What many are calling a ground-breaking decision on contract law came down from the Supreme Court last week; although the decision applies to all commercial dealings, the decision will likely prove to be particularly important for those individuals and companies that are parties to an independent contractor agreement.

The decision in  Bhasin v. Hrynew  2014 SCC 71, involved 3 different parties: Bhasin, Can-Am, and Hrynew. Bhasin was an individual who had a renewable contract (a ‘commercial dealership agreement’ to be specific) with the second party, Can-Am, to sell and promote education savings plans. The third party involved in this case was an individual named Hrynew, one of Bhasin’s competitors. After being pressured by Hrynew, Can-Am decided it was not going to renew Bhasin’s contract, instead opting to enter into an agreement with Hrynew for the sale of the education savings plans. Can-Am sought to achieve this by restructuring the company’s operations, which had the effect of putting Hrynew in charge of the company’s main agency for Alberta. Bhasin sued Can-Am for breach of contract.

The case found its way to the Supreme Court of Canada.

Why is this decision important?

You may wonder what the big deal is; does a company not have the right to decide who it wants to do business with? And the answer to that question is yes; however, what is important here, is not the fact that Can-Am decided not to renew Bhasin’s contract, but the Court took issue with the manner in which Can-Am used its discretion to exercise its rights under the non-renewal provision. The most important factor which led the Supreme Court to its decision was the trial judge’s finding that Can-Am lied to Bhasin; that Can-Am acted “dishonestly” when it came to the non-renewal of Bhasin’s contract. Therefore the issue before the Court was not whether Can-Am had the right to end the contract with Bhasin, but whether Can-Am exercised that right in a lawful manner.

At paras 15, 97-101 of the decision, Justice Cromwell referenced several of the trial judge’s findings with respect to Can-Am’s dishonesty:

 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.

In reaching its conclusion that Can-Am had breached its contract with Bhasin, the Court created a new cause of action in holding that parties to any commercial agreement now have a “duty of honest performance”, in addition to a general duty of good faith. Aside, Justice Cromwell’s statement in paragraph 65, where he comments that “a contracting party should have appropriate regard to the legitimate interests of the contracting partner”, we do not get much guidance on what “honest performance” should look like in day-to-day commercial life. Many questions still remain.

Although the Court may have left many questions unanswered with respect to this issue, independent contractors and companies who use them can be certain of at least a few things:

Firstly, the concept of “good faith” in commercial dealings should no longer be viewed as an abstract principle of contract law that applies only in unique contractual relationships, such as in the employment and insurance context. The new duty of honest performance is a cause of action, meaning that a party may bring a lawsuit on this basis alone. A party need not specifically plead a breach of an express term of the contract before suing; thus you can expect to see a flurry of litigation on this issue, at least until the lower courts have an opportunity to flesh out the details of how this new duty is to be applied.

Secondly, since many independent contractor agreements contain so-called, “renewal” provisions, companies who use independent contractors, need to tread carefully when approaching the non-renewal of their agreements. The Bhasin v. Hrynew fact scenario is common when it comes to independent contractors and/or contract for service arrangements. As a result, those who participate in independent contractor agreements can be sure that lawyers will now be paying particular attention to whether a party conducted itself “honestly” in making decisions that affect their client’s contractual rights.

Thirdly, parties entering into independent contractor agreements should exercise caution early on in the process when approaching a renewal/non-renewal provision. Although these provisions have always been contentious, parties seeking to exercise a right to non-renewal of a contract should avoid any behaviour that may be characterized as misleading to the other party; this would include lying, active concealment of important information especially when such information is requested by the other party, and outright deception. Furthermore, any communications relevant to a non-renewal provision should be in writing in the form of memorandums, emails, or detailed letters.

To take things a step further, it could also be argued, based on this decision, that parties ought to be somewhat proactive in order to comply with the duty of honest performance. Despite the fact that the Court was clear in that there is no duty of disclosure imposed on either party to an agreement, a party would be prudent in conveying enough information to the other party, for that party to protect its interests under the contract. One of the main problems for Can-Am, in this case, was that it kept Bhasin in the dark on the restructuring that was taking place, to the point where the Court concluded that Can-Am was actually being deceptive in its dealings. This should be a warning to those who prefer to operate behind a cloak of secrecy, particularly at important junctures in the independent contractor relationship.

How this new duty of honest performance will ultimately affect independent contractor arrangements across Alberta and BC remains to be seen; however, in the meantime, both companies and independent contractors are well-advised to take extra precautions when it comes to their commercial dealings with one another.

 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.