Defense Counsel Journal

Moving Beyond Uberrima Fides? The General Duty of Honesty in Contractual Performance and Punitive Damage Awards in Anglo-Canadian Contract Law

January 20, 2020

This article was awarded Second Place in the 2017 IADC Legal Writing Contest. The authors would like to extend their deepest gratitude to the International Association of Defense Counsel (IADC) for the award and for publishing this work, and to Professor Helge Dedek of McGill University’s Faculty of Law, who supervised this research and with whom Mr. Flaczyk worked on several other projects of the last two years.

PUNITIVE damages have been called “the bane of corporate defendants.”¹1 Peter J. Pliszka and Richard D. Butler, Legal Larceny or Just Desserts: Punitive Damages – Recent Developments, (Paper delivered at the Fasken Martineau Seminar: “Follow the Money: Damages in Produce Liability and Insurance Lawsuits—Recent Developments”, Toronto, Canada, November 21, 2006) at 2, available at www.fasken.com/files/Publication/f9e57550-6f53-41f5-8373be675ac385ca/Presentation/PublicationAttachment/0ada337a-2a2f-4742-afa1-9a5cf266cb72/LEGAL_LARCENY_OR_JUST_DESSERTS.PDF. This characterization has perhaps never been more true under Anglo-Canadian contract law. While punitive damages for pure breach of contract are undoubtedly exceptional remedies at common law,²2 See Whiten v. Pilot Insurance Co, 2002 SCC 18 [2002] 1 SCR 595 [Whiten]. they are generally larger and more common than ever before.³3 See id. See also Frank Portman, “Ontario Court Continues Trend of Large Punitive Damages Awards”, Stringer LLP (November 24, 2015), available at www.stringerllp.com/ontario-court-continues-trend-of-large-punitive-damages-awards; Tate McLeod, “’Never Having to Say You’re Sorry’: Are Canadian Punitive Damage Awards on the Rise?” Norton Rose Fulbright LLP (February 2014), available at www.nortonrosefulbright.com/files/never-having-to-say-youre-sorry-are-canadian-punitive-damage-awards-on-the-rise-pdf-46kb-112800.pdf; Jordan Watson, “Beware the Ides of March: Insurers get Hammered with Bad Faith Punitive Damages!” Clark Watson LLP (April 10, 2013), available at https://www.cwilson.com/insurers-get-hammered-with-bad-faith-punitive-damages/; David McDonald, “Punitive Damages Awards Increasing in Canadian Employment Cases” HR Hero (blog) (March 31, 2013), available at blogs.hrhero.com/northernexposure/2013/03/31/punitive-damages-awards-increasing-in-canadian-employment-cases/.

This is an extraordinary development in Anglo-Canadian contract law considering that only thirty years ago punitive damages were barred for pure breach of contract.⁴4 See Vorvis v. Insurance Corporation of British Columbia, [1989] 1 SCR 1085, 1107, 58 DLR (4th) 193 [Vorvis]. Indeed, Canada has historically embraced the House of Lords’ cautious and piecemeal approach for awarding punitive damages in civil cases.⁵5 See John D. McCamus, Prometheus Bound or Loose Cannon? Punitive Damages for Pure Breach of Contract in Canada, 41 San Diego L. Rev. 1491, 1491-1493 (2004). For example, in Rookes v Barnard (1964),⁶6 Rookes v. Barnard [1964] AC 1129 HL (Eng) [Rookes].  an iconic English authority on punitive damages, Lord Devlin cautioned about awarding punitive damages in civil cases—observing that such judicial action is “admitting into the civil law a principle which ought logically to belong to the criminal.”⁷7 Id at 1226.  Punitive damages were restricted to tort law and only for two categories of cases: (1) “oppressive, arbitrary or unconstitutional action by the servants of the government;”⁸8 Id. and (2) cases in which the “defendant’s conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff.”⁹9 Id. In early English cases, punitive damages for pure breach of contract were typically considered “beyond the pale.”¹⁰10 McCamus, supra note 5, at 1492. 

In Anglo-Canada, the availability of punitive damages for pure breach of contract was seriously contemplated for the first time by the Supreme Court of Canada in Vorvis v Insurance Corporation of British Columbia [Vorvis].¹¹11 Supra note 4. Although punitive damages were not awarded on the specific facts in the case, the Court established an important precedent by recognizing the availability of punitive damages for pure breach of contract. McIntyre J., writing for the Court, remarked, “the trial judge would have awarded punitive damages had he been of the view that it was open to him to do so…  while it may be very unusual to do so, punitive damages may be awarded in cases of breach of contract.”¹²12 Id at 1107. McIntyre J. recognized the availability of punitive damages upon the satisfaction of two conditions: the alleged conduct, apart from the breach sued upon, constituted an “actionable wrong;”¹³13 Id. at 1106, McIntyre J.  and second, the alleged conduct deserved to be punished because of its “harsh, vindictive, reprehensible and malicious nature.”¹⁴14 Id. at 1108, McIntyre J.

Unfortunately, McIntyre J.’s use of the expression  “actionable wrong” had “plagued [the] reasoning in lower courts”¹⁵15  McCamus, supra note 5, at 1503. since it was unclear whether the Court intended to depart from an “actionable tort” standard.¹⁶16 Id. Critics of the Vorvis decision condemned McIntyre J.’s confusing comparison between the “actionable wrong” standard and the U.S. standard in the Restatement on the Law of Contracts 2d.¹⁷17 See Whiten v Pilot Insurance Co, 2002 SCC 18, [2002] 1 SCR 595 at para. 78, Binnie J [Whiten]. McIntyre J. drew a parallel between two seemingly different standards:

The only basis for the imposition of such punishment must be a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff¹⁸18 Vorvis, supra note 4, at 1105. … [This approach] has found approval in the Restatement on the Law of Contracts 2d in the United States… s. 355, which provides: Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.¹⁹19 Id. at 1105-1106.  

