Bhasin V Hrynew: Why a General Duty of Good Faith Would Be out of Place in English Canadian Contract Law

Valcke Printer's Version Final (Do Not Delete) 6/6/2019 10:15 AM BHASIN V HRYNEW: WHY A GENERAL DUTY OF GOOD FAITH WOULD BE OUT OF PLACE IN ENGLISH CANADIAN CONTRACT LAW CATHERINE VALCKE* ABSTRACT. Consistently with the objective conception of contract prevailing at English law, English Canadian courts have traditionally resorted to estoppel (at Equity) and the implied terms doctrine (at Law) to resolve roughly the same array of cases as are typically resolved through a general doctrine of good faith at French- sourced civil law, which instead tends to conceptualize contracts subjectively. The author argues against a broad reading of Bhasin v. Hrynew, which would be tantamount to importing the latter doctrine into English Canadian law, on the basis that such broad reading would be unnecessary, undesirable and legally less tenable than the alternative, narrow reading. A general doctrine of good faith is unnecessary because its domain of application is already satisfactorily covered by such pillar English doctrines as estoppel and implied terms. It is undesirable because it clashes with the internal, objective logic animating the English law of contracts. More technically, finally, a broad reading of Bhasin arguably is persuasive only (as obiter dictum rather than ratio decidendi) insofar as the Court’s conclusion is better supported through implying, more narrowly, a plain contractual term of honest performance. *Professor of Law, University of Toronto. LLB(Civil) (Sherbrooke), LLB(Common) (Toronto), LLM (Chicago), JSD (Columbia). 65 Valcke Printer's Version Final (Do Not Delete) 6/6/2019 10:15 AM 66 JOURNAL OF COMMONWEALTH LAW [Vol. 1 KEYWORDS: Bhasin v. Hrynew, good faith, English and French contract law, objective and subjective theories of contract, unilateral mistake in assumption, Smith v. Hughes, contractual consent, estoppel, implied terms. I. INTRODUCTION The recent decision of the Canadian Supreme Court in Bhasin v Hrynew1 has been heralded, as far as across the ocean,2 as breaking new grounds in importing a general duty of good faith from Quebec civil law into the English Canadian law of contracts. As such, the case would testify to Canadian juridical cross-pollination operating both ways. Whereas many have worried about the preservation of Quebec’s civilian distinctness amidst Canada’s dominant common law,3 we would now be witnessing a welcome swing back of the pendulum.4 At the risk of disappointing Canadian legal harmonization enthusiasts, I here propose to argue, first, that importing a general duty of good faith into English Canadian contract law would be ill-advised. Not only is such a doctrine 1 [2014] SCC 71, [2014] 3 SCR 494. 2 Yves-Marie Laithier, « La consécration par la Cour suprême du Canada d’un principe directeur imposant l’exécution du contrat de bonne foi » [2015] D 756. 3 See: Robert Yalden, “Unité et différence: The Structure of Legal Thought in Late Nineteenth Century” (1988)] 46 UT Fac L Rev 365. 4 See Joseph T. Robertson, “Good Faith as an Organizing Principle in Contract Law: Bhasin v Hrynew —Two Steps Forward and One Looking Back” (2015) 93 R du B 8098; Tamara Buckwold, “The Enforceability of Agreements to Negotiate in Good Faith : The Impact of Bhasin v Hrynew and the Organizing Principle of Good Faith in Common Law” 2016 (SSRN, April 06, 2016) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2758844 accessed 30 May 2019; John Enman-Beech, “The Subjects of Bhasin: Good Faith and Relational Theory” (SSRN, May 26 2018) < http://ssrn.com/abstract=3174846 > accessed 30 May 2019. Valcke Printer's Version Final (Do Not Delete) 6/6/2019 10:15 AM 2019] GOOD FAITH IN CANADIAN CONTRACT LAW 67 unnecessary, it would clash with the internal logic of the common law of contracts, which differs significantly from that animating the civil law of contractual obligations. And as with any ill-fitting legal doctrine, importing this one into English Canadian contract law would be sure to generate conceptual disorder, confusion, uncertainty—all bad things when it comes to law… Second, I will briefly explain why I consider that, as implied by the conditional tense used in the last sentences, the Bhasin decision in fact does not, or at any rate does not yet, effect such an importation. II. THE DOCTRINE OF GOOD FAITH IS ILL-SUITED TO ENGLISH CANADIAN CONTRACT LAW My first argument centers on a single case, one that is both old and not typically branded as a good faith case, though I certainly hope to show that such branding would be warranted. I am here thinking of the famous English case of Smith v Hughes5, the facts of which are all too well-known. It is the case invoving a sale of oats, which the buyer (a horse trainer) believed to be old, whereas they were in fact new. Crucially for our purposes, the Court there somehow took it to be an established fact that the oat-growing seller knew full well, not just that the oats were new, but also that the buyer believed them to be old, yet neglected to say or do anything to alert the buyer to his mistake. The seller, that is, neglected to alert the buyer to the fact that the oats he was about to buy in fact were of a kind that he had no use for, as horses only eat old oats. So there is a sense in which the seller in that case was all too happy to take advantage of the buyer’s mistake, and the question for the court is whether such advantage taking should be cause for 5 [1871] LR 6 QB 597. Valcke Printer's Version Final (Do Not Delete) 6/6/2019 10:15 AM 68 JOURNAL OF COMMONWEALTH LAW [Vol. 1 freeing the buyer from any obligation to take delivery of the oats. The Court never answers that question directly as its primary concern is to determine the adequacy of the questions put to the jury at trial. But what the Court says about these questions suggests that it considers the seller’s behaviour to be legitimate, at least to a point. That is, the Court considers that the seller might not have had any duty to alert the buyer to his mistake, provided that that mistake was one going to “factual assumptions” as opposed to “contractual terms”6 The Court explains the difference as follows: the buyer’s mistake would be only one of fact, or of “assumptions”, if he believed that the oats that he was buying happened to be old oats, quite apart from any formal warranties that the seller could have given him to that effect. In contrast, if the buyer thought that the contract of sale included (explicitly or implicitly) a warranty from the seller that the oats would be old, the buyer’s mistake would go to the terms of his contract with the seller—it would then be a mistake “as to contractual terms”, not just a mistakes as to facts or assumptions. The difference is crucial, the Court suggests, because the seller not alerting the buyer to his mistake might be acceptable behaviour where the mistake is one of fact, but would be found unacceptable, and a valid cause to estop the seller from asserting his rights under the contract, where the mistake attaches to contractual terms. The case accordingly begs the question: How can it be that English law would allow the seller to take advantage of the buyer’s mistake of facts? Importantly, moreover, by “English law” I here mean to refer to both Law and Equity. For the Court 6 See Stephen M. Waddams, The Law of Contracts (7th edn, Canada Law Book 2017) 317. Valcke Printer's Version Final (Do Not Delete) 6/6/2019 10:15 AM 2019] GOOD FAITH IN CANADIAN CONTRACT LAW 69 makes no suggestion that the case should be treated differently under Law and Equity.7 The question can accordingly be rephrased as: How can it be that it might be perfectly legal, as well as perfectly equitable, for the seller to stay silent in the knowledge that the buyer is operating under a mistake of fact going to a quality of the oats that turns out to be fundamental to him ? The answer lies, I would suggest, in the objective theory of contracts, which Smith v Hughes also stands for. Under the objective theory of contracts, contracts are formed and interpreted based on what objectively passes between the parties (their words and actions), on what the parties laid out objectively, in the public space between them, not on what might be going on in each of their minds subjectively.8 To the extent that the quality of the oats was never discussed by the parties (the issue raised through the first question to the jury), any of their private thoughts or knowledge going to that matter would be considered as falling outside the ambit of their bargain. Of course, matters not openly discussed by the parties can sometimes form an implicit part of their bargain –not all contract terms are explicit—depending on the larger context, industry standards, etc… But here, the sale was one by sample, which suggests that the parties were implicitly agreed that their rights and obligations would be determined by reference … to the sample. That is, the seller was undertaking to deliver “oats matching the sample” and the buyer was correspondingly 7 Notwithstanding Lord Denning’s later suggestion to the contrary, following the fusion of Law and Equity. See Solle v Butcher [1950] 1 KB 671. 8 “If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.” Smith v Hughes (n 5) 598 (Blackburn J).

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