Law Times

Law Times • apriL 25, 2016 Page 13 www.lawtimesnews.com construction law Untitled-2 1 2016-04-12 2:57 PM Ruling in Bhasin v. Hrynew addresses contracts, and duty of good faith Supreme Court decision has effects for construction law BY MICHAEL MCKIERNAN For Law Times M ore than a year on from its release, con- struction law bou- tiques are still ad- justing to a landmark Supreme Court of Canada decision that formally recognized a new com- mon law duty applying to all contractual relationships. Max Gennis, a lawyer with Toronto firm Glaholt LLP, says "breach of the duty of honest performance," has become the pleading de rigueur in construc- tion law disputes ever since the nation's top court released its judgment in Bhasin v. Hrynew in November 2014, a decision that also identified good faith contractual performance as a general organizing principle of the common law of contract. "We are definitely seeing these allegations being made a lot more often," he says. Even though the case did not emerge out of a construction law dispute, Gennis says it has had a big impact on lawyers in the field. "Construction law is very contract-driven, so that might be why we see it coming up more frequently," he says. According to Howard Kru- pat, a past president of the Ontar- io Bar Association's construction and infrastructure law section, the number of parties involved in large construction projects adds a layer of complexity over the top of contractual relation- ships in the construction field. "There are various specific obligations in construction con- tracts that are all captured by this new duty, so it's important for parties, when they are apply- ing for payment and submitting documents ref lecting perfor- mance, that they are cognizant of it throughout," he says. Audrey Warner, a lawyer with McLauchlin & Associates, a con- struction law boutique based in Toronto, says the Bhasin deci- sion has introduced a measure of uncertainty into construction lawyers' practices, at least in the short term. "The fact that this principle is out there is a good thing, but we don't really know how it's go- ing to play out until we see some more decisions that show how strenuously courts are going to apply these principles," she says. In the meantime, Warner says she and her colleagues are warn- ing clients that they must be aware of the new duty of honesty in the performance of their contracts. "They want to know what it means, and the real answer is that nobody really knows in practice. It hasn't yet been tested, but we can be fairly certain it will be," she says. The roots of Bhasin lie in a three-year commercial dealership agreement signed in 1998 between Harish Bhasin and Canadian-American Financial Corp., a retailer of education sav- ings plans to investors. By that time, Bhasin had spent almost a decade in business with Can- Am, earning a reputation as one of its top enrolment directors, with an entire sales force un- der him. However, the relation- ship soured in 1999 when Larry Hrynew, a competing enrolment director with Can-Am, began aggressively pursuing a merger between his and Bhasin's agen- cies. A trial judge found Can-Am effectively gave into pressure from Hrynew not to renew Bha- sin's contract, dealing dishon- estly with Bhasin in the process. According to the trial judge, the firm repeatedly misled Bha- sin about Hrynew's appointment to an audit role that gave him ac- cess to confidential information about other enrolment directors, before finally giving him notice of non-renewal in May 2001. Bhasin lost the value of his business, had most of his sales force poached by Hrynew, and was forced to take up less lucrative work at a com- petitor of Can-Am's. The trial judge found that Can- Am had breached an implied term of good faith in the contract regarding decisions about wheth- er or not to renew the agreement. However, the province's appeal court reversed the decision, find- ing the lower court judge erred in implying the good-faith term in the context of an unambigu- ous contract containing an entire agreement clause. However, a seven-judge pan- el of the Supreme Court ruled in Bhasin's favour, finding a "basic level of honest conduct is neces- sary to the proper functioning of commerce." Supreme Court Justice Thomas Cromwell, on behalf of the unanimous court, wrote that Can-Am's conduct did not fit into any of the existing situ- ations in which duties of good faith have been found, favouring a new common law duty under the broad umbrella of the organizing principle of good faith perfor- mance of contracts. "I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about mat- ters directly linked to the perfor- mance of the contract," Crom- well wrote. "This is an area where it was previously thought the law had no business veering into: touching on moral issues and how people are supposed to behave," War- ner says. "That's probably espe- cially true in construction, which sometimes has a reputation of be- ing a bit more ruthless than other industries." LT This is an area where it was previously thought the law had no business veering into: touching on moral issues and how people are supposed to behave. Audrey Warner

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