Harish Bhasin, carrying on business as Bhasin & Associates Appellant v. Larry Hrynew and Heritage Education Funds Inc. (formerly known as Allianz Education Funds Inc., formerly known as Canadian, 2014 SCC 71

SUPREME COURT OF CANADA Citation: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 Date: 20141113 Docket: 35380 Between: Harish Bhasin, carrying on business as Bhasin & Associates Appellant and Larry Hrynew and Heritage Education Funds Inc. (formerly known as Allianz Education Funds Inc., formerly known as Canadian American Financial Corp. (Canada) Limited) Respondents Coram: McLachlin C.J. and LeBel, Abella, Rothstein, Cromwell, Karakatsanis and Wagner JJ.

Reasons for Judgment: (paras. 1 to 112) Cromwell J. (McLachlin C.J. and LeBel, Abella, Rothstein, Karakatsanis and Wagner JJ. concurring) bhasin v. hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 Harish Bhasin, carrying on business as Bhasin & Associates Appellant v. Larry Hrynew and Heritage Education Funds Inc. (formerly known as Allianz Education Funds Inc., formerly known as Canadian American Financial Corp. (Canada) Limited) Respondents Indexed as: Bhasin v. Hrynew 2014 SCC 71 File No.: 35380. 2014: February 12; 2014: November 13.

Present: McLachlin C.J. and LeBel, Abella, Rothstein, Cromwell, Karakatsanis and Wagner JJ. on appeal from the court of appeal for alberta Contracts — Breach — Performance — Non-renewal provision — Duty of good faith — Duty of honest performance — Agreement governing relationship between company and retail dealer providing for automatic contract renewal at end of three-year term unless parties giving six months’ written notice to contrary — Company deciding not to renew dealership agreement — Retail dealer lost value of business and majority of sales agents solicited by competitor agency — Retail dealer suing company and competitor agency — Whether common law requiring new general duty of honesty in contractual performance — Whether company breaching that duty.

Damages — Quantum — Contracts — Breach — Performance — Non-renewal provision — Duty of good faith — Duty of honest performance — Agreement governing relationship between company and retail dealer providing for automatic contract renewal at end of three-year term unless parties giving six months’ written notice to contrary — Company deciding not to renew dealership agreement — Retail dealer lost value of business and majority of sales agents solicited by competitor agency — Retail dealer suing company and competitor agency — What is appropriate measure of damages.

C markets education savings plans to investors through retail dealers, known as enrollment directors, such as B. An enrollment director’s agreement that took effect in 1998 governed the relationship between C and B. The term of the contract was three years. The applicable provision provided that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary. H was another enrollment director and was a competitor of B.

H wanted to capture B’s lucrative niche market and previously approached B to propose a merger of their agencies on numerous occasions. He also actively encouraged C to force the merger. B had refused to participate in such a merger. C appointed H as the provincial trading officer (“PTO”) to review its enrollment directors for compliance with securities laws after the Alberta Securities Commission raised concerns about compliance issues among C’s enrollment directors. The role required H to conduct audits of C’s enrollment directors. B objected to having H, a competitor, review his confidential business records.

During C’s discussions with the Commission about compliance, it was clear that C was considering a restructuring of its agencies in Alberta that involved B. In June 2000, C outlined its plans to the Commission and they included B working for H’s agency. None of this was known by B. C repeatedly misled B by telling him that H, as PTO, was under an obligation to treat the information confidentially. It also responded equivocally when B asked in August 2000 whether the merger was a “done deal”.

When B continued to refuse to allow H to audit his records, C threatened to terminate the 1998 Agreement and in May 2001 gave notice of non-renewal under the Agreement. At the expiry of the contract term, B lost the value in his business in his assembled workforce. The majority of his sales agents were successfully solicited by H’s agency. B sued C and H. The trial judge found C was in breach of the implied term of good faith, H had intentionally induced breach of contract, and both C and H were liable for civil conspiracy. The Court of Appeal allowed the appeal and dismissed B’s lawsuit.

Held : The appeal with respect to C should be allowed and the appeal with respect to H dismissed. The trial judge’s assessment of damages should be varied to $87,000 plus interest. Canadian common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear. Two incremental steps are in order to make the common law 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 step 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.

Taking these two steps will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty. There is an organizing principle of good faith that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. An organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived.

An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations . It is a standard that helps to understand and develop the law in a coherent and principled way. 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.

This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. However, this list is not closed.

The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.

The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide tofuture development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varyingcontexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as togive appropriate consideration to the legitimate interests of both contracting parties.

The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the commonlaw of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. Incommerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest.Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economicefficiency.

The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palmtree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives ofcontracting parties. The objection to C’s conduct in this case does not fit within any of the existing situations or relationships in which duties ofgood faith have been found to exist.

It is appropriate to recognize a new common law duty that applies to all contracts as a manifestationof the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other inrelation to the performance of their contractual obligations. Under this new general duty of honesty in contractual performance, parties must not lie or otherwise knowingly mislead eachother about matters directly linked to the performance of the contract.

This does not impose a duty of loyalty or of disclosure or require aparty to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’scontractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of goodfaith is a modest, incremental step. This new duty of honest performance is a general doctrine of contract law that imposes as a contractual duty a minimumstandard of honesty in contractual performance.

It operates irrespective of the intentions of the parties, and is to this extent analogous toequitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability. However, the precisecontent of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of thedoctrine so long as they respect its minimum core requirements. The duty of honest performance should not be confused with a duty of disclosure or of fiduciary loyalty.

A party to acontract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to relyon a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if thecontract does not work out, they will have a fair opportunity to protect their interests. In this case, the trial judge did not make a reversible error by adjudicating the issue of good faith. C breached the 1998Agreement when it failed to act honestly with B in exercising the non-renewal clause.

The trial judge concluded that C acted dishonestlywith B throughout the period leading up to its exercise of the non-renewal clause, both with respect to its own intentions and with respectto H’s role as PTO. The trial judge’s detailed findings amply support this overall conclusion. C is liable for damages calculated on the basis of what B’s economic position would have been had C fulfilled its duty. While the trial judge did not assess damages on that basis given the different findings in relation to liability, the trial judge made findingsthat permit this Court to do so.

