In Bhasin v. Hrynew, [2014] 3 SCR 494, 2014 SCC 71 (CanLII), Hrynew was the producer of educational savings plans. Bhasin was a distributor. The obvious analogy is to mutual funds. Hrynew and Bhasin had a contract which specifically stated that either party could terminate the relationship on 6 months notice. After investigations by the securities regulator, Hrynew decided to change its marketing practices to conform to securities requirements. Hrynew gave Bhasin 6 months notice. Bhasin sued pleading ‘dishonesty’. Bhasin wins.
So what’s so wrong with Cromwell J. telling us that honesty is the best policy in contract? There can’t be anything wrong with ‘honesty’ can there?
When Cromwell J. says (para 35), how ‘good faith’ almost had a life of its own in contract, only to be brought down by ‘detractors’ (para 39), well, this calls for a standard supreme court of Canada remedy doesn’t it?
We all know the result: Cromwell J. schooled us in how wrong, wrong, wrong we were, for these centuries of common law, failing to properly place ‘good faith’ at its appointed place in contract.
This calls for an investigation of those ‘detractors’ who were so wrong to not give ‘good faith’ its proper place. Why were they all so stupid?
Cromwell J. (at para 35) cites Lord Kenyon, who 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
Mellish v. Motteux was the sale of a ship at a time when the buyer could not fully inspect. The sale was ‘as is-where is’. The Buyer ultimately found broken framework that threatened the ship’s seaworthiness.
Cromwell cited Kenyon’s sweeping obiter. Kenyon’s ratio was that the seller is bound to warrant against latent and explicit defects in a ship sale where the buyer cannot inspect.
If Kenyon’s actual ratio sounds familiar: it is alive and well in negligent and fraudulent misrepresentation law, and in real estate law.
Kenyon was the father of the rule that the onus shifts, somewhat, to the seller to warrant against latent defects. Lord Ellenborough immediately attacked Kenyon for putting no onus upon the buyer in an ‘as is-where is’ sale.
Ellenborough properly further attacked on the point that contract law must permit the possibility of ‘as is-where is’. Kanyon’s sweeping ‘honesty’ proclamation in actual application to the ship-sale, in effect, turned the seller into an insurer.
In a wonderful example of the self-healing property of common-law iteration, by 1813, the courts had effectively overruled Kenyon, adopted Ellenborough and definitely said that the seller is not an insurer.
But relying upon Mellish v, Motteux at para 35, Cromwell J. is prepared to make the defendant in Bhasin v. Hrynew into the insurer of the plaintiff, in spite of the actual contract language – being the termination clause – that distinctly warranted against that an insurance result.
Every lawyer knows that contracts are about limiting the pretensions of the other party to deem your client to be the insurer of the other guy’s success. Cromwell J. and the supreme court may go down the Kenyon road of ‘good faith’ – but the common law won’t follow for very long. Cromwell’s ‘good faith’ will ultimately go the way of Kenyon’s sweeping obiter in Mellish v. Motteux.
Cromwell J. disregarded the specific term in the contract set to protect the producer from being deemed Bhasin’s insurer. Does this mean we should go back to 781834 Ontario Inc. v. Glixton Developments Ltd., 1994 CanLII 7353 (ON SC) and set aside the specific provision in that contract which protected the first mortgagee from a latent defect charge?
‘Good faith’ and whatnot requires it – doesn’t it?
what legal philosophy criticizes the supreme court of Canada’s attempt to codify a principle (such as ‘good faith’) that already has a complex and well -defined existence in Canadian common law:
hayek-law-legislation-and-liberty