The availability of punitive damages for pure breach of contract was revisited by the Supreme Court of Canada in Whiten v Pilot Insurance [Whiten].²⁰20 Whiten, supra note 2. The Supreme Court in Whiten—unlike in Vorvis—awarded punitive damages for pure breach of contract. It is a monumental decision in Anglo-Canadian contract law because it affirms the “actionable wrong” standard set out in Vorvis, thereby “extending punitive damage awards from their then existing home of tort actions to breach of contract cases.”²¹21 McCamus, supra note 5, at 1496. Binnie J., writing for the Court, quashed the preexisting uncertainty by ruling “it constitutes an ‘actionable wrong’ within the Vorvis rule, which does not require an independent tort.”²²22 Whiten, supra note 2, at para 79. Whiten continues to be the leading decision on punitive damages for pure breach of contract in Anglo-Canada. It consolidates numerous commonwealth decisions since Vorvis and proposes ten guiding principles for awarding punitive damages in pure breach of contract cases.²³23 See id. at paras 66—77, Binnie J. Moreover, it reaffirms the test set out in Vorvis: (1) apart from the breach sued upon, did the defendant commit an “independent actionable wrong;”²⁴24 Id. at para 82. and (2) if yes, was the defendant’s “conduct so reprehensible and high-handed that he should be punished for his behaviour.”²⁵25 Id. at para 83, citing Andrusiw v Aetna Life Insurance Co of Canada, 289 AR 1 at para 84.

Nevertheless, by affirming the “actionable wrong” standard set out in Vorvis, the Whiten decision was followed by a wave of criticism condemning the Court of an alleged “Americanization”²⁶26 Pliszka and Butler, supra note 1, at 3; Whiten, supra note 2, at para 39. of Anglo-Canadian remedies.²⁷27 See e.g. Rudy V. Buller, Whiten v Pilot: Controlling Jury Awards of Punitive Damages, Case Comment, 36 UBC L Rev 357, 361 (2003). By “Americanization”, critics of the decision pointed to the sharp increase in the size of punitive damage awards in Canada. For instance, before 1995, the largest punitive damage award in a Canadian libel case was $50,000.²⁸28 See Walker et al v CFTO Ltd, [1987] OJ No 236, 37 DLR (4th) 224; Pliszka and Butler, supra note 1, at 2.

This increased to $800,000 with the Supreme Court of Canada’s decision in Hill v Church of Scientology of Toronto in 1995.²⁹29Hill v Church of Scientology of Toronto, [1995] 2 SCR 1130, 126 DLR (4th) 129. The “alarm bells” were surely sounded just a few years later, following the Supreme Court’s $1 million award in Whiten. Critics were now convinced that “the flood gates had been opened and corporate Canada would be hit by a wave—or perhaps a tsunami—of punitive damages awards.”³⁰30 Pliszka and Butler, supra note 1, at 2.  McIntyre J. had anticipated the knee-jerk reaction to Whiten, writing: “Critics of punitive damages warn against an “Americanization” of our law that, if adopted, would bring the administration of justice in this country into disrepute.”³¹31 Whiten, supra note 2, at para 39. He refuted the critics’ perspective, observing:

These are serious concerns, but… the punitive damage controversies have little if anything to do with Americanization of our law. Jury awards of punitive damages in civil actions have a long and important history in Anglo-Canadian jurisprudence. They defy modern attempts at neat classification of remedies.”³²32 Id. at para 40.

Although punitive damages have a “long-established existence in Anglo-Canadian jurisprudence”,³³33 Pliszka and Butler, supra note 1, at 2. they have historically been limited to specific “categories of cases”³⁴34 Rookes, supra note 6, at 1226, Lord Devlin. (as described by Lord Devlin in Rookes v Barnard and reiterated by McIntyre J.’s description, “neat classification of remedies”).³⁵35 Whiten, supra note 2, at para 40. This categorical approach is similar to the common law’s treatment of good faith duties in contractual performance. Both approaches are inextricably linked at common law. Until only recently in Anglo-Canadian contract law, “claims of good faith [would] generally fail unless they fit within existing categories relating to ‘the types of situations and relationships in which the law requires… honest, candid, forthright or reasonable contractual performance.”³⁶36 Shannon O’Byrne and Ronnie Cohen, The Contractual Principle of Good Faith and the Duty of Honesty in Bhasin v. Hrynew, 53 Alta L Rev 1, 12 (2015), citing Bhasin v Hrynew, 2014 SCC 71, [2014] SCR 494, Cromwell J, [Bhasin]. The common law has historically been reluctant to recognize good faith duties in contractual performance for both practical and moral reasons. On the practical side, some corporate defendants have argued that implied duties of good faith detract from judicial predictability—and therefore commercial certainty—because of the loosely defined nature of good faith duties. Some corporate defendants alsoquestion the morality of good faith duties in contractual performance. They argue that imposing such duties, where they have not been explicitly agreed upon by the parties, amounts to nothing more than “palm tree justice”. See e.g. Transamerica Life Canada Inc v ING Canada Inc, 68 OR (3rd) 457, 234 DLR (4th) 367; Jacob Young, Justice Beneath the Palms: Bhasin v Hrynew and the Role of Good Faith in Canadian Contract Law, 79 Sask. L. Rev. 79, 91 (2016). John D. McCamus identified three situations that have generally triggered good faith duties in contractual performance: “where the parties must cooperate in order to achieve the objects of the contract; where one party exercises a discretionary power under the contract; and where one party seeks to evade contractual duties.”³⁷37 John D McCamus, The Law of Contracts, 840-856 (Toronto: Irwin Law, 2d. ed. 2012), cited in id., para 47. These situations are characteristic of what the common law refers to as uberrima fides contracts, or contracts “requiring the utmost good faith”.³⁸38 Id. at 333.  At the heart of uberrima fides contracts are risks and vulnerabilities that, if unchecked, would ultimately extinguish their purpose and utility. Punitive damage awards have been relatively common under these contracts because the higher expectation of performance makes it easier to prove a defendant’s conduct was “so reprehensible and high-handed that he should be punished for his behaviour.”³⁹39 Whiten, supra note 2, at para 83, Binnie J, citing Andrusiw v Aetna Life Insurance Co of Canada, 289 AR 1, para 84. See also Brandon Pasternak, A “First Look”: The Canadian Courts’ Treatment of Good Faith Contractual Performance Post-Bhasin, 19 Trinity College L. Rev. 123 (2016). Thus, punitive damages for breach of good faith have typically been limited to certain contracts.