These findings permit damages to be assessed on the basis that if C had performed the contract honestly,B would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to H. It is clear fromthe findings of the trial judge and from the record that the value of the business around the time of non-renewal was $87,000. B isentitled to damages in the amount of $87,000. The Court of Appeal was correct in finding that there could be no liability for inducingbreach of contract or unlawful means conspiracy.

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No. 395 (QL), 2013 CarswellAlta 822, setting aside a decision of Moen J., 2011 ABQB 637 , 526 A.R. 1, 96 B.L.R. (4th) 73, [2012] 9 W.W.R. 728, [2011] A.J. No. 1223 (QL), 2011 CarswellAlta 1905. Appeal allowed in part. Neil Finkelstein , Brandon Kain , John McCamus and Stephen Moreau , for the appellant. Eli S. Lederman , Jon Laxer and Constanza Pauchulo , for the respondents. The judgment of the Court was delivered by Cromwell J. — I.

Introduction [ 1 ] The key issues on this appeal come down to two straightforward questions: Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? And, if so, did either of the respondents breach that duty? I would answer both questions in the affirmative. Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result. II.

Facts and Judicial History Overview and Issues [ 2 ] The appellant, Mr. Bhasin, through his business Bhasin & Associates, was an enrollment director for Canadian American Financial Corp. (“Can-Am”) beginning in 1989. The relationship between Mr. Bhasin and Can-Am soured in 1999 and

ultimately Can-Am decided not to renew the dealership agreement with him. The litigation leading to this appeal ensued. [ 3 ] Can-Am markets education savings plans (“ESPs”) to investors through retail dealers, known as enrollment directors, such as Mr. Bhasin. It pays the enrollment directors compensation and bonuses for selling ESPs. The enrollment directors are in effect small business owners and the success of their businesses depends on them building a sales force. It took Mr.

Bhasin approximately 10 years to build his sales force, but his business thrived and Can-Am gave him numerous awards and prizes recognizing him as one of their top enrollment directors in Canada: 2011 ABQB 637 , 526 A.R. 1, at paras. 51 , 238 and 474. [ 4 ] An enrollment director’s agreement that took effect in 1998 governed the relationship between Can-Am and Mr. Bhasin. (That Agreement replaced a previous agreement of an indefinite term that had governed their relationship since the outset in 1989.) The Agreement was a commercial dealership agreement, not a franchise agreement.

There was no franchise fee and it was not covered by the statutory duty of fair dealing such as that provided for in s. 7 of the Franchises Act , R.S.A. 2000, c. F-23. [ 5 ] That said, there were some features of the 1998 Agreement that are similar to provisions typically found in franchise agreements. Mr. Bhasin was obliged to sell Can-Am investment products exclusively and owed it a fiduciary duty. Can-Am owned the client lists, was responsible for branding and implemented central policies that applied to all enrollment directors: see cls. 4.1, 5.2, 5.3 and 4.7. Mr.

Bhasin could not sell, transfer, or merge his operation without Can-Am’s consent, which was not to be withheld unreasonably: see cls. 4.5 and 11.4. [ 6 ] The term of the contract was three years. Clauses 8.3 and 8.4 allowed termination on short notice for misconduct or other cause. Clause 3.3 — the provision at the centre of this case ― provided that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary. [ 7 ] Mr. Hrynew, one of the respondents and another enrollment director, was a competitor of Mr.

Bhasin and there was considerable animosity between them: trial reasons, at para. 461. The trial judge found, in effect, that Mr. Hrynew pressured Can-Am not to renew its Agreement with Mr. Bhasin and that Can-Am dealt dishonestly with Mr. Bhasin and ultimately gave in to that pressure. [ 8 ] When Mr. Hrynew moved his agency to Can-Am from one of its competitors many years before the events in question, Can-Am promised him that he would be given consideration for mergers that would take place and he in fact merged with other agencies in Calgary after joining Can-Am: trial reasons, at para. 238.

He was in a strong position with Can-Am because he had the largest agency in Alberta and a good working relationship with the Alberta Securities Commission, which regulated Can-Am’s business: para. 284. [ 9 ] Mr. Hrynew wanted to capture Mr. Bhasin’s lucrative niche market around which he had built his business: trial reasons, at para. 303. Mr. Hrynew personally approached Mr. Bhasin to propose a merger of their agencies on numerous occasions: para. 238.

He also actively encouraged Can-Am to force the merger and made “veiled threats” that he would leave if no merger took place: para. 282; see also paras. 251 and 287. The trial judge found that the proposed “merger” was in effect a hostile takeover of Mr. Bhasin’s agency by Mr. Hrynew: para. 240. Mr. Bhasin steadfastly refused to participate in such a merger: para. 247. [ 10 ] The Alberta Securities Commission raised concerns about compliance issues among Can-Am’s enrollment directors.

In late 1999, the Commission required Can-Am to appoint a single provincial trading officer (“PTO”) to review its enrollment directors for compliance with securities laws: trial reasons, at paras. 149, 152 and 160. Can-Am appointed Mr. Hrynew to that position in September of that year. The role required him to conduct audits of Can-Am’s enrollment directors. Mr. Bhasin and Mr. Hon, another enrollment director, objected to having Mr.

Hrynew, a competitor, review their confidential business records: paras. 189-96. [ 11 ] Can-Am became worried that the Commission might revoke its licence and, in 1999 and 2000, it had many discussions with the Commission about compliance. During those discussions, it was clear that Can-Am was considering a restructuring of its agencies in Alberta that involved Mr. Bhasin. In June 2000, Can-Am outlined its plans to the Commission and they included Mr. Bhasin working for Mr. Hrynew’s agency. The trial judge found that this plan had been formulated before June 2000: para. 256. None of this was known by Mr.

Bhasin: paras. 243-46. [ 12 ] In fact, Can-Am repeatedly misled Mr. Bhasin by telling him that Mr. Hrynew, as PTO, was under an obligation to treat the information confidentially and that the Commission had rejected a proposal to have an outside PTO, neither of which was true: trial reasons, at para. 195. It also responded equivocally when Mr. Bhasin asked in August 2000 whether the merger was a “done deal”: para. 247. When Mr. Bhasin continued to refuse to allow Mr.

