In my last article, I dealt with the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew. In that decision, the Supreme Court of Canada established two fundamental principles for the Canadian common law of contract:

First, that the parties are under a general obligation to perform contracts in good faith; and

Second, that the parties have a duty to act honestly in the performance of contracts.

There was a third issue before the court, and that was whether the plaintiff had suffered any recoverable damage. The Alberta Court of Appeal had held that, whether or not the defendants had acted honestly or in bad faith, the defendant Can-Am had the right to not extend the contract and had chosen not to. Therefore, Bhasin had no right to recover any damages. The Alberta Court of Appeal said:

[Can-Am] had a right to end the contract at the end of three years. The law of damages presumes that a party will use the least expensive method to perform. So (for example) employment contracts do not yield damages beyond the date at which the defendant could have ended the contract. See Hamilton v. Open Window Bakery Ltd. (2003), 2004 SCC 9, [2004] 1 S.C.R. 303, 316 N.R. 265(S.C.C.) (paras 11-20). Therefore, since the contract was performed up to its expiry date, in law there was no loss, and no damages are payable. That is an additional reason to dismiss the suit.”

In its decision in Bhasin v. Hrynew, the Supreme Court did not mention its decision in Open Windows Bakery and the principle stated in that case. Accordingly, it is necessary to determine if any hints can be derived from the Bhasin case about how to deal with the principle in Open Windows Bakery.

Background

The following facts were found by the trial judge in Bhasin v. Hrynew. Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”).   Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was in effect a competitor of Bhasin and wanted to take over Bhasin’s agency and he campaigned with Can-Am to direct such a merger of the agencies. Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.  Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Can-Am had dealt dishonestly with Bhasin.

The Supreme Court of Canada restored the trial judge’s finding that Can-Am had breached its contract with Bhasin by dealing with him dishonestly. It was then a question of determining the damages to which Bhasin was entitled.

Supreme Court’s Decision re Damages

The Supreme Court referred to the trial judge’s finding that, even though Can-Am had a right to not extend the term of the agency, the agency still had value and Bhasin could have sold it. The Supreme Court said:

“The trial judge specifically held that but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to “retain the value in his agency”: paras. 258-59. In reaching this conclusion, the trial judge was well aware of the difficulties that Mr. Bhasin would have in selling his business given the “almost absolute controls” that Can-Am had on enrollment directors and that it owned the “book of business”: para. 402.  She also heard evidence and made findings about what the value of the business was, taking these limitations into account.  These findings, in my view, permit us to assess damages on the basis that if Can-Am had performed the contract honestly, Mr. Bhasin would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to Mr. Hrynew.”

The Supreme Court then referred to the evidence of Can-Am’s expert who said that the value of Bhasin’s agency around the time of non-renewal was $87,000. The court was satisfied that the trial judge had found that Bhazin’s business was worth $87,000 at the time that his agreement with Can-Am expired. In the appeal to the Supreme Court, Can-Am argued that the evidence of their expert established that the value of Bhazin’s agency was $87,000. Accordingly the Supreme Court concluded that Bhazin’s damages were $87,000.

Discussion

It is, perhaps, not very useful to discuss what the Supreme Court of Canada did not decide, but any chance to discuss the Open Windows Bakery decision must be taken. That case presents a challenge to those trying to understand and fairly apply the Canadian law of contract damages.

The Alberta Court of Appeal correctly stated that, in Open Windows Bakery, the Supreme Court held that contract damages are to be calculated on the basis that the defendant was entitled to use the least expensive method to perform. If the defendant could have terminated the contract in another way which would have entitled the plaintiff to no damages, then that is the amount to which the plaintiff is entitled. Apparently, that formula is to be applied no matter how unlikely it would have been for the defendant to have so acted. To what extent the defendant is entitled to unscramble events which have actually occurred, and which involved third parties, tax implications and other facts totally outside the contractual performance itself, is as yet unclear.

In Bhazin v. Hrynew, the Supreme Court held that because the Bhazin agency was worth a certain amount at the time of the breach of contract, therefore Bhazin was entitled to that amount of damages. However, the connection between the two – the value of the agency and the entitlement of the plaintiff to damages in that amount – is not clear. If Can-Am was entitled to allow the agency to terminate, what difference does it make how much it was worth?

The Supreme Court did not mention Open Windows Bakery in its decision, so we are left to draw the conclusions ourselves. It is clear that the Supreme Court held that the dishonesty of Can-Am was a separate breach of contract, quite apart from the termination of the contract by expiry of its term. Based upon that holding, it may be that the Supreme Court has held that damages for dishonesty may be assessed without regard to the principle in Open Windows Bakery. Or that a breach of contract arising from dishonesty gives rise to separate causation, and therefore the entitlement of the defendant to terminate the contract is not relevant. Or it may be that Open Windows Bakery does not apply to contracts which expire but only to contracts which are terminated in a less onerous way by the defendant.

Other possible explanations about why Open Windows Bakery did not apply will certainly be drawn from the decision in Bhazin v. Hrynew. There seems little doubt that the latter decision will be relied upon in the future to narrow what some argue is the unfair rule in the former.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Damages – Least Onerous Performance  – Honest Performance

T.G. Heintzman O.C., Q.C., FCIArb                                             December 7, 2014

www.heintzmanadr.com

www.constructionlawcanada.com