However, the law on punitive damages was potentially⁴⁰40 Since the Supreme Court of Canada rendered its decision in Bhasin only recently in 2014, the long-term impacts of the decision are still uncertain. See e.g. Claire Mummé, Bhasin v. Hrynew: A New Era for Good Faith in Canadian Employment Law, or Just Tinkering at the Margins? 3 Intl. J. Comp. Lab. L. & Ind. Rel. 117 (2016) (employment law); Neil Finkelstein et al, Honour Among Businesspeople: the Duty of Good Faith and Contracts in the Energy Sector, 53 Alta. L. Rev. 349 (2015)  (energy law); Adam Ship and Mohammed Sohail, Franchise Renewals and Transfers in Canada’s Common Law Provinces 35 Franchise L. Rev. 237 (2016)  (franchise law). Most judicial decisions citing Bhasin have appeared in lower courts. transformed yet again by the Supreme Court of Canada’s decision in Bhasin v Hrynew [Bhasin].⁴¹41 Bhasin, supra note 36. In what has been called, “perhaps the most important contract decision of the past 20 years,”⁴²42 David Dias, “SCC Establishes a Duty of Honesty Between Contracting Parties” Legal Feeds (blog) (November 13, 2014), available at www.canadianlawyermag.com/legalfeeds/2379/scc-establishes-duty-of-honesty-between-contracting-parties.html. the Supreme Court took “two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just.”⁴³43 Bhasin, supra note 36, at para 33, Cromwell J. The Court made an unprecedented decision to recognize “a general organizing principle of good faith”⁴⁴44 Id. at para 62, Cromwell J. in contractual performance and a specific  “manifestation”⁴⁵45 Id. at para 93, Cromwell J. of that principle—the “general duty of honesty in contractual performance.”⁴⁶46 Id. at para 73.  Following the Bhasin decision, parties to every contract are obligated to perform their duties “honestly.” In an already changing landscape of punitive damages in Anglo-Canadian contract law, the Bhasin decision raises both legal and moral questions. In this article, we attempt to answer some of those questions by evaluating seven sources of uncertainty that have challenged courts when applying Bhasin for punitive damages:

(1) Does a breach of the “general duty of honesty” in contractual performance in Bhasin constitute an “independent actionable wrong” according to Whiten?

(2) Can parties to a contract breach the “general organizing principle of good faith” such that it constitutes an “independent actionable wrong” according to Whiten?

(3) What is “honesty” and what does it require from the parties?

(4) What is the scope of “contractual performance” per Bhasin?

(5) Is the duty of honesty an implied duty or a general doctrinal principle?

(6) How should courts interpret concurrent doctrinal and implied legal duties?

(7) How should courts assess the quantum of punitive damages for breach of honesty?

Despite this early uncertainty, the Supreme Court of Canada’s “incremental step” towards a general duty of good faith in contractual performance is a positive development in Anglo-Canadian law, particularly for predictability and certainty over the long-term. It must be very carefully and diligently applied in punitive damage analyses. There are several reasons for this. First, the breach of the new general duty of honesty has been interpreted as an “independent actionable wrong” according to Whiten. This is major development in Anglo-Canadian remedies law precisely because the duty is doctrinal and transcends the common law’s “categorical”—and restrictive—approach to good faith and punitive damages. Parties to all contracts are now bound to perform their duties honestly. Accordingly, how the courts interpret “honest contractual performance” will be decisive in many future punitive damage analyses. A strict interpretation of “honest performance” would defeat the purpose of this new doctrinal duty by allowing dishonest performance to go unpunished; while a liberal interpretation risks exposing defendants to record claims for punitive damages for pure breach of contract. Second, the existing landscape of good faith at common law continues to undergo tremendous change. The Supreme Court of Canada in Bhasin itself used the expression “incremental step” to signal a movement towards a broader, “general” duty of good faith in contractual performance. Thus, courts have the flexibility and opportunity to further develop the general organizing principle. While strong arguments could be made that good faith duties increase predictability and certainty, each development also risks adding another trigger for punitive damages claims. By their very nature, punitive damages are unpredictable and uncertain because they are not assessed in light of the actual damages sustained. It is absolutely imperative that all courts recognize Cromwell J.’s warning about interpreting good faith duties too liberally: “The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the important of private ordering and certainty in commercial affairs.”⁴⁷47 Id. at para 66.  The  misapplication of Bhasin risks fueling a rising trend toward larger and more frequent punitive damage awards in Anglo-Canadian contract law.

This article proceeds in five subsequent parts. First, we review how Anglo-Canadian courts have interpreted independent actionable wrong in light of Bhasin. Second, we study the precise nature of “honest contractual performance.” Third, we examine how courts have quantified their punitive damage awards for breach of the duty of honesty. Fourth, we offer recommendations for mitigating contractual uncertainty relating to whether “dishonest performance” can trigger punitive damages. Finally, we end by exploring potential future developments on good faith and punitive damages in Anglo-Canadian contract law.

I.    Applying Bhasin For Punitive Damages: Sources of Uncertainty

A. What Is An “Independent Actionable Wrong” As Per Bhasin?

1. Does A Breach of the “General Duty of Honesty” In Bhasin Constitute An “Independent Actionable Wrong” Under Whiten?

According to the Supreme Court of Canada in Whiten, to bring a claim in punitive damages for pure breach of contract, the plaintiff must establish that the defendant committed an independent actionable wrong apart from the breach of contract sued upon. Hence, the first question in this analysis is whether a breach of the new “duty of honesty” in contractual performance constitutes an “independent actionable wrong” under Whiten.