Hrynew to audit his records, Can-Am threatened to terminate the 1998 Agreement and in May 2001 gave notice of non-renewal under the Agreement: paras. 207-11. [ 13 ] At the expiry of the contract term, Mr. Bhasin lost the value in his business in his assembled workforce. The majority of his sales agents were successfully solicited by Mr. Hrynew’s agency. Mr. Bhasin was obliged to take less remunerative work with one of Can-Am’s competitors. [ 14 ] Mr. Bhasin sued Can-Am and Mr. Hrynew.

Moen J. in the Alberta Court of Queen’s Bench found that it was an implied term of the contract that decisions about whether to renew the contract would be made in good faith. The court held that the corporate respondent was in breach of the implied term of good faith, that Mr. Hrynew had intentionally induced breach of contract, and that the respondents were liable for civil conspiracy. [ 15 ] The trial judge found that Can-Am acted dishonestly with Mr.

Bhasin throughout the events leading up to the non- renewal: it misled him about its intentions with respect to the merger and about the fact that it had already proposed the new structure to the Commission; it did not communicate to him that the decision was already made and final, even though he asked; and it did not communicate with him that it was working closely with Mr. Hrynew to bring about a new corporate structure with Hrynew’s being the main agency in Alberta. The trial judge also found that, had Can-Am acted honestly, Mr.

Bhasin could have “governed himself accordingly so as to retain the value in his agency”: para. 258. [ 16 ] The Alberta Court of Appeal allowed the respondents’ appeal and dismissed Mr. Bhasin’s lawsuit. The court found

his pleadings to be insufficient and held that the lower court erred by implying a term of good faith in the context of an unambiguous contract containing an entire agreement clause: 2013 ABCA 98 , 84 Alta. L.R. (5th) 68. [ 17 ] The appeal raises four issues: (

a) Did Mr. Bhasin properly plead breach of the duty of good faith? (

b) Did Can-Am owe Mr. Bhasin a duty of good faith? If so, did it breach that duty? (

c) Are the respondents liable for the torts of inducing breach of contract or civil conspiracy? (

d) If there was a breach, what is the appropriate measure of damages? III. Analysis A. Did Mr. Bhasin Properly Plead Breach of the Duty of Good Faith? [ 18 ] The Court of Appeal held that Mr. Bhasin had not properly pleaded the good faith issue and that the trial judge had therefore erred in considering it. Mr. Bhasin contests this conclusion, while the respondents support it. I agree with Mr. Bhasin. [ 19 ] The allegations in the statement of claim clearly put the questions of improper purpose and dishonesty in issue. These facts are sufficient to put Can-Am’s good faith in issue.

The question of whether this conduct amounted to a breach of the duty of good faith is a legal conclusion that did not need to be pleaded separately. The defendants did not move to strike the pleadings or seek particulars of the allegation of wrongful termination in the statement of claim. Good faith was a live issue that was fully canvassed in a lengthy trial: A.F., at paras. 92-94. Written submissions by both parties at trial referred to the good faith issue and, even in his opening at trial, Mr.

Bhasin’s counsel raised the issue of good faith. [ 20 ] The trial judge held that any deficiency in the pleadings did not cause prejudice to the respondents: paras. 23 and 48. This is an assessment she was uniquely positioned to make and her conclusion ought to be treated with deference on appeal. The good faith issue was fully argued in and addressed by the Court of Appeal and has been fully argued on the merits in this Court. [ 21 ] In my view, the trial judge did not make a reversible error by adjudicating the issue of good faith and we should address the merits of that issue. B. Did Can-Am Owe Mr.

Bhasin a Duty of Good Faith?

(1) Decisions and Positions of the Parties (

a) Decisions [ 22 ] The trial judge accepted Mr. Bhasin’s position that there was a duty of good faith in this case and that it had been breached. In brief, her reasoning was as follows. [ 23 ] First, the trial judge decided that the 1998 Agreement was a type of agreement which as a matter of law requires good faith performance. She recognized that the 1998 Agreement did not fall within any of the existing categories of contract, such as employment, insurance and franchise agreements, which have been held to require good faith performance.

She concluded, however, that the Agreement was analogous to a franchise or employment contract, and so by analogy to these cases, she implied a term of good faith performance as a matter of law. The contract was not balanced from its inception and the relationship placed the enrollment director in a position of inherent and predictable vulnerability: paras. 67-86. [ 24 ] Second, and in the alternative, the trial judge held that a term of good faith performance should be implied based on the intentions of the parties in order to give business efficacy to the agreement.

She concluded that “[w]hen one considers the whole of the relationship . . . it is clear that the parties had to operate in good faith and there was a requirement of fairness between them. In other words, good faith was necessary to give business efficacy to the whole 1998 Agreement”: para. 101. [ 25 ] The 1998 Agreement contained an “entire agreement clause” stating that there were no “agreements, express, implied or statutory, other than expressly set out” in it: cl. 11.2. The trial judge held, however, that this clause did not preclude the implication of a duty of good faith.

The parties, she reasoned, cannot rely on exclusion clauses to avoid contractual obligations where there is an imbalance of power, and courts refuse to let parties shelter under entire agreement clauses where it would be unjust or inequitable to do so: paras. 116-18. [ 26 ] Turning to the issue of breach, the trial judge found that Can-Am had breached the agreement, first by requiring Mr. Bhasin to submit to an audit by Mr. Hrynew and to provide the latter with access to his business records, and second by exercising the non-renewal clause in a dishonest and misleading manner and for an improper purpose.

The non-renewal clause was not intended to permit Can-Am to force a merger of the Bhasin and Hrynew agencies, but that was the purpose for which Can-Am exercised this power: para. 261. The trial judge also found both respondents liable for unlawful means conspiracy and found Mr. Hrynew liable for inducing Can-Am’s breach of its contract with Mr. Bhasin. [ 27 ] The Court of Appeal reversed and held that there had been no breach of contract. The duty of good faith in employment contracts could not be extended by analogy to other types of contract.

In any event, the duty of good faith in the employment context is limited to the manner of termination and does not include reasons for non-renewal: C.A. reasons, at paras. 27 and 31. Nor was this a circumstance in which a term could be implied because it was so obvious it was not thought necessary to mention or was necessary to make the contract work: para. 32. Even if there were an implied duty of good faith in this case, the impugned conduct concerned the non-renewal of a contract, which occurs on expiry, unlike a termination clause: para. 31.

