced if there was no duty of good faith on the part of CAFC. [ 80 ] It was the evidence of some of the witnesses including Hrynew that it took many years to develop an agency.

Hrynew said 10 years although he equivocated on redirect examination that it was his agency, which was larger than Bhasin ’ s agency, that had taken 10 years to build. Nevertheless, the evidence clearly establishes that it took many years, and certainly more that three years, to build an agency to the point that the Enrollment Director and its agents were making a living. [ 81 ] Notwithstanding the length of time it took to build an agency, CAFC retained the right, at its sole discretion, to appoint other Enrollment Directors to compete in the same geographic area [clause 2.1].

This had the effect of diluting the potential pool of purchasers of education funds available for any one Enrollment Director. [ 82 ] A review of the entire 1998 Agreement shows that the business risk was left almost entirely with the Enrollment Director and there was little or no risk for CAFC. [ 83 ] Further, Clause 11.4 of the 1998 Agreement provided that the Enrollment Director could not assign the contract to another party without the consent of CAFC. This meant Bhasin would require CAFC ’ s consent to sell the business to a party outside of CAFC.

The 1998 Agreement provides for mergers with other CAFC Enrollment Directors, but mergers also required the consent of CAFC [clause 4.4]. If the Enrollment Director merged, he would have to resign as an Enrollment Director and his contract immediately expired [clause 8.6]. [ 84 ] CAFC was in control of all agencies. Notwithstanding that an Enrollment Director had spent years building his business, it was worth very little or nothing in the market. In particular, CAFC had tight control over whether an Enrollment Director could sell his or her agency to someone on the outside, or merge with another agency.

Therefore, if an Enrollment Director wanted to exit the industry and obtain compensation for the value of his or her agency, the Enrollment Director was at the mercy of CAFC. [ 85 ] Viewing the relationship between Bhasin and CAFC at the time they entered into the 1998 Agreement, there was an inherent

[85] Viewing the relationship between Bhasin and CAFC at the time they entered into the 1998 Agreement, there was an inherentimbalance of power between them. [86] Implying a term of good faith is necessary in a practical sense to the fair functioning of the agreement, given the relationshipbetween the parties. Here, I am imposing a term of good faith because the relationship between CAFC and Bhasin has an inherent andpredictable vulnerability of the Enrollment Director. Therefore, the performance of the whole of the 1998 Agreement should beexercised in good faith by operation of law.

b) Implied by the Parties’ intentions [87] Notwithstanding that I have found that a good faith term is implied by operation of law, I am now going to review the lawand facts to determine if a good faith term should also or alternatively be implied by the intention of the parties.

Contracts in thiscategory are not of a specific type, as is the case with respect to the classes of contracts where a good faith term is implied by operationof law. [88] The evidence did not establish a contrary and deliberate decision on the part of CAFC to exclude good faith operations,unless one considers the exclusive agreement clause in the 1998 Agreement to oust a good faith term.

I discuss this point later, but fornow I will review the law and circumstances without considering that term. [89] Here, I must determine if a good faith term ought to be implied because it reflects the unstated intentions of the parties at thetime of the formation of the contract. A duty of good faith “may arise ordinarily out of the nature of the relationship, or the circumstancescreated by the other party”: O’Byrne at 202. It is described as “late-breaking” domination on the part of one of the parties.

However,contractual intent must be determined at the time of the formation of the contract: at p 204. [90] In these cases, the good faith term is not implied to balance a vulnerability inherent in a contractual relationship, but rather onthe basis that the parties agreed to govern their relationship on a good faith standard. Where a term of good faith is implied by virtue ofthe parties’ intentions, the analysis must be done on a case by case basis. [91] The difficulty in finding an implied term of good faith by virtue of the parties’ intentions lies in identifying the parties’intentions.

By definition, in each case one party is denying their intention to agree to a good faith term, as CAFC is in the case beforeme. The evidence to support a finding that the parties agreed to a good faith term is derived from sources other than the parties’ after-the-fact stated intentions.

How then, do I go about determining whether the parties intended, at the time they entered into the 1998Agreement, to be governed by a relationship of good faith? [92] O’Byrne suggests that contracts in this category are more ad hoc - focussing on “whether conduct at the time of performancewas in breach of a good faith term implied on the basis of the parties’ intentions measured at the time of contract formation”: at p 203. Inthese cases the inherent imbalance of power is not obvious at the time of the contract formation but emerges over time.

In this case,although the power imbalance was obvious at the time of the contract formation, the relationship of the parties by the evidence given bymany witnesses was one of cooperation. It was only in the last one to two years of the contract with Bhasin that CAFC flexed its musclesand used its power in bad faith as I shall set out later in these reasons. Here, the contractual power of CAFC was exercised very much tothe detriment of Bhasin. [93] It is appropriate to use the commercial context of the parties’ agreement to determine what the parties agreed to.