The Supreme Court of Canada in Bhasin never directly answers this question, but it hints at an answer on two occasions. First, at paragraph 55 of the decision, the Supreme Court refers to earlier case law on the “duty of good faith” in insurance contracts, writing: “[t]his Court has also affirmed the duty of good faith, which requires an insurer to deal with its insured’s claim fairly, both with respect to the manner in which it investigates and assesses the claim and to the decision whether or not to pay it... .  The breach of this duty may support an award of punitive damages: Whiten v Pilot Insurance”.⁴⁸48 Id. at para 55. The Court here is reiterating the traditional approach to awarding punitive damages for breach of an implied duty of good faith in uberrima fides contracts. However, on the second occasion, the Court specifically addresses the general duty of honesty in contractual performance, distinguishing it from other equitable duties at common law: “Unlike promissory estoppel and estoppel by representation, the contractual duty of honest performance… is not subject to the uncertainty around whether estoppel can be used to found an independent cause of action… and breach of it supports a claim for damages according to the contractual rather than the tortious measure.”⁴⁹49 Id. at para 88.  Accordingly, while the Supreme Court in Bhasin never explicitly answers whether a breach of the duty of honesty can constitute an “independent actionable wrong” under Whiten, it does tell us that a breach of this new duty can serve as an “independent cause of action” in contract. And like “independent causes of action” for breach of implied duties of good faith in uberrima fides contracts, the Court presumably intends that a breach of honesty can also constitute an “independent actionable wrong.”

At the lower court and appeal level, only a handful of decisions have cited Whiten and Bhasin together. Of those decisions, only one decision directly and explicitly answers whether a breach of the duty of honesty can constitute an independent actionable wrong. This was the case in Gordon v Altus Group [Gordon]⁵⁰50 Gordon v Altus Group Ltd, 2015 ONSC 6642, [2015] OJ No 5556 (QL) [Gordon].  at the Ontario Superior Court of Justice. In this case, Gordon successfully brought an action for breach of his employment contract after being wrongfully dismissed by his employer Altus. Justice Glass awarded $168,845 in compensatory damages and an additional $100,000 in punitive damages. He perceived Altus’ failure to perform the contract “honestly” as an “independent actionable wrong”: 

Punitive damages may be considered if there is an independent actionable wrong on the part of Altus… the SCC [Whiten] noted that an actionable wrong can be established with a breach of a distinct and separate contractual provision or other duty such as a fiduciary duty. I accept the submission of the Plaintiff that in the case of Alan Gordon the independent wrong is the termination of Alan Gordon when his company… gave notice to pursue arbitration… Altus failed to perform honestly the employment contract with Alan Gordon.⁵¹51 Id. at paras 40—41 (emphasis added). 

In Bray v Canadian College of Massage and Hydrotherapy [Bray],⁵²52 Bray v Canadian College of Massage and Hydrotherapy, [2015] OJ No 465 (QL) [Bray].  the Ontario Superior Court of Justice awarded Ms. Bray $5,000 in punitive damages after she proved wrongful dismissal by the College without notice. Counsel for Ms. Bray argued not only breach of contract for wrongful dismissal, but like in Gordon, also breach of the duty of honesty in contractual performance set out Bhasin. While Justice Winny of the Superior Court referred to “honesty” in his analysis—unlike in Gordon—he concluded by characterizing the breach not as a breach of the “duty of honesty”, but as a breach of the “duty of good faith performance of a contract”⁵³53 Id. at para 76., citing Bhasin. Justice Winny remarked: “I find that the failure to disclose this matter to Ms. Bray, involving as it did a question of her honesty, and failing to give her an opportunity to respond, was a violation of the duty of good faith performance of a contract.”⁵⁴54 Id. (emphasis added).  

Justice Winny’s reasoning is unclear for two reasons. First, Bhasin did not create a “duty of good faith performance.” Rather, it recognized a “general organizing principle of good faith” in contractual performance and a manifestation of that principle—the general duty of honesty in contractual performance. Justice Winny, therefore, expanded good faith in Bhasin beyond the organizing principle. Second, as we discuss in the section on “Concurrent Implied and Doctrinal Duties”, Winny mixed both the former approach to implied good faith duties in uberrima fides situations and Bhasin’s approach to doctrinal duties of honest performance. Employee dismissal is one situation at common law that has traditionally imposed implied duties of good faith.⁵⁵55 See McCamus, supra note 37, at 1495. Justice Winny could have justified the independent actionable wrong by drawing on either a breach of a general duty of honesty or on a breach of an implied duty of good faith in contractual performance. It appears he mistakenly combined both approaches.

Considering Bhasin, Whiten, Gordon and Bray, it is reasonable to conclude that a breach of the “general duty of honesty” in contractual performance could constitute an “independent actionable wrong” according to Whiten. By affirming the looser “actionable wrong” standard in Vorvis,⁵⁶56 Vorvis, supra note 4.  as opposed to the United States’s more restrictive “actionable tort” standard of the Restatement on the Law of Contracts 2d,⁵⁷57 See Whiten, supra note 2, at para. 78, Binnie J [Whiten]. the Supreme Court of Canada affirmed that the availability of punitive damages for breach of contract is not dependent on formal categories of cases. Rather, the Court in Whiten agreed, in part, with Wilson J.’s dissenting opinion in Vorvis, which advocated for a contextualized and ad hoc approach for awarding punitive damages. Citing Clement J. in Paragon Properties Ltd v Magna Envestments, Wilson J. in Vorvis suggested: “It is the reprehensible conduct of the wrongdoer which attracts [punitive damages], not the legal category of the wrong… To place arbitrary limitations upon the application is to evade the underlying principle.”⁵⁸58 Vorvis, supra note 4, at 1130, Wilson J., citing Paragon Properties Ltd v Magna Envestments Ltd, 24 DLR (3rd) 159, 167, Clement J. In other words, as it relates to the new duty of honesty in contractual performance, barring the availability of punitive damages for reprehensibly “dishonest” behavior would fail to recognize that reprehensibly dishonest behavior should be punished. In both Gordon and Bray, the Superior Court adamantly characterized the defendants as “outrageous”⁵⁹59 Gordon, supra note 50, at para 39.  and as “adverse treatment”⁶⁰60 Bray, supra note 52, at para 56.  —conduct that ultimately deserved to be punished.