[ 28 ] Moreover, the Court of Appeal held that a term cannot be implied where it goes against an express term of the contract. Here, the parties did not intend a perpetual contract, since they included a term allowing either party to unilaterally trigger its expiration prior to the end of each three-year term. The trial judge’s approach was inconsistent with the non-renewal provision of the contract. The motive for triggering expiration was not restricted under the Agreement. The implication of a term of good faith also violated the entire agreement clause.

The court held that the evidence of assurances given by Can-Am as to how the non-renewal power would be exercised fell afoul of the parol evidence rule and should not have been considered. Since the Court of Appeal held there was no breach of contract, the basis for the claims in unlawful means conspiracy and inducing breach of contract also disappeared. (

b) Positions of the Parties [ 29 ] Mr. Bhasin advances two related positions on appeal. His broad submission is that the Court should recognize a general duty of good faith in contract. The duty arises where the agreement gives the defendant the power to unilaterally defeat a legitimate contractual objective of the plaintiff and it does not clearly allow the defendant to exercise its power without regard for that objective: A.F., at para. 51.

This duty of good faith prevents conduct which, while consonant with the letter of a contract, exhibits dishonesty, ill will, improper motive or similar departures from reasonable business expectations. Mr. Bhasin contends that common law in Canada is increasingly isolated as other jurisdictions embrace a greater role for good faith in contract law: A.F., at paras. 27-32. The recognition of a general duty of good faith would constitute an incremental advance in the law, given the numerous specific situations that already give rise to a duty of good faith. Mr.

Bhasin relies on the findings of the trial judge that the respondents improperly and dishonestly used their non-renewal right to compel Mr. Bhasin to merge with his competitor. Mr. Bhasin contends that the respondents had no legitimate business reason for not renewing the contract. He also says that the entire agreement clause should be construed narrowly, and that express language is needed for such a clause to derogate from a duty of good faith: A.F., at para. 83. [ 30 ] Mr.

Bhasin’s second position, emphasized in oral argument, is that the Court should at least recognize a duty of honest performance of contractual obligations: transcript, at pp. 8, 10 and 24. Mr. Bhasin relies on the trial judge’s findings that Can-Am acted dishonestly towards Mr. Bhasin throughout the period leading up to the non-renewal. It repeatedly lied to him about the nature of the organizational changes required by the Alberta Securities Commission, the nature of the audits that were to be carried out by Mr.

Hrynew, and was dishonest about its intention to force him out: trial reasons, at paras. 195, 221, 246-47 and 267. [ 31 ] Unsurprisingly, the respondents see things very differently. While they accept that good faith plays a role in Canadian contract law, they submit that this role is much more modest than Mr. Bhasin suggests. They say that such a duty arises only in certain classes of contract, such as employment contracts, and in contracts involving discretionary powers: R.F., at para. 52. In the employment context, the duty applies only to the manner in which a contract is terminated.

The contract in this case was negotiated between commercial parties to whom the policy considerations underlying employment law doctrine do not apply. Mr. Bhasin is alleging a right to a perpetual, or at least indefinite, contract with the respondents. The contract in this case could not be said to be discretionary, because it provided simply that on six months’ notice, either party could terminate the Agreement.

The respondents submit that there is no ambiguity in the wording of the non-renewal clause of the contract and so there is no basis for implying other terms or for relying on extrinsic evidence of the parties’ intentions. The entire agreement clause specifically precluded the implication of any terms other than the express terms of the contract.

(2) Analysis (

a) Overview [ 32 ] The notion of good faith has deep roots in contract law and permeates many of its rules. Nonetheless, Anglo- Canadian common law has resisted acknowledging any generalized and independent doctrine of good faith performance of contracts. The result is an “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze”: Ontario Law Reform Commission (“OLRCˮ), Report on Amendment of the Law of Contract (1987), at p. 169.

This approach is out of step with the civil law of Quebec and most jurisdictions in the United States and produces results that are not consistent with the reasonable expectations of commercial parties. [ 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. [ 34 ] In my view, taking these two steps is perfectly consistent with the Court’s responsibility to make incremental changes in the common law when appropriate. Doing so will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty. (

b) Good Faith as a General Organizing Principle (

i) Background [ 35 ] The doctrine of good faith traces its history to Roman law and found acceptance in early English contract law. For example, Lord Northington wrote in Aleyn v. Belchier (1758), 1 Eden 132, 28 E.R. 634, at p. 637, cited in Mills v. Mills (1938), 60 C.L.R. 150 (H.C.A.), at p. 185, that “[n]o point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void.” Similarly, Lord Kenyon wrote in Mellish v.

Motteux (1792), Peake 156, 170 E.R. 113 , “in contracts of all kinds, it is of the highest importance that courts of law should compel the observance of honesty and good faith”: p. 113-14. In Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162, at p. 1910, Lord Mansfield stated that good faith is a principle applicable to all contracts; see also Herbert v. Mercantile Fire Ins. Co. (1878), 43 U.C.Q.B. 384; R. Powell, “Good Faith in Contracts” (1956), 9 Curr. Legal Probs. 16.

[36] However, these broad pronouncements have been, for the most part, restricted by subsequent jurisprudence tospecific types of contracts and relationships, such as insurance contracts, leaving unclear the role of the broader principle of good faith inthe modern Anglo-Canadian law of contracts: Chitty on Contracts (31st ed. 2012), vol. I, General Principles, at para. 1-039; W. P. Yee,“Protecting Parties’ Reasonable Expectations: A General Principle of Good Faith” (2001), 1 O.U.C.L.J. 195, at p. 195; E. P.

Belobaba,“Good Faith in Canadian Contract Law”, in Special Lectures of the Law Society of Upper Canada 1985 — Commercial Law: RecentDevelopments and Emerging Trends (1985), 73, at p. 75. One leading Canadian contracts scholar went so far as to say that the commonlaw has taken a “kind of perverted pride” in the absence of any general notion of good faith, as if accepting that notion “would beadmitting to the presence of some kind of embarrassing social disease”: J.