The AlbertaCourt of Appeal has considered traditions and practices of the Alberta oil and gas industry in determining the expectations of the parties:Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 AR 187 at para 20 (CA),leave to appeal refused (1994), 162 AR 318 (SCC) [Mesa]. [94] The “officious bystander test” identifies implied terms based on what the imagined officious bystander would say should bethe case.

The “business efficacy test” identifies implied terms based on the assumption that parties intended to be bound by rights andobligations which are necessary for and facilitate performance of the contract (O’Byrne at 201-202).

[95] This Court is not meant to determine whether a good faith term would be reasonable in the circumstances; the parties areentitled to contract as they see fit (apart from good faith terms implied by operation of law). A proper application of the officiousbystander and business efficacy tests allows the court to draw an inference as to whether the parties factually intended that a good faithterm would govern the contract. The Supreme Court of Canada has said that the “courts must be careful not to slide into determining theintentions of reasonable parties.

This is why the implication of the term must have a certain degree of obviousness to it, and why, if thereis evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis”: Double N EarthmoversLtd v City of Edmonton, 2007 SCC 3, [2007] 1 SCR 116 at para 31, quoting Iacobucci J in MJB Enterprises Ltd v DefenceConstruction

(1951) Ltd, (SCC), [1999] 1 SCR 619 at para 29. [96] Terms may be implied based on the “presumed intention” of the parties where the implied term is “necessary to give businessefficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that theyhad obviously assumed”: Canadian Pacific Hotels Ltd. v. Bank of Montreal, (SCC), [1987] 1 SCR 711 at 775. [97] Alberta courts have taken a cautious approach with respect to finding implied terms of good faith between commerciallycontracting parties.

The leading case in Alberta on implied terms of good faith is Mesa (supra). In Mesa, Kerans J.A. found an impliedterm of good faith by virtue of the parties intentions, requiring one party to consider multiple methods of pooling to determine royaltiesand act reasonably in applying whichever method was equitable.

However, Kerans J.A. expressed hesitation about implying good faithterms by operation of law, and emphasized that implied terms of good faith by virtue of the parties’ intentions must be grounded in adetermination of what the parties factually agreed. [98] The Alberta Court of Appeal applied Mesa finding that “the duty of good faith stems not from the law but from the parties; itwill be imposed when the court concludes that application of the rule will fulfill the agreement in question”: Klewchuk v Switzer, 2003ABCA 187 at para 33, 330 AR 40. [99] To determine if these parties intended that their contract was to be bound by good faith, I must look at the businessrelationship of CAFC with all of its Enrollment Directors. [100] The evidence of witnesses who had worked for CAFC in executive capacities or had been contracted to CAFC as EnrollmentDirectors was that the nature of the relationship between an Enrollment Director and CAFC required co-operation between them.

It was arelationship that was expected to last a number of years and the contract could not express all that needed to be done to ensure aproductive business relationship. It was the evidence of former senior employees of CAFC that trust between CAFC and their EnrollmentDirectors was an important part of the business relationship.

There were a number of examples given by the witnesses as to areas not inthe contract that were respected by both CAFC and the Enrollment Directors. [101] When one considers the whole of the relationship between CAFC and its Enrollment Directors, of which Bhasin was one, it isclear that the parties had to operate in good faith and there was a requirement of fairness between them.

In other words, good faith wasnecessary to give business efficacy to the whole 1998 Agreement. [102] An example of the parties’ understanding that the 1998 Agreement would be performed in good faith is with respect tocompetition for sales representatives. Mr. Bouji said there were certain understandings not reflected in the contract between anEnrollment Director and CAFC. CAFC had an understanding with its Enrollment Directors that it would not permit an EnrollmentDirector to “snatch” sales representatives from another Enrollment Director.

CAFC set up a system for ensuring that an EnrollmentDirector was compensated when its sales representatives went to another Enrollment Director. It was recognized, although not set out inthe contract, that an agency who lost a sales representative to another agency was entitled to payment representing a value for therecruitment, training, and coaching of that sales representative, among other things.

In April 2001, CAFC reduced this understanding towriting. [103] Another example of the good faith intention relates to the performance of the non-renewal clause in 3.3 which states: 3.3 The term of this Agreement shall be for a period of three years from the date hereof (the “Initial Term”) and thereafter shall beautomatically renewed for successive three year periods (a “Renewal Term”), subject to earlier termination as provided for in

section 8hereof, unless either CAFC or the Enrollment Director notifies the other in writing at least six months prior to expiry of the Initial Term

or any Renewal Term that the notifying party desires expiry of the Agreement, in which event the Agreement shall expire at the end of such Initial Term or Renewal Term, as applicable. [ 104 ] First, it seems obvious, given the length of time it took to establish an agency, that all parties to the 1998 Agreement would have contemplated at the outset that CAFC would not unilaterally “ pull the plug ” two and a half years after the commencement of the contract, causing all of the effort and financial cost to an Enrollment Director to be taken away arbitrarily and capriciously, that is unfairly.

Therefore, it seems unlikely that either party considered that they were entering into a contract that would not be renewed at the end of the three-year term unless there were a very good reason for doing so. The language of the Agreement was that renewal was automatic. Why would anyone enter into a contract setting up a business when it was contemplated that CAFC could unilaterally and unfairly take away an Enrollment Director ’ s livelihood and business?

The parties had to understand that the non-renewal clause would be exercised in good faith, that is fairly. [ 105 ] This conclusion that the whole of the 1998 Agreement and particularly clause 3.3 would be exercised in good faith, is further substantiated by evidence of the discussions of all parties to the agreement prior to the agreement being executed by most Enrollment Directors in Canada. I acknowledge that my discussion here could be misconstrued as a breach of the parol evidence rule which I discuss in more detail later.

However, I am mindful here that evidence as to intentions is an important component of the analysis. If that evidence served to contradict the intentions it would be important. Here, however, that evidence serves to support the intention. [ 106 ] When CAFC was preparing the 1998 Agreement, it met with certain Enrollment Directors across Canada who expressed concern about the non-renewal provision. At the time, the senior executives of CAFC assured the Enrollment Directors that clause 3.3 would never be used without a good reason.

CAFC used several examples of situations to explain how clause 3.3 might be used, including mental incompetence of an Enrollment Director and if one of the Enrollment Directors was disclosed as being involved in child pornography. These are examples of situations where it is obvious that CAFC would want to dissociate itself from the Enrollment Director, and CAFC would use clause 3.3 to trigger non-renewal of the contract. The purpose of this clause was to cover situations that the parties could not contemplate.

It would simply not be possible for both parties at the time of entering into the agreement to consider what all of those circumstances might be, and for that reason the provision was drafted broadly. Clause 3.3 is specific example of a term that the parties understood would only be exercised in good faith. [ 107 ] With respect to non-renewal of an Enrollment Director contract, it was the evidence of one witness, Mr.

Bouji who had been with CAFC from 1989 to 1999, that CAFC would do so for lack of production, competency, death of the Enrollment Director, criminal activity on the part of the Enrollment Director and similar kinds of things. [ 108 ] As Senior Vice President in Toronto, Mr. Agla was aware of activity with CAFC all across Canada. Mr. Agla was able to give us a picture of how CAFC operated throughout the years from the time Bhasin joined the company in 1998 to and including the negotiations concerning the 1998 Agreement. He was involved with those discussions.

He described the purpose of the non-renewal clause 3.3 as providing CAFC with the ability not to renew a contract where there was a bad situation with an Enrollment Director not covered by the termination provisions. Mr. Agla said that to the best of his recollection CAFC had never terminated an Enrollment Director without cause since 1988, when the company had started in Canada. [ 109 ] Because of the way CAFC had operated up to the time of the 1998 Agreement and continued to operate, I find that the parties intended that the 1998 Agreement be performed in good faith.

I find that the explicit terms of the 1998 Agreement are subject to an implied term of good faith. 2. Entire agreement clause [ 110 ] The defendants say that I cannot find an implied term of good faith because there is an entire agreement clause in the contract: 11.2 This Agreement expresses the entire and final agreement between the parties hereto and supersedes all previous agreements between the parties.

There are no representations, warranties, terms, conditions or collateral agreements, express, implied or statutory, other than expressly set out in this Agreement. [ 111 ] A good faith term will not be implied where it is inconsistent with the express terms of the written contract. Often the party denying an implied term will point to a clause which purports to exclude implied terms. Entire agreement clauses are evidence that the

parties did not intend to be bound by a term of good faith. Rawlins J explained that “[t]he underlying theory that terms can be implied in acontract is based on adding missing terms that the parties intended. Where parties expressly disavow the existence of any other terms inan "entire agreement" clause, it cannot be consistent with their intention to act to the opposite and purport to add some.”: 921250 AlbertaLtd v 762910 Alberta Inc, 2003 ABQB 81 at para 16. [112] Alberta courts have taken a relatively strict approach to the application of entire agreement clauses.

This was emphasized inGainers Inc v Pocklington Holdings Inc, 2000 ABCA 151 at para 14, 255 AR 37 [Gainers] where Côté JA found that an entireagreement clause was alone sufficient to shut out any finding of an implied term. I note that in Gainers Inc the action involvedsophisticated parties. It was an action in which the appellant plaintiff, Gainers Inc., sued its former parent corporations (PocklingtonFoods Inc, Pocklington Holdings Inc and Pocklington Financial Corporation).

An entire agreement clause in the Management ServicesAgreements (MSAs) was upheld to prevent the sole director of the defendant respondent companies from making unilateral adjustmentsto the MSAs, which was never agreed to by the provincial government, the sole shareholder of Gainers Inc. [113] In 921250 Alberta Ltd at paras 18, 25-27, Rawlins J found that an entire agreement clause was a complete answer to theargument that the contract included an implied term and in these circumstances, it was inappropriate to find an implied term of good faithto the same effect. 921250 Alberta Ltd involved a contract between sophisticated parties.

The plaintiff purchaser, 921250 Alberta Ltd,claimed specific performance or damages arising out of a contract for the sale of a commercial building in Edmonton (“Harley CourtProperty”). The defendant vendor, 762910 Alberta Inc., refused to close.

In the same action, the defendant vendor counterclaimed fordamages caused by the failure of the plaintiff purchaser to purchase two other buildings owned by affiliates of the defendant vendor(“Centre West Property” and “King Street Mall Property”). [114] Most recently, in Manufacturers Life Insurance Co v Executive Centre at Manulife Place Inc, 2011 ABQB 189, Veit Jgranted an application for

summary judgment on the basis that where “there is an entire clause term in the written contract for acommercial lease between sophisticated parties...no term can be implied beyond the written terms of the agreement.” ManufacturersLife similarly involved a written commercial lease agreement between the applicant and the respondent that are, in the assessment ofVeit J “sophisticated parties” in a tenancy “agreement for a ten year term in respect of 21,809 square feet located on the 10th floor inManulife Place, Edmonton.” [115] All of these commercial transactions are distinguishable from the case at bar.

Although Bhasin operated his agencycompetently, relative to CAFC and its executive team, he was not a sophisticated party relative to CAFC. [116] Certainly, an exclusion clause may be evidence that the parties did not intend to be governed by an implied term of good faithwhere the contract is between equal parties in a standard commercial context. However, in each of the cases set out above decided inAlberta, there was no imbalance of power between the parties.

Where there is an imbalance of power, as in the case before me, parties toa contract will not be permitted to rely on an exclusion clause to avoid contractual obligations. For example, courts have often impliedterms of good faith into real estate contracts, notwithstanding that the contract also includes an exclusion clause. The Supreme Court ofCanada stated that “...a vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in acapricious or arbitrary manner”: Mason v Freedman, (SCC), [1958] SCR 483, 14 DLR (2d) 529.

Typically, the impliedgood faith term prevents vendors and purchasers from relying on a technical

interpretation of an exclusion or termination clause to avoidcontractual obligations. In the situation before me, the exclusion clause is not conclusive evidence that the parties did not intend to begoverned by an implied term of good faith. [117] Courts have refused to let a party shelter under an entire agreement clause where it would be unjust or inequitable to do so,such as when the party seeking to rely on the clause has exercised its contractual power abusively. CAFC, who is seeking to takeadvantage of the entire agreement clause, exercised its rights under the contract in a capricious and arbitrary manner.

See: Civiclife.comInc v Canada (Attorney General) (2006), (ON CA), 215 OAC 43 at para 52 (Ont CA), citing Guarantee Co ofNorth America v Gordon Capital Corp, (SCC), [1999] 3 SCR 423 at para 65; and Shelanu at paras 30-35. [118] Therefore, I find that the entire agreement clause does not bar a review of the exercise of the non-renewal power by CAFC orother contractual terms to determine if it was exercised unfairly or abusively. 3. Parol Evidence Rule

[119] In general, the parol evidence rule bars extrinsic evidence that alters, adds to, subtracts from, or varies the meaning of thewritten document; and the parties intentions are to be found in the document itself: Paddon-Hughes Development Co v PancontinentalOil Ltd, 1998 ABCA 333 at para 27, 223 AR 180, leave to appeal to SCC refused [1998] SCCA No 600 (QL).

The Alberta Court ofAppeal identified the three salient features of the parol evidence rule as: first, where the written language of an instrument is clear andunambiguous on its face, it is unnecessary to consider extrinsic evidence; second, where the words are ambiguous, evidence ofsurrounding circumstances may be admitted to enable the court to properly construe the language; and third, such evidence must shedlight on the surrounding circumstances, not merely on the subjective intention of the parties: Guaranty Properties Limited v Edmonton(City of), 2000 ABCA 215 at para 24, 261 AR 376, citing, Eli Lilly & Co v Novopharm Ltd, (SCC), [1998] 2 SCR129. [120] The defendants argue that I should not consider any evidence of discussions by the parties prior to the execution of the 1998Agreement, because the parol evidence rule excludes the Court's consideration of extrinsic written evidence which modifies or varies theterms of a complete and unambiguous written document/contract: Dover Towing

(1995) Ltd v Paramount Towing Ltd, 2000 ABCA147, 261 AR 372; Hawrish v Bank of Montreal, (SCC), [1969] S.C.R. 515, 2 DLR (3d) 600; Millbourne Maytag JustLike Home Laundrymat Ltd v VK Thapar Professional Corp, 2004 ABQB 236 at para 9, 356 AR 278; AGP, Inc (cob Master Feeds) vChinook Grain Co, 1999 ABQB 857, 254 AR 1. [121] Here, in particular, the defendants argue that I should not consider the evidence about the discussions between CAFCexecutives and Enrollment Directors as to the performance of the contract respecting clause 3.3 (the non-renewal clause). [122] The plaintiff argues that all evidence dealing with the intention and reasonable expectations of the parties in relation to theperformance of the 1998 Agreement should be received and considered by the Court.

Bhasin says this evidence is admissible to giveeffect to the plain reading of clause 3.3 as “words do not have immutable or absolute meanings; they take their meanings from theircontext”: SM Waddams, The Law of Contracts, 4th ed (Toronto, Ont: Canada Law Book, 1999) at 232. [123] The impugned parol evidence, as set out above, is the evidence of discussions between CAFC executives and the EnrollmentDirectors about clause 3.3, the non-renewal provision, in the time leading up to the signing of the 1998 Agreement.

The evidence is thatCAFC represented to the Enrollment Directors that clause 3.3 would only be used for a good reason. [124] Clause 3.3 is not ambiguous; the meaning of the wording is clear. I have not changed, altered or added to the language ofclause 3.3 or any part of the 1998 Agreement. I have not relied on parol evidence to interpret clause 3.3, and therefore, the parol evidencerule does not apply here.. [125] I have considered the evidence with respect to the issue of whether the 1998 Agreement includes an implied term of good faithby virtue of the parties’ intentions.

Because the court must determine the intentions of the parties at the time they entered into theagreement, what was said and done before that is evidence of intentions. I have therefore considered evidence from several witnessesabout the relationship between Enrollment Directors (including Bhasin) and CAFC. I have relied on evidence from these witnesses andthe business efficacy test in determining how the parties’ intended for the 1998 Agreement to be performed.. Based on this evidence, Ihave concluded that CAFC and Bhasin intended to be governed by an implied term of good faith in performance of the contract.

I haveused the impugned parol evidence to confirm that the parties’ understood they were obligated to perform the 1998 Agreement, includingclause 3.3, in good faith. This use of the evidence does not run afoul the parol evidence rule. 4. Conclusion as to Duty of Good Faith [126] I find that there was a duty of good faith implied in the 1998 Agreement. That duty is found by analogy in contracts which fallunder the implied-by-law category.

However, even if I am wrong about this, I infer from the wording in the contract and the behaviour ofthe parties over the long term relationship of the Enrollment Directors and CAFC that it was their intention, at the time of entering intothe 1998 Agreement, to operate in good faith and to interpret the terms of the contract in good faith - this is notwithstanding that there isan entire agreement clause in the contract. 5. Did CAFC Breach the implied term of good faith?

a) Scope of Duty of Good Faith &

Interpretation of Contract

[127] Whether a good faith term is breached depends “on all the circumstances of the case, including whether the party subject to aduty of good faith conducted itself fairly throughout the process.”: Shelanu at para 74. [128] In an analysis about a breach of a duty of good faith, one must address the scope of the duty before it can be determined if thatduty has been breached. However, an obligation of good faith and fair dealing is incapable of precise definition: Wallace at para 98. [129] To date, the Supreme Court of Canada has not set out an overarching test for the standard of good faith conduct.

An oftenquoted general characterization of the scope of a “good faith” term is that of Kelly J. in Gateway Realty Ltd v Arton Holdings Ltd(1991), (NS SC), 106 NSR (2d) 180 at para 39 (SC), aff’d on other grounds (1992), 1992 NSCA 70 , 112NSR (2d) 180 (CA): The law requires that parties to a contract exercise their rights under that agreement honestly, fairly and in good faith.

This standard isbreached when a party acts in a bad faith manner in the performance of its rights and obligations under the contract. “Good faith”conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breachedwhen a party acts in “bad faith” - a conduct that is contrary to community standards of honesty, reasonableness or fairness. [130] This definition was quoted with approval by the trial judge in Mesa.

The Alberta Court of Appeal did not explicitly adopt theGateway definition of good faith, but agreed with the trial judge’s characterization of the standard of “good faith” as follows: A party cannot exercise a power granted in a contract in a way that "substantially nullifies the contractual objectives or causes significantharm to the other contrary to the original purposes or expectations of the parties.” (at para 22) [131] John McCamus (The Law of Contracts (Toronto: Irwin Law, 2005) at 804-05) has laid out a useful scheme for setting out thescope of the duty of good faith.

According to McCamus, the scope of the obligations which flow from an implied term of good faith fallinto three broad categories, requiring the parties to: 1) co-operate in achieving the objectives of the agreement; 2) exercise discretionary powers provided for in the contract reasonably; and 3) not evade contractual duties; in other words, refrain from engaging in conduct not strictly prohibited by the letter of theagreement but that effectively defeats the other party’s contractual rights. [132] The scope of the implied term of good faith is such that the 1998 Agreement obliged both Bhasin and CAFC to cooperate inachieving the objectives of the agreement, to exercise discretionary powers reasonably, and to refrain from acting in a way thateffectively defeats the other party’s rights and the purpose of the agreement. [133] The purpose and objective of the 1998 Agreement was to enable Bhasin to establish and operate an agency selling CAFCproducts.

This objective was beneficial to both Bhasin and CAFC. [134] The 1998 Agreement provides for several discretionary powers including clauses 3.3 and 4. [135] Clause 3.3 of the 1998 Agreement, set out above, provides that the contract is automatically renewed for successive periods ofthree years, unless either party exercises the discretionary power to trigger non-renewal.

[136] Clause 4 of the 1998 Agreement sets out that CAFC has the discretionary power to approve or reject mergers between Bhasin ’ s agencies and other CAFC agencies, and specifies that this power must be exercised reasonably: 4.

The Enrollment Director covenants and agrees to devote his/her necessary efforts and attention to the provision of services and fulfilment of responsibilities in accordance with this Agreement and further agrees to the following: 4.5 To ensure that no mergers or amalgamations with other CAFC agencies, Enrollment Directors or officers occur without the prior written consent of CAFC, such consent not to be unreasonably withheld. [137] Clause 4.7 of the 1998 Agreement sets out that CAFC has the discretionary power to set mandatory policies and procedures: 4.7 To use sound business practices and to follow CAFC administrative procedures, policies and systems. [138] Clause 4.11 sets out that CAFC has the discretionary power to audit Bhasin ’ s agency: 4.11 To permit CAFC and Heritage Scholarship Trust Foundation, upon notice of at least one business day and during normal business hours, to examine and inspect the books, records and methods of the Enrollment Director at the business premises or residence of the Enrollment Director and to take copies of any books, records or documents. [139] The 1998 Agreement is not all-encompassing.

The relationship between CAFC and the Enrollment Directors, specifically Bhasin, was such that the contract governing their relationship could not possibly address every right and obligation between them with respect to every scenario or issue that could arise. The terms of the 1998 Agreement set the framework for the contractual relationship. The implied term of good faith governs the parties ’ rights and obligations outside of this framework.

In other words, the implied term of good faith fills in the gaps. [140] The explicit terms of the 1998 Agreement, including the discretionary powers mentioned above, are subject to an overarching implied term of good faith. The 1998 Agreement does not explicitly define limits on the exercise of discretionary powers (with the exception of Clause 4.5), but the implied term of good faith limits how the parties are entitled to exercise these powers.

The explicit terms of the 1998 Agreement must be interpreted in conjunction with the implied term of good faith, such that neither party retained the right to exercise its discretionary powers unreasonably or in bad faith. [141] Clause 3.3, the non-renewal provision, provides both parties with the discretionary power to trigger non-renewal of the contract. The non-renewal provision was purposefully drafted such that it would catch scenarios the parties could not contemplate.

One can think of many circumstances in which either party would be entitled to trigger non-renewal in good faith. [142] Clause 3.3 does not, however, grant either party the unrestricted right to trigger non-renewal of the contract. A proper

interpretation of the 1998 Agreement, considering Clause 3.3 and the implied term of good faith, is such that it grants both parties the discretion to trigger non-renewal of the contract fairly, with respect for the interests of the other party to the standard of good faith. [143] Bhasin argues that considering both the express words of clause 3.3 and the implied term of good faith, the 1998 Agreement should be interpreted such that it required CAFC to provide a “ good reason ” for exercising the non-renewal provision. [144] CAFC argues that the 1998 Agreement does not require good faith conduct, but I have already rejected this argument.

CAFC argues alternatively that even considering the implied term of good faith, clause 3.3 should not be interpreted so as to require a reason for non-renewal. Finally, CAFC argues that if clause 3.3 does require a reason for non-renewal, CAFC exercised the non-renewal clause because of genuine concerns relating to Bhasin ’ s compliance with ASC requirements. CAFC argues this constitutes a “ good reason ” and CAFC, therefore, acted in good faith. [145] I need not determine whether the scope of clause 3.3 is such that it always requires a “ good reason ” for non-renewal; nor do I

need to determine what the scope of a “ good reason ” would be. I reject the proposition that CAFC exercised the non-renewal clause because of genuine concerns relating to Bhasin ’ s compliance with ASC requirements. Rather, CAFC exercised the non-renewal clause because of Bhasin ’ s refusal to merge with Hrynew.

With respect to this issue, I need only determine whether CAFC ’ s conduct in exercising the non-renewal clause amounted to a breach of the implied term of good faith. [146] Similarly, Clause 4.5 (consent for mergers), Clause 4.7 (set mandatory policy) and Clause 4.11 (right to audit) are subject to an implied term of good faith. CAFC undoubtedly retained the right to block mergers, set mandatory policies and audit Bhasin ’ s agency; however, these rights were not absolute. A proper

interpretation of the 1998 Agreement, considering the explicit terms and the implied term of good faith, is such that CAFC retained the right to withhold consent for mergers, set mandatory policy and require audits of Bhasin ’ s agency fairly, with respect for Bhasin ’ s interests. CAFC did not retain the right to exercise these powers in a way that would defeat the purpose of the agreement, which was to allow Bhasin to establish and operate an agency selling CAFC products.

b) Breach of duty of good faith [147] Bhasin alleges that CAFC breached the 1998 Agreement in two ways. Firstly, Bhasin alleges that CAFC acted in bad faith by appointing Hrynew as the Provincial Trading Officer (PTO) and requiring that Hrynew, a competitor, audit Bhasin ’ s agency. Secondly, Bhasin alleges that CAFC acted in bad faith by triggering non-renewal of the 1998 Agreement. [148] I will review the circumstances surrounding the performance of the contract with respect to both alleged breaches of good faith.

I will review the series of events which led up to the appointment of Hrynew as PTO, the attempt to force a merger of Bhasin with Hrynew, the non-renewal of the contract and some events that occurred after.

i) Events surrounding PTO appointment and audit of Bhasin ’ s agency [149] Throughout these reasons, I sometimes refer to PTO and sometimes to ATO. These terms are used interchangeably in much of the correspondence between the parties and between the parties and ASC. Early, CAFC appointed three ATOs in Alberta, one of which was Hrynew. Their responsibilities were not heavy and it appears they receive no compensation from CAFC for that role. Later, as I discuss, ASC demanded that CAFC appoint one trading officer for the whole of the province.

This apparently was not uncommon across Canada where securities commissions were requiring that CAFC appoint one senior person in the province to fulfill securities requirements. This person was referred to as the provincial trading officer or PTO. Therefore, in these reasons those two terms are used interchangeably except that ATO was used for the early position in Alberta. [150] An organizational chart dated May 10, 1999 clearly shows that at this time, Hrynew, Bhasin and Hon were the three Enrollment Directors in Alberta, all reporting to Mr.

Bruce Elliot (Elliot) at CAFC ’ s Ontario head office. [151] As of May 1999, the Alberta Trading Officers (ATOs) named by CAFC were Hrynew, Mr. Peter Hon and Ms. Deborah Taylor, all Enrollment Directors. Those officers had little corporate responsibility and certainly did not inspect the books of other Enrollment Directors. Hrynew was not named by CAFC as the contact person for the ASC. [152] Up until 1999, the ASC did not appear to scrutinize the operation of CAFC to any extent. Early in 1999, (April, it appears) this began to change.

CAFC received its first correspondence from the ASC suggesting that CAFC was not in compliance with many requirements of the ASC in Alberta. [153] On May 7, 1999, the ASC wrote to Hrynew as an ATO requiring CAFC (Hrynew in particular) to complete an attached compliance questionnaire within 7 days. The letter stated that the ASC was implementing a compliance program which would require “ examiners conducting on-site examination of all dealers and advisers. ” [154] On, May 10, 1999, Doreen Johnston of CAFC head office (Johnston) advised Elliot that Hrynew had suggested to Mr.

McKeller of the ASC that Hrynew be the ASC contact person for CAFC in Alberta. That is, Hrynew suggested to the ASC that the ASC

communicate with CAFC through him rather than the other ATOs in Alberta. Clearly, Hrynew had not cleared this with Johnston or anyone else at CAFC. In fact, Johnston suggested to McKellar in a subsequent phone call that CAFC wanted the ASC contact person to be someone from head office in Ontario. Further, she stated that it was head office that should reply to the ASC letter. [155] However, on May 17, 1999, Hrynew wrote to the ASC, as an ATO, on CAFC letterhead with respect to the compliance issues. He reported to the ASC that “ we ” were still accumulating responses for Agency 544 (Hrynew ’ s agency).

It appears from the language in that letter that he is at arm ’ s length from Agency 544, and does not acknowledge that Agency 544 is his agency. Notably, Hrynew also reported that CAFC had a “ political challenge ” in Alberta with respect to Hon and Bhasin in particular. He was already painting the Bhasin and Hon agencies in a bad light with the ASC. That letter said: We have a political challenge in Alberta. You may not be aware of the fact that Hon, Bhasin and Ngai agencies are all under separate contract with CAFC and therefore operate independently.

Though we all represent the same plan, there is an element of competition that is complicating my ability to accumulate their records and materials. [emphasis added] [156] The tone of the letter is that Hrynew is separate and apart from the other agencies and that he is the only ATO. Why did Hrynew do that unless he really wanted to be the only person in Alberta representing CAFC with the ASC?

Further, as early as May 1999, it is clear that Hrynew knew his auditing of the other agencies ’ books would not be accepted by those agencies. [157] On May 20, 1999 CAFC head office wrote a memo to Bhasin attaching the questionnaire sent by the ASC to Hrynew. In this memo, CAFC asked Bhasin for certain information required in the compliance questionnaire and apologized to Bhasin for the short notice. In that memo Debbie Walter (Walter) said: “ I am so sorry Harish since only Larry [Hrynew] received a copy of this letter whereby he in turn faxed HO a copy.

I really thought that each Trading officer or branch office received a copy. ” Bhasin responded that same day with some information and completed the questionnaire the next day. He demonstrated complete cooperation with CAFC. [158] I note that this memo from Walter suggested that Bhasin had not received any request until then.

This is notwithstanding that Hrynew indicated to the ASC in his May 17 letter that Hrynew ’ s ability to accumulate Bhasin ’ s records was “ complicated. ” [159] Hrynew was already starting a campaign in early 1999 to discredit Bhasin in the eyes of the ASC and CAFC. [160] In late 1999, the ASC pointed out that CAFC ’ s employee chart showed that there was no one in Alberta ultimately responsible for all sales representatives in Alberta. The ASC made it very clear that a Provincial Trading Officer (PTO) must be appointed as an officer of CAFC and must be employed by CAFC on a full-time basis .

Further, the ASC suggested that the PTO: “ have access to all the records (trade, licenses etc.), have the ability to review all trades or any activities of any sales rep (see

section 42 of the Rules). Work can be delegated to other branch managers (EDs) but ATO needs to have regular meetings or contact with them. Won ’ t work if they are at each other ’ s throats as the ASC has heard about in the past. ” : Memo dated September 22, 1999 from Johnston to persons in head office of CAFC. [161] Although Hyrnew protested throughout the period of 1999 to 2000 that he did not want the position of PTO, when one looks at the whole of the correspondence around this subject with him, it is clear that he indeed did want the position but was bargaining for a substantial fee for doing the job.

Hrynew said a few times to persons in CAFC head office that he did not want the PTO position for CAFC. Notwithstanding Hrynew ’ s protestations that he did not want the job of PTO, my impression is that Hrynew did want that position of power in Alberta, and as early as May 1999 was negotiating for the best terms for himself and was “ bad-mouthing ” Hon and Bhasin. The only other Enrollment Director that was positioned to take on the role of PTO was Hon. Hyrnew made disparaging remarks about him to the executive of CAFC.

I infer that Hrynew made these remarks to ensure that Hon did not get the position and Hyrnew did. Hrynew manipulated the situation to ensure that he was going to be the one appointed as PTO. Further, I infer from the correspondence and the fact that the ASC communicated only with Hrynew, that Hrynew had conversations with the ASC as to his being the “ go-to ” person in Alberta for CAFC. [162] Further, Johnston conveyed to the CAFC executive that Hrynew did not trust Hon to do the job of PTO honestly.

Hrynew was trying to cast a bad light on Hon. [163] On September 10, 1999, CAFC (Johnston) wrote to the ASC and proposed that they would appoint Hrynew as the PTO.

[164] On September 16, 1999, Hrynew wrote a rather lengthy memo to Elliott discussing the PTO position. On that occasion he protested that he did not want the job, but, on a reading of that whole memo and other circumstances surrounding the writing of that memo that were in evidence, it appears to me that he definitely did want that job. Hrynew was bargaining. In the memo, Hrynew set out his terms which were fairly significant. He wanted both authority over the agencies and a vested interest in the success of each of the other agencies as well as complete indemnification by CAFC of himself.

Further, he wanted a long term commitment from CAFC. Notably, he said in that memo that “ it appears to be the time to make the appropriate amalgamation for all of the Alberta agencies. ” He also said that the Enrollment Directors (Hon and Bhasin) are difficult. [165] Throughout 1999 and into 2000, the ASC was putting considerable pressure on CAFC to comply with its requirements. From the time that ASC sent the compliance questionnaire to Hrynew in May 1999, the ASC was putting more and more pressure on CAFC because it was not complying with securities legislation and regulations in a number of respects.

There was an exchange of correspondence setting out those requirements and CAFC was having some difficulty meeting all of them. It was in this climate that CAFC was considering appointing Hyrnew as PTO. [166] Also a result of the pressure being put on CAFC by ASC in Alberta, CAFC decided to draft a wide ranging policy and procedures compliance manual to apply across Canada. [167] In the early part of 2000, CAFC was

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