2. Does a Breach of the “General Organizing Principle of Good Faith” Constitute an “Independent Actionable Wrong”?

A second source of uncertainty following the Bhasin decision is whether parties to a contract can breach the “general organizing principle of good faith,” and if so, whether it can constitute an “independent actionable wrong” for punitive damages. Underlying this uncertainty is a fundamental misunderstanding of the differences between legal doctrines, duties, and general organizing principles of the law. Justice Cromwell in Bhasin affirmed: “There is an organizing principle of good faith that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.”⁶¹61 Bhasin, supra note 36, at header. However, some lower court judges and practitioners have misapplied the “organizing principle.” In Bray, for example, recall how the Ontario Superior Court of Justice awarded $5,000 in punitive damages for a “violation of the duty of good faith performance of a contract.”⁶²62 Id.  As noted above, the Court in Bray performed an “honesty” analysis, yet awarded punitive damages for a breach of a general good faith duty.

Justice Cromwell in Bhasin had anticipated that courts and practitioners might confuse the “general duty of honesty” with the “general organizing principle of good faith”, so offered to distinguish both concepts:

an organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines… It is a standard that helps to understand and develop the law in a coherent and principled way.⁶³63 Id. at para 64, Cromwell J.

In Data & Scientific Inc v Oracle Corp,⁶⁴64 Data & Scientific Inc v Oracle Corp, 2015 ONSC 4178 [Data & Scientific]. Oracle similarly confused the role of the “general organizing principle of good faith” in Bhasin. At issue was whether Oracle had exercised its discretionary contractual powers reasonably,⁶⁵65 Id. at paras 7-8. as required at common law.⁶⁶66 McCamus, supra note 37, at 791. “Where discretionary powers are conferred by agreement, it is implicitly understood that the powers are to be exercised reasonably.” Id. While counsel for Oracle conceded that discretionary contractual powers must generally be exercised reasonably,⁶⁷67 Data & Scientific, supra note 64, at paras 7-8.  they  argued, “the general rule was explicitly curtailed by the Supreme Court in Bhasin where the Court made clear that absent active dishonesty, the reasonable exercise of discretionary powers does not apply in contractual renewal.”⁶⁸68 Id. at para 8. In this example, Oracle tried to give legal force to a general organizing principle. Oracle interpreted the general organizing principle of good faith as a freestanding rule that limits other legal duties. This interpretation, however, was firmly dismissed by Justice Belobaba, who remarked: “[Bhasin] made clear that this new duty of honesty in contractual performance flowed ‘directly from’ and was an ‘aspect’… of the general organizing principle of good faith. In other words, the pre-existing situational and relational… pockets of implied good faith… were not eliminated but were simply realigned under a broad organizing principle of good faith.”⁶⁹69 Id. at para 11. Justice Belobaba suggested that the organizing principle of good faith is not a legal rule or doctrine that can be breach, but rather a general framework of rules.

Alan Clausi PC v Bullock⁷⁰70 Alan Clausi PC v Bullock, 2016 ONSC 3033 [Clausi].  is currently the only decision in Anglo-Canadian law that directly and explicitly addresses whether a breach of the general organizing principle of good faith in Bhasin constitutes an independent actionable wrong under Whiten. In this case, the plaintiff sought $90,000 in punitive damages for breach of a $5,000 retainer. He argued that the defendant owed him a general duty of good faith in contractual performance and that the defendant’s breach of that duty constituted an “independent actionable wrong” under Whiten. Unlike in Bray (where the plaintiff was wrongfully dismissed), the nature of the contractual relationship did not fit one of the categories that have traditionally imposed a duty of good faith performance. Justice MacLeod, therefore, correctly denied the claim and clarified an important distinction between the duty of good faith in Whiten (which served as an independent actionable wrong for punitive damages) and the “general organizing principle of good faith” in Bhasin (which did not serve as an independent actionable wrong for punitive damages). He cautioned:

Good faith as used in Whiten is not the same as the organizing principle subsequently established in Bhasin. Whiten arose in the context of an insurance contract where the court found it was a contract of an absolute good faith… In Bhasin, the court specifically held that the organizing principle did not in and of itself create a cause of action or render contracting parties’ fiduciaries.⁷¹71 Id. at paras 42.

Justice MacLeod recognized that to award punitive damages for a breach of the “general organizing principle of good faith” would mean extending good faith beyond what the Supreme Court intended in Bhasin. Justice Cromwell himself acknowledged that claims in good faith will fail unless they fall within existing categories or relationships, wherein Canadian common law “already determined that good faith obligations lie.”⁷²72 O’Byrne and Cohen, supra note 36, at 3. In Bhasin, Justice Cromwell cautioned: “The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally.”⁷³73 Bhasin, supra note 36, at para 66.  He later explained that a subtle and incremental development of good faith is necessary as “[g]ood faith may be invoked in widely varying contexts and calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties.”⁷⁴74 Id. at para 69.

The subtle and incremental approach to good faith has inspired some critics to argue that Bhasin will not substantially change the common law’s approach to good faith in contract law. Justice Veit of the Alberta Court of Queen’s Bench, for example, writing in Technical Services Inc v Eco-Industrial Business Park Inc,⁷⁵75 Kramer’s Technical Services Inc v Eco-Industrial Business Park Inc, 2015 ABQB 59.   remarked: “the organizing principle of good faith is already manifest in our law of contract and that generally, issues relating to the good faith principle in contract law will continue to be dealt with as they have been in the existing law.”⁷⁶76 Id. at para 35. Accordingly, “[t]o all those raising the spectre of uncertainty, fear not: the organizing principle of good faith will not break contract law.”⁷⁷77 Andrea M Bolieiro, Bhasin v Hrynew and the Principle of Good Faith in Contracts: Moving Towards a Modern View of Commercial Relationships, 33:4 Adv J 23, 29 (2015).

The Supreme Court in Bhasin did not intend to expand the scope of good faith far beyond the common law’s existing categories and relationships. This means that parties cannot breach the “general organizing principle of good faith” and, by extension, cannot bring a related claim for punitive damages. Instead, “[r]ecognition of a duty of honesty in contractual performance is simply the first example of applying this new approach.”⁷⁸78 O’Byrne and Cohen, supra note 36, at 3.

Even though Anglo-Canadian contract law has not recognized a general duty of good faith in contractual performance, Bhasin invites judges and practitioners to further develop the scope of good faith “where the existing law is found to be wanting.”⁷⁹79 Bhasin, supra note 36, at para 66. Bhasin reminds us that while “[g]enerally, claims of good faith will not succeed if they do not fall within… existing doctrines… this list is not closed.”⁸⁰80 Id. Justice Cromwell draws a useful parallel between the conceptual evolutions of good faith and unjust enrichment at common law, citing Justice McLachlin in Peel (Regional Municipality) v Canada:⁸¹81 Peel (Regional Municipality) v Canada, [1992] 3 SCR 762.  “[t]he tripartite principle of general application which this Court has recognized as the basis of the cause of action for unjust enrichment is thus seen to have grown out of the traditional categories of recovery. It is informed by them. It is capable, however, of going beyond them, allowing the law to develop in a flexible way as required”.⁸²82 Id. at 788. He praised McLachlin J.’s approach in Peel, adding: “[i]n that case, this Court further developed the law through application of an organizing principle without displacing the existing specific doctrines. This is what I propose to do with regards to the organizing principle of good faith.”⁸³83 Bhasin, supra note 36, at para 68. In a case like Alan Clausi, therefore, where the plaintiff was barred from making a good faith argument under existing categories, Bhasin gives room to plaintiffs to argue that a “new” manifestation of good faith ought to be recognized on the specific facts of the case. In this way, the general organizing principle of good faith is still relevant for punitive damages.

B. What Is the Nature of “Honest Contractual Performance”?

1. What Is “Honesty” And What Does It Require?

When applying Bhasin, another challenge in punitive damage analyses relates to the meaning of honesty and what it requires from the parties to a contract. While the Supreme Court in Bhasin aimed to bring coherence to an unsettled and piecemeal law on good faith, “its efforts to bring clarity proved to be less than fruitful... illustrated by the difficulties faced by lower courts in interpreting Bhasin.”⁸⁴84 Pasternak, supra note 40, at 149. One major source of difficulty has been to consistently interpret the “duty of honesty.” Since Bhasin was rendered, many courts—particularly lower courts—have been guilty of what Jacob Young called, “justice beneath the palms,”⁸⁵85 Young, supra note 36, at 79. interpreting   honesty outside of some principled approach. Broad judicial discretion about the meaning of “honesty” is particularly dangerous in punitive damage analyses, because as discussed earlier, breach of the duty of honesty can serve as an “independent actionable wrong” according to Whiten. This gives judges a considerable amount of freedom to award damages beyond those actually sustained. In this section, we explore how courts have interpreted and applied the “general duty of honesty” in punitive damage analyses and offer suggestions for how it should be interpreted in future cases.

The Supreme Court in Bhasin offered little guidance for interpreting the new duty of honesty in contractual performance. According to the Court in Bhasin, honesty “means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”⁸⁶86 Bhasin, supra note 36, at para 73 (emphasis added). At the core of the decision, “knowledge of” and “directness” are the necessary conditions for establishing a breach of the general duty of honesty in contractual performance. It added that the duty is a “general doctrine of contract law [that] operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”⁸⁷87 Id. at para 74. The Court distinguished the duty from other existing duties of loyalty and disclosure, writing, “[t]his [duty] does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract.”⁸⁸88 Id. at para 73. Rather, the duty of honesty flows directly from the “general organizing principles of good faith” and was envisioned to “put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.”⁸⁹89 Id. at para 34.

How the Court applied this duty to the facts of the case also speaks to its nature. Bhasin was a case involving three commercial parties: Can-Am, Bhasin and Hrynew. Bhasin and Hrynew were competitors, and both had a separate contract with Can-Am. Under the contract between Bhasin and Can-Am, an automatic renewal provision stipulated that the contract would be renewed after three years unless one of the parties provided six month’s written notice to the contrary. The six month’s notice period was approaching and Bhasin wanted to renew the contract with Can-Am. However, both Hrynew and Can-Am wanted to merge Hrynew and Bhasin’s businesses. Bhasin repeatedly refused to merge with Hrynew and simply wanted to renew his agreement with Can-Am. Before the six month’s notice period, Can-Am informed Bhasin he wanted to conduct an independent audit of Bhasin’s operations. However, he assigned Hrynew—Bhasin’s competitor—to carry out the audit. Bhasin repeatedly refused to have Hrynew perform the audit, but Can-Am repeatedly lied to Bhasin, telling him that Hrynew was bound by a duty of confidentiality. Can-Am knew that Hrynew was not bound by a duty of confidentially, but intentionally mislead Bhasin to believe that it was the case. Furthermore, Can-Am threatened Bhasin, telling him that if he did not accept the audit by Hrynew, Can-Am would not renew his contract. Bhasin did not accept the audit and Can-Am did not renew his contract. Since the contract was not renewed, Bhasin lost his clients, which were solicited by Hrynew shortly thereafter.

The Supreme Court held that Can-Am failed to perform his contract with Bhasin “honestly.” It pointed to Can-Am’s repeated lying about Hrynew’s purported duty of confidentiality. Can-Am’s lie concerned matters that were directly linked to the performance of his contract with Bhasin as it was intended to dissuade Bhasin from renewing his three-year contract. Notably, punitive damages were not considered in the Bhasin decision because there was no initial breach of contract; Can-AM was not obligated to renew his contract with Bhasin. Several other facts stand out in Bhasin that may have been relevant to the Court’s interpretation of “honesty” in contractual   performance.⁹⁰90 Although the Supreme Court in Bhasin did not explicitly base their decision on these facts, these facts make the Bhasin case unique and could be grounds for comparison in future cases on “honesty”. First, the Court emphasized throughout the decision that the parties to the dispute were commercial parties. “The contract in this case was negotiated between commercial parties… [who] reasonably expect a basic level of honesty and good faith in contractual dealings.”⁹¹91 Bhasin, supra note 36, at paras 31, 60. Second, the Court emphasized that the Respondent acted dishonestly due to self-interested motives. “[I]t was clear that Can-Am was considering a restructuring of its agencies… that involved Mr. Bhasin.”⁹²92 Id. at para 11. Third, the Court emphasized that Mr. Bhasin took active measures to clarify the dishonesty. “[W]hen questioned about Can-Am’s intentions with respect to the merger, [Can-Am] ‘equivocated’ and did not tell him the truth that from Can-Am’s perspective this was a done deal.”⁹³93 Id. at para 100. Fourth, the Court emphasized that Can-Am  was “repeatedly”⁹⁴94 Id.at paras 12,30,101.  dishonest, writing, “it repeatedly lied to him about the nature of the organizational changes required... telling him that Mr. Hrynew, as PTO, was under an obligation to threat the  information confidentially.”⁹⁵95 Id. at paras 30,12. Fifth, the Court emphasized that the agreement between Bhasin and Can-Am was unbalanced from “inception and put [Bhasin] in a position of inherent and predictable vulnerability.”⁹⁶96 Id. at para 23. Sixth, the  Court emphasized that the relationship between Bhasin and Can-Am was always positive up until the dispute and lasted for over ten years.⁹⁷97 Id. at para 2. In fact, “Can-Am gave him numerous awards and prices recognizing him as one of the their top enrollment directors.”⁹⁸98 Id. at para 3. Seventh, the Court emphasized that Bhasin suffered from a material loss as a result of Can-Am’s dishonesty, observing, “but for Can-Am’s dishonesty, Mr. Bhasin could have acted to retain the value of his business.”⁹⁹99 Id. at para 109. Finally, the Court emphasized the agreement “did not fall within any existing categories of contract… which have been held to require good faith performance.”¹⁰⁰100 Id. at para 23.  The following table reviews some of the relevant considerations for interpreting “dishonesty” that came into play in the Bhasin decision.

NON-EXHAUSTIVE LIST OF CONSIDERATIONS FOR INTERPRETING “DISHONESTY” PER BHASIN (1) Dishonesty must not be done “knowingly” (2) Dishonesty must relate to matters “directly” linked to the performance of the contract (3) Intention of the dishonest party is not a necessary condition (4) Commercial nature of the parties and of the contract may be considered (5) Self-interested motives of the dishonest party may be considered (6) Active attempts to clarify dishonesty by the innocent party may be considered (7) Repeated dishonesty may be considered (8) Vulnerability of the innocent party under the contract may be considered (9) Duration of the relationship between the parties may be considered (10) Degree of material loss caused by the dishonesty may be considered (11) Relation of the contract to existing categories of good faith may be considered

However, the Supreme Court in Bhasin leaves many questions unanswered about how courts should interpret and apply “dishonesty” in contractual performance. There are at least ten questions that merit further consideration. First, does an isolated incident of dishonesty trigger a breach of the duty? The Supreme Court in Bhasin emphasized all-throughout its decision that Can-Am was “repeatedly”¹⁰¹101 Id. at paras 12, 30, 101. dishonest with Mr. Bhasin. How would the case have been decided if Can-Am was dishonest with Mr. Bhasin a single time? What is the threshold for triggering this new duty? Second, what are the differences between dishonesty, lying, misleading, misrepresentation, silence, refusal to answer, and truthfulness? One weakness of the Bhasin decision is the Court’s reliance on a variety of different expressions to describe the same duty. Notice how the Court describes the duty as “simply that parties must not lie or otherwise knowingly mislead each other”,¹⁰²102 Id. at para 73.  but goes on write about “truthfulness” at paragraphs 100-101. “Can-Am in effect blamed the Commission, claiming that the Commission had rejected to appoint a third party... This was not truthful.”¹⁰³103 Id. at para 101. To be untruthful and to mislead are simply two different standards. Third, can the duty be breached when both parties reciprocate dishonesty? In Bhasin, it is unclear whether Mr. Bhasin reciprocated dishonesty towards Can-Am (though the Court seems to suggest that Mr. Bhasin performed his duties honesty). Would the Court have decided the case differently if both parties were reciprocally dishonest or how would the Court react if one party’s dishonesty causes the other party to behave dishonestly? Fourth, does the innocent party have to suffer a material loss caused by the dishonest performance? One could imagine a scenario where a plaintiff brings a claim for compensatory and punitive damages. An initial breach of contract caused $100,000 in damages and only incidentally, the plaintiff argues there was an independent breach of “honesty.”

Unlike in Bhasin, however, the breach of honesty did not cause any material damages. Should this breach be interpreted in the same way as the breach in Bhasin? Fifth, would dishonesty between non-commercial parties trigger a breach of this new duty? The Supreme Court in Bhasin emphasized all throughout the decision that the duty of honesty was envisioned to “accor[d] with the reasonable expectations of commercial parties… [to] enhance rather than to detract from commercial certainty.”¹⁰⁴104 Id. at para 34. Under this standpoint, are non-commercial parties to a contract also obligated to perform their duties honestly? Sixth, does it matter how the dishonesty is performed? In Bhasin, Can-Am appears to have communicated its dishonestly to Mr. Bhasin in person. Would it have made any difference if Can-Am had used e-mail or postage to communicate with Mr. Bhasin? Seventh, to what extent does an agent’s dishonesty implicate the principal? In a commercial context, companies can have thousands of agents. Is a company responsible for the honesty of all of its agents? Eighth, is the duty of honesty affected by the nature of a contractual relationship? In Bhasin, the Supreme Court emphasized that the parties had positive dealings for over ten years. Do longer, more elaborate relationships influence a party’s expectation of honesty? Ninth, how should courts assess whether dishonesty is directly linked to the performance of the contract? We explore this question in the following section of this article. Finally, and perhaps the most pertinent question to this article, how should courts interpret whether a party’s dishonest performance was so malicious, vindictive, reprehensible or high-handed that it justifies an award in punitive damages? These ten questions are summarized below.

NON-EXHAUSTIVE LIST OF QUESTIONS LEFT UNANSWERED ABOUT “DISHONESTY” PER BHASIN (1) Does an isolated incident of dishonest performance trigger a breach? (2) What is the difference between dishonesty, lying, misleading and misrepresentation? (3) Is the duty of honesty breached when parties reciprocate dishonest performance? (4) Does the innocent party have to suffer a material loss to trigger a breach? (5) Does dishonest performance between non-commercial parties trigger a breach? (6) Does it matter how dishonest performance is performed? (7) To what extent does an agent’s dishonesty implicate the principal? (8) Is the expectation of honest performance affected by the nature of the relationship? (9) How is dishonesty “directly” linked to the performance of a contract? (10) When is dishonesty so reprehensible that it justifies an award in punitive damages?

In light of this uncertainty, how has the duty of honesty been interpreted and applied in punitive damage analyses? While only a handful of decisions have considered the duty of honesty in punitive damage analyses, courts have generally approached their analyses in similar ways. One striking theme in lower court decisions is judges’ tendency to overlook Whiten’s second criterion for awarding punitive damages. Remember that the Supreme Court in Whiten reaffirmed the so-called “Vorvis Test”, where parties claiming punitive damages must establish an “independent actionable wrong” that is also “high-handed, malicious, arbitrary, or highly reprehensible misconduct [departing] to a marked degree from ordinary standards of decent behaviour.”¹⁰⁵105 Whiten, supra note 2, at para 94. Nevertheless, in a case like Bray v Canadian College of Massage and  Hydrotherapy,¹⁰⁶106 Bray, supra note 52.  the court added an additional 25% in punitive damages without ever discussing the reprehensible nature of the misconduct or the standard of decent behavior in the employment context. The Court justified the award by casually writing, “I accept [Bray’s] submission that her employer’s conduct in this matter is bad faith conduct sufficient to warrant an award in punitive damages.”¹⁰⁷107 Id. at para 78. In Gordon v Altus,¹⁰⁸108 Gordon, supra note 50. the court justified its award by writing, “[p]unitive damages will be set at $100,000 because that sum of money notes the harsh treatment to [Gordon] over an extended period of time as a means of sanctioning Altus for its terrible conduct.”¹⁰⁹109 Id. at para 42.

Like in Bray, the court in Gordon failed to specifically justify why the defendant’s dishonesty was reprehensible and markedly removed from ordinary standards of decent behavior. It appears that some courts may be downplaying this criterion as dishonesty already carries a ‘reprehensible’ connotation. In fact, the Supreme Court in Bhasin wrote, “A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance.”¹¹⁰110 Bhasin, supra note 36, at para 80. But to what extent is this true? Should courts always interpret “dishonesty” as removed from ordinary standards of decent behavior?

A second theme related to the interpretation and application of the duty of honesty for awarding punitive damages is the inclination of courts to apply the duty within existing categories of good faith at common law. Courts have generally been hesitant to apply the duty where the common law has not traditionally recognized implied duties of good faith.

In Gordon v Altus,¹¹¹111 Gordon, supra note 50. the trial judge awarded $100,000 in punitive damages after “Altus failed to perform honestly the employment contract with Alan Gordon.”¹¹²112 Id. at para 41.  In that case, however, Gordon was seeking damages “for being wrongfully dismissed from his employment with the Defendant.”¹¹³113 Id. at para 1. Wrongful dismissal is within a category of cases that requires good faith, established in the Supreme Court’s decision in Wallace v United Grain Growers Ltd.¹¹⁴114 Wallace v United Grain Growers Ltd, [1997] 3 SCR 701, 152 DLR (4th) 1 [Wallace]. See also Shafik Bhalloo andAlisha Parmar, Bhasin v. Hrynew: Ramifications for Employment Law 74 Advocate Vancouver 185, 187 (2016), and McCamus, supra note 5, at 1495. Justice Iacobucci, writing for the Majority, remarked, “to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the matter of dismissal.”¹¹⁵115 Wallace, supra note 114, at para 95. One decade later, the Supreme Court in Honda Canada Inc v Keays¹¹⁶116 Honda Canada Inc v Keays, 2008 SCC 39, [2008] 2 SCR 362 [Honda]. confirmed that punitive damages can be awarded for breach of an implied duty of good faith in cases of wrongful dismissal. Citing Whiten and Vorvis, the Court warned, “punitive damages are restricted to advertent wrongful acts that are so malicious and outrageous that they are deserving punishment on their own.”¹¹⁷117 Id. at para 62. Under Wallace and Honda, the court in Gordon was free to award punitive damages for the breach of an implied duty of good faith resulting from the Defendant’s ‘dishonest’ misconduct. The dispute in Bray also concerned a Defendant’s wrongful dismissal. Unlike Gordon, the court in Bray characterized the defendant’s dishonesty as a breach of an implied duty of good faith rather than a breach of the duty of honesty.

In Industrial Alliance Insurance and Financial Services Inc v Brine,¹¹⁸118 Industrial Alliance Insurance and Financial Services Inc v Brine, 2015 NSCA 104. breach of the duty of honesty was also considered for punitive damages. Like Gordon and Bray, the dispute (enforcement of an insurance agreement) fell within the existing categories of “good faith.”¹¹⁹119 Id. at para 318. Alan Clausi PC v Bulluck¹²⁰120 Clausi, supra note 70. appears to be the only case to date where the court could have extended the duty of honesty beyond existing categories of good faith. While the court agreed that the plaintiff, “may be able to show that he was mislead by the defendant,”¹²¹121 Id. at para 35. it did not threat his misconduct as an “independent actionable wrong.¹²²122 Id. at para 41. The Court justified this decision by writing, “[g]ood faith as used in Whiten is not the same as the organizing principle subsequently established in Bhasin. Whiten arose in the context of an insurance contract, where the court found it was a contract of absolute good faith in which a fiduciary duty existed.”¹²³123 Id. at para 42.

This reasoning makes it clear that the court in Clausi was reluctant to award punitive damages for a breach of the duty of honesty since, unlike in Whiten, the case did not fall within an existing category of cases recognizing an implied duty of good faith. Overall, courts’ inclinations to apply the duty within existing categories of good faith is showing strong deference to Bhasin, which suggested it should be “developed where the existing law is found to be wanting and the where development  may occur incrementally in a way that is consistent with the structure of the common law.”¹²⁴124 Bhasin, supra note 36, at para 66.

Five additional points regarding lower courts’ application of the duty merit further discussion. First, the Bray decision makes it clear that reciprocal dishonesty between both parties is not a bar from claiming a right under the duty of honesty. In Bray, the defendant advanced that “the plaintiff had been guilty of an act of dishonesty… and [the] decision to schedule her for no hours… was a disciplinary measure in  response.”¹²⁵125 Bray, supra note 52, at para 3. While it was unclear whether or not Ms. Bray was dishonest with her employer, the court firmly held, “even if the substance of the alleged misconduct