Swan, “Whither Contracts: A Retrospective and ProspectiveOverview”, in Special Lectures of the Law Society of Upper Canada 1984 — Law in Transition: Contracts (1984), 125, at p. 148. [37] This Court has not examined whether there is a general duty of good faith contractual performance. However, therehas been an active debate in other courts and among scholars for decades over whether there is, or should be, a general or “stand-alone”duty of good faith in the performance of contracts.

Canadian courts have reached different conclusions on this point. [38] Some suggest that there is a general duty of good faith: Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), (NS SC), 106 N.S.R. (2d) 180 (S.C. (T.D.)), aff’d on narrower grounds (1992), 1992 NSCA 70 , 112 N.S.R. (2d)180 (S.C. (App. Div.)); McDonald’s Restaurant of Canada Ltd. v. British Columbia (1997), (BC CA), 29 B.C.L.R.(3d) 303 (C.A.), at para. 99; Crawford v. Agricultural Development Board (N.B.) (1997), (NB CA), 192 N.B.R. (2d)68 (C.A.), at paras. 7-8.

They see a broad role for good faith as an implied term in all contracts that establishes minimum standards ofacceptable commercial behaviour. As Kelly J. put it in Gateway Realty, at para. 38: 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 faithˮconduct 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 faithˮ — a conduct that is contrary to community standards of honesty, reasonableness or fairness. [39] Other courts are of the view that there exists no such general duty of good faith in all contracts: Transamerica LifeCanada Inc. v. ING Canada Inc. (2003), (ON CA), 68 O.R. (3d) 457 (C.A.), at paras. 53-54; Mesa Operating LimitedPartnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 A.R. 187 (C.A.), at paras. 15-19, per Kerans J.A.,dubitante; Barclays Bank PLC v.

Metcalfe & Mansfield Alternative Investments VII Corp., 2013 ONCA 494, 365 D.L.R. (4th) 15, atpara. 131; see G. R. Hall, Canadian Contractual

Interpretation Law (2nd ed. 2012), at pp. 338-46.

The detractors of such a general dutyof good faith have accepted a limited role for good faith in certain contexts but have held that it would create commercial uncertainty andundermine freedom of contract to recognize a general duty of good faith that would permit courts to interfere with the express terms of acontract. [40] This Court ought to develop the common law to keep in step with the “dynamic and evolving fabric of our society”where it can do so in an incremental fashion and where the ramifications of the development are “not incapable of assessment”: R. v.Salituro, (SCC), [1991] 3 S.C.R. 654, at p. 670; Bow Valley Husky (Bermuda) Ltd. v.

Saint John Shipbuilding Ltd., (SCC), [1997] 3 S.C.R. 1210, at para. 93; see also Watkins v. Olafson, (SCC), [1989] 2 S.C.R. 750, at pp.760-64; Hill v. Church of Scientology of Toronto, (SCC), [1995] 2 S.C.R. 1130, at para. 85; R.W.D.S.U., Local 558 v.Pepsi-Cola Canada Beverages (West) Ltd., 2002 SCC 8, [2002] 1 S.C.R. 156; British Columbia v. Imperial Tobacco Canada Ltd., 2005SCC 49, [2005] 2 S.C.R. 473; Grant v. Torstar Corp., 2009 SCC 61, [2009] 3 S.C.R. 640, at para. 46.

This is even more appropriatewhere, as here, what is contemplated is not the reversal of some settled rule, but a development directed to bringing greater certainty andcoherence to a complex and troublesome area of the common law. [41] As I see it, the developments that I propose are desirable as a result of several considerations. First, the currentCanadian common law is uncertain. Second, the current approach to good faith performance lacks coherence.

Third, the current law isout of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of commonlaw Canada — Quebec and the United States: see, e.g., Hall, at p. 347.

While the developments which I propose will not completelyaddress these problems, they will bring a measure of coherence and predictability to the law and will bring the law closer to whatreasonable commercial parties would expect it to be. (ii) Survey of the Current State of the Common Law [42] Anglo-Canadian common law has developed a number of rules and doctrines that call upon the notion of good faithin contractual dealings; it is a concept that underlies many elements of modern contract law: S. M. Waddams, The Law of Contracts (6thed. 2010), at para. 550; J. D.

McCamus The Law of Contracts (2nd ed. 2012), at pp. 835-38; OLRC, at p. 165; Belobaba, at pp. 75-76; J.F. O’Connor, Good Faith in English Law (1990), at pp. 17-49; J. Steyn, “Contract Law: Fulfilling the Reasonable Expectations ofHonest Men” (1997), 113 Law Q. Rev. 433. The approach, not unfairly, has been characterized as developing “piecemeal solutions inresponse to demonstrated problems”: Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., [1989] 1 Q.B. 433 (C.A.), at p.439, per Bingham L.J. (as he then was).

Thus we see, for example, that good faith notions have been applied to particular types ofcontracts, particular types of contractual provisions and particular contractual relationships. It also underlies doctrines that explicitly dealwith fairness in contracts, such as unconscionability, and plays a role in interpreting and implying contractual terms. The difficulty withthis “piecemeal” approach, however, is that it often fails to take a consistent or principled approach to similar problems.

A brief reviewof the current landscape of good faith will show the extent to which this is the case. [43] Considerations of good faith are apparent in doctrines that expressly consider the fairness of contractual bargains,such as unconscionability. This doctrine is based on considerations of fairness and preventing one contracting party from taking undueadvantage of the other: G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at pp. 329-30; E.

Peden, “When Common LawTrumps Equity: the Rise of Good Faith and Reasonableness and the Demise of Unconscionability” (2005), 21 J.C.L. 226; Belobaba, at p.86; S. M. Waddams, “Good Faith, Unconscionability and Reasonable Expectations” (1995), 9 J.C.L. 55. [44] Good faith also plays a role in the law of implied terms, particularly with respect to terms implied by law. Terms

implied by law redress power imbalances in certain classes of contracts such as employment, landlord-lessee, and insurance contracts:London Drugs Ltd. v. Kuehne & Nagel International Ltd., (SCC), [1992] 3 S.C.R. 299, at p. 457, per McLachlin J. (asshe then was); see also Machtinger v. HOJ Industries Ltd., (SCC), [1992] 1 S.C.R. 986, per McLachlin J., concurring.The implication of terms plays a functionally similar role in common law contract law to the doctrine of good faith in civil lawjurisdictions by filling in gaps in the written agreement of the parties: Chitty on Contracts, at para. 1-051.

In Mesa Operating, the AlbertaCourt of Appeal implied a term that a power of pooling properties for the purpose of determining royalty payments be exercisedreasonably. The court implied this term in order to give effect to the intentions of the parties rather than as a requirement of good faith,but Kerans J.A. stated that “[t]he rule that governs here can, therefore, be expressed much more narrowly than to speak of good faith,although I suspect it is in reality the sort of thing some judges have in mind when they speak of good faith”: para. 22.

Many otherexamples may be found in Waddams, The Law of Contracts, at paras. 499-506. [45] Considerations of good faith are also apparent in contract

interpretation: Chitty on Contracts, at para. 1-050; Hall, atp. 347. The primary object of contractual

interpretation is of course to give effect to the intentions of the parties at the time of contractformation. However, considerations of good faith inform this process. Parties may generally be assumed to intend certain minimumstandards of conduct. Further, as Lord Reid observed in Schuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), at p.251, “[t]he more unreasonable the result the more unlikely it is that the parties can have intended it”. As A. Swan and J.

Adamski put it,the duty of good faith “is not an externally imposed requirement but inheres in the parties’ relation”: Canadian Contract Law (3rd ed.2012), at §§ 8.134-8.146. [46] Good faith also appears in numerous contexts in a more explicit form. The concept of “good faith” is used inhundreds of statutes across Canada, including statutory duties of good faith and fair dealing in franchise legislation and good faithbargaining in labour law: S. K. O’Byrne, “Good Faith in Contractual Performance: Recent Developments” (1995), 74 Can.

Bar Rev. 70,at p. 71. [47] There have been many attempts to bring a measure of coherence to this piecemeal accretion of appeals to good faith:see, among many others, McCamus, at pp. 835-68; S. K. O’Byrne, “The Implied Term of Good Faith and Fair Dealing: RecentDevelopments” (2007), 86 Can. Bar Rev. 193, at pp. 196-204; Waddams, The Law of Contracts, at paras. 494-508; R. S. Summers,“‛Good Faith’ in General Contract Law and the Sales Provisions of the Uniform Commercial Codeˮ (1968), 54 Va. L. Rev. 195; S. J.Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faithˮ (1981), 94 Harv. L. Rev. 369.

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 foundto exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionarypower under the contract; and (3) where one party seeks to evade contractual duties (pp. 840-56; CivicLife.com Inc. v.

Canada (AttorneyGeneral) (2006), (ON CA), 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 stateof the law on the duty of good faith. They also reveal some of the lack of coherence in the current approach. It is often unclear whether agood faith obligation is being imposed as a matter of law, as a matter of implication or as a matter of

interpretation. Professor McCamusnotes: Although the line between the two types of implication is difficult to draw, it may be realistic to assume that implied duties of good faithare likely, on occasion at least, to slide into the category of legal incidents rather than mere presumed intentions. Certainly, it would bedifficult to defend the implication of terms on each of the cases considered here on the basis of the traditional business efficiency orofficious bystander test.

In the control of contractual discretion cases, for example, it may be more realistic to suggest that the impliedlimitation on the exercise of the discretion is intended to give effect to the “reasonable expectations of the parties.ˮ [pp. 865-66] [49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) isreflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K.

Detailing Ltd., (SCC), [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 forobtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining suchpermission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J.(as he then was) 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.

Itis not completely clear whether this duty was imposed as a matter of law or was implied based on the parties’ intentions: see p. 1083; seealso Gateway Realty and CivicLife.com. [50] Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, (SCC), [1995] 2 S.C.R. 187, is an example ofthe second type of situation (exercise of contractual discretion). The lease of a helicopter included an option to buy at the “reasonable fairmarket value of the helicopter as established by Lessor”: para. 2.

This Court held, at para. 34, that, “[c]learly, the lessor is not in aposition, by virtue of clause 32, to make any offer that it may feel is appropriate.

It is contractually bound to act in good faith todetermine the reasonable fair market value of the helicopters, which is the price that the parties had initially agreed would be the exerciseprice of the option.” The Court did not discuss the basis for implying the term, but suggested that in the absence of a reasonablenessrequirement, the option would be a mere agreement to agree and thus would be unenforceable, which means that the implication of theterm was necessary to give business efficacy to the agreement. [51] This Court’s decision in Mason v.

Freedman, (SCC), [1958] S.C.R. 483, falls in the third type ofsituation 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 areal estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simplebecause he claimed his wife would not provide a bar of dower.

The issue was whether he could take advantage of a clause permittinghim to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made noefforts 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 acause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486.

On the contrary, “[a] vendor whoseeks 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.

[52] The jurisprudence is not always very clear about the source of the good faith obligations found in these cases. Thecategories of terms implied as a matter of law, terms implied as a matter of intention and terms arising as a matter of

interpretationsometimes are blurred or even ignored, resulting in uncertainty and a lack of coherence at the level of principle. [53] Apart from these types of situations in which a duty of good faith arises, common law Canadian courts have alsorecognized that there are classes of relationships that call for a duty of good faith to be implied by law. [54] For example, this Court confirmed that there is a duty of good faith in the employment context in Honda CanadaInc. v. Keays, 2008 SCC 39, [2008] 2 S.C.R. 362. Mr. Keays was diagnosed with chronic fatigue syndrome and was frequently absentfrom work.

Honda grew concerned with the frequency of the absences. It ordered Mr. Keays to undergo an examination by a doctorchosen by the employer, required him to provide a doctor’s note for any absences, and discouraged him from retaining outside counsel.The majority held that in all employment contracts there was an implied term of good faith governing the manner of termination. Inparticular, the employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading orunduly insensitive” when dismissing an employee: para. 57, citing Wallace v.

United Grain Growers Ltd., (SCC),[1997] 3 S.C.R. 701, at para. 98. Good faith in this context did not extend to the employer’s reasons for terminating the contract ofemployment because this would undermine the right of an employer to determine the composition of its workforce: Wallace, at para. 76. [55] This Court has also affirmed the duty of good faith which requires an insurer to deal with its insured’s claim fairly,both with respect to the manner in which it investigates and assesses the claim and to the decision whether or not to pay it: Fidler v.

SunLife Assurance Co. of Canada, 2006 SCC 30, [2006] 2 S.C.R. 3, at para. 63, citing 702535 Ontario Inc. v. Lloyd’s London, Non-MarineUnderwriters (2000), (ON CA), 184 D.L.R. (4th) 687 (Ont. C.A.), at para. 29. The breach of this duty may supportan award of punitive damages: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595.

This duty of good faith is alsoreciprocal: the insurer must not act in bad faith when dealing with a claim, which is typically made by someone in a vulnerable situation,and the insured must act in good faith by disclosing facts material to the insurance policy (para. 83, citing Andrusiw v. Aetna LifeInsurance Co. of Canada (2001), (AB KB), 289 A.R. 1 (Q.B.), at paras. 84-85, per Murray J.). [56] This Court has also recognized that a duty of good faith, in the sense of fair dealing, will generally be implied in factin the tendering context.

When a company tenders a contract, it comes under a duty of fairness in considering the bids submitted underthe tendering process, as a result of the expense incurred by parties submitting these bids: Martel Building Ltd. v. Canada, 2000 SCC 60,[2000] 2 S.C.R. 860, at para. 88; see also M.J.B. Enterprises Ltd. v. Defence Construction

(1951) Ltd., (SCC), [1999] 1S.C.R. 619; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 58-59; A. C. McNeely, Canadian Law of Competitive Bidding and Procurement (2010), at pp. 245-54. [57] Developments in the United Kingdom and Australia point to enhanced attention to the notion of good faith, mitigatedby reluctance to embrace it as a stand-alone doctrine. Good faith in contract performance has received increasing prominence in Englishlaw, despite its “traditional . . . hostility” to the concept: Yam Seng Pte Ltd. v.

International Trade Corporation Ltd., [2013] EWHC 111,[2013] 1 AII E.R. (Comm.) 1321 (Q.B.), at para. 123, citing E. McKendrick, Contract Law (9th ed. 2011), at pp. 221-22; see also Chittyon Contracts, at para. 1-039. In Yam Seng, Leggatt J. held that a number of specific duties embodying good faith can be implied basedon the presumed intentions of the parties according to the traditional approach for implying terms: para. 131. Leggatt J. identified anumber of these implied duties, including honesty, fidelity to the parties’ bargain, cooperation, and fair dealing: paras. 135-50.

Leggatt J.stated that “[a] paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty.That expectation is essential to commerce, which depends critically on trust”: para. 135; see D. Campbell, “Good Faith and the Ubiquityof the ‘Relational’ Contract” (2014), 77 Mod. L. Rev. 475. The Court of Appeal considered the Yam Seng decision in Mid Essex HospitalServices NHS Trust v.

Compass Group UK and Ireland Ltd., [2013] EWCA Civ 200 (BAILII), where it confirmed that good faith wasnot a general principle of English law, but that it could be an implied term in certain categories of cases: paras. 105 and 150. [58] Australian courts have also moved towards a greater role for good faith in contract performance: Cheshire andFifoot’s Law of Contract (9th Australian ed. 2008), at paras. 10.43-10.47. The duty of good faith in its modern form was recognized byPriestley J.A. in Renard Constructions (ME) Pty Ltd. v. Minister for Public Works (1992), 26 N.S.W.L.R. 234 (C.A.).

There is nogenerally applicable duty of good faith, but one will be implied into contracts in certain circumstances. The duty of good faith can beimplied as a matter of law or as a matter of fact, although the cases are not always clear on the basis on which the term is being implied.Australian courts have taken a broad view of what constitutes good faith: see, e.g., Burger King Corporation v. Hungry Jack’s Pty Ltd.,[2001] NSWCA 187, 69 N.S.W.L.R. 558.

The law of good faith performance in Australia is still developing and remains unsettled: E.Peden, “Good faith in the performance of contract law” (2004), 42 L.S.J. 64, at p. 64. However, it is clear that the duty of good faithrequires adherence to standards of honest conduct: A. Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000),116 Law Q.

Rev. 66, at p. 76; Burger King, at paras. 171 and 189. (iii) The Way Forward [59] This selective survey supports the view that Canadian common law in relation to good faith performance of contractsis piecemeal, unsettled and unclear: Belobaba; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 95; B. J.Reiter, “Good Faith in Contractsˮ (1983), 17 Val. U.L. Rev. 705, at pp. 711-12. It also shows that in Canada, as well as in the UnitedKingdom and Australia, there is increasing attention to the notion of good faith, particularly in the area of contractual performance.

Opponents of any general obligation of good faith prefer the traditional, organic development of solutions to address particular problemsas they arise: see, e.g., M. G. Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?” (1984), 9 Can. Bus. L.J.385; D.

Clark, “Some Recent Developments in the Canadian Law of Contracts” (1993), 14 Advocates’ Q. 435, at pp. 436 and 440.However, foreclosing some incremental development of the law at the level of principle would go beyond what prudent caution requiresand evidence an almost “perverted pride” — to use Swan’s term, at p. 148 — in the law’s failings. [60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While theyremain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the properfunctioning of commerce.

The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly callfor 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. [61] The fact that commercial parties expect honesty on the part of their contracting partners can also be seen from thefact that it was the American Bar Association’s

Section of Corporation, Banking and Business Law that urged the adoption of “honestyin fact” in the original drafting of the Uniform Commercial Code (“U.C.C.ˮ): E. A. Farnsworth, “Good Faith Performance andCommercial Reasonableness Under the Uniform Commercial Codeˮ (1963), 30 U. Chicago L. Rev. 666, at p. 673. Moreover, empiricalresearch suggests that commercial parties do in fact expect that their contracting parties will conduct themselves in good faith: see, e.g.,S. Macaulay, “Non-contractual Relations in Business: A Preliminary Study” (1963), 28 Am. Soc. Rev. 55, at p. 58; H.

Beale and T.Dugdale, “Contracts Between Businessmen: Planning and the Use of Contractual Remedies” (1975), 2 Brit. J. Law & Soc. 45, at pp. 47-48; S. Macaulay, “An Empirical View of Contract”, [1985] Wis. L. Rev. 465; V. Goldwasser and T. Ciro, “Standards of Behaviour inCommercial Contracting” (2002), 30 A.B.L.R. 369, at pp. 372-77.

It is, to say the least, counterintuitive to think that reasonablecommercial parties would accept a contract which contained a provision to the effect that they were not obliged to act honestly inperforming their contractual obligations. [62] I conclude from this review that enunciating a general organizing principle of good faith and recognizing a duty toperform contracts honestly will help bring certainty and coherence to this area of the law in a way that is consistent with reasonablecommercial expectations. (iv) Towards an Organizing Principle of Good Faith [63] The first step is to recognize that there is an organizing principle of good faith that underlies and manifests itself invarious more specific doctrines governing contractual performance.

That organizing principle is simply that parties generally mustperform their contractual duties honestly and reasonably and not capriciously or arbitrarily. [64] As the Court has recognized, an organizing principle states in general terms a requirement of justice from whichmore specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard thatunderpins and is manifested in more specific legal doctrines and may be given different weight in different situations: see, e.g., R. v.Jones, (SCC), [1994] 2 S.C.R. 229, at p. 249; R. v.

Hart, 2014 SCC 52, [2014] 2 S.C.R. 544, at para. 124; R. M.Dworkin, “Is Law a System of Rules?”, in R. M. Dworkin, ed., The Philosophy of Law (1977), 38, at p. 47. It is a standard that helps tounderstand and develop the law in a coherent and principled way. [65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of thecontract, 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 requireacting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This generalprinciple has strong conceptual differences from the much higher obligations of a fiduciary.

Unlike fiduciary duties, good faithperformance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting partyfirst. [66] This organizing principle of good faith manifests itself through the existing doctrines about the types of situationsand relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance.Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that thislist is not closed.

The application of the organizing principle of good faith to particular situations should be developed where the existinglaw is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of thecommon law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs. [67] This approach is consistent with that taken in the case of unjust enrichment. McLachlin J. outlined the approach inPeel (Regional Municipality) v.

Canada, (SCC), [1992] 3 S.C.R. 762, at pp. 786 and 788: This case presents the Court with the difficult task of mediating between, if not resolving, the conflicting views of the proper scope ofthe doctrine of unjust enrichment. It is my conclusion that we must choose a middle path; one which acknowledges the importance ofproceeding on general principles but seeks to reconcile the principles with the established categories of recovery . . . . . . .

The tri-partite principle of general application which this Court has recognized as the basis of the cause of action for unjust enrichment isthus seen to have grown out of the traditional categories of recovery. It is informed by them.

It is capable, however, of going beyondthem, allowing the law to develop in a flexible way as required to meet changing perceptions of justice. [68] The flexible approach that was taken in Peel recognizes that “[a]t the heart of the doctrine of unjust enrichment,whether expressed in terms of the traditional categories of recovery or general principle, lies the notion of restoration of a benefit whichjustice does not permit one to retain”: p. 788. In that case, this Court further developed the law through application of an organizingprinciple without displacing the existing specific doctrines.

This is what I propose to do with regards to the organizing principle of goodfaith. [69] The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guideto future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varyingcontexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as togive appropriate consideration to the legitimate interests of both contracting parties.

For example, the general organizing principle ofgood faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more

transactional exchange: Swan and Adamski, at § 1.24; B. Dixon, “Common law obligations of good faith in Australian commercialcontracts — a relational recipe” (2005), 33 A.B.L.R. 87. [70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of thecommon law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest.In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest:A.I. Enterprises Ltd. v.

Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary togood faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v.Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not toveer into a form of ad hoc judicial moralism or “palm treeˮ justice.

In particular, the organizing principle of good faith should not be usedas a pretext for scrutinizing the motives of contracting parties. [71] Tying the organizing principle to the existing law mitigates the concern that any general notion of good faith incontract law will undermine certainty in commercial contracts. In my view, this approach strikes the correct balance betweenpredictability and flexibility. (

v) Should There Be a New Duty? [72] In my view, the objection to Can-Am’s conduct in this case does not fit within any of the existing situations orrelationships in which duties of good faith have been found to exist. The relationship between Can-Am and Mr. Bhasin was not anemployment or franchise relationship. Classifying the decision not to renew the contract as a contractual discretion would constitute asignificant expansion of the decided cases under that type of situation. After all, a party almost always has some amount of discretion inhow to perform a contract.

It would also be difficult to say that a duty of good faith should be implied in this case on the basis of theintentions of the parties given the clear terms of an entire agreement clause in the Agreement. The key question before the Court,therefore, is whether we ought to create a new common law duty under the broad umbrella of the organizing principle of good faithperformance of contracts. [73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance.

This meanssimply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of thecontract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is asimple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performanceflowing directly from the common law organizing principle of good faith is a modest, incremental step.

The requirement to act honestlyis one of the most widely recognized aspects of the organizing principle of good faith: see Swan and Adamski, at § 8.135; O’Byrne,“Good Faith in Contractual Performance: Recent Developments”, at p. 78; Belobaba; Greenberg v. Meffert (1985), (ON CA), 50 O.R. (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v. Print Three Franchising Corp.(2003), (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 69.

For example, the duty of honesty was a key component ofthe good faith requirements which have been recognized in relation to termination of employment contracts: Wallace, at para. 98; HondaCanada, at para. 58. [74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or aterm 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 ashadow of uncertainty over a good deal of the jurisprudence.

I am at this point concerned only with a new duty of honest performanceand, 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 aminimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extentanalogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability. [75] Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arisingin this case.

Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, likeunconscionability, the parties are not free to exclude it: see CivicLife.com, at para. 52. [76] It is true that the Anglo-Canadian common law of contract has been reluctant to impose mandatory rules not based onthe agreement of the parties, because they are thought to interfere with freedom of contract: see Gateway Realty, per Kelly J.; O’Byrne,“Good Faith in Contractual Performance: Recent Developments”, at p. 95; Farnsworth, at pp. 677-78.

As discussed above, however, theduty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permitdishonest performance of their obligations. [77] That said, I would not rule out any role for the agreement of the parties in influencing the scope of honestperformance in a particular context. The precise content of honest performance will vary with context and the parties should be free insome contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.

The approach I outlinehere is similar in principle to that in § 1-302(

b) of the U.C.C. (2012): The obligations of good faith, diligence, reasonableness, and care . . . may not be disclaimed by agreement. The parties, by agreement,may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestlyunreasonable. [78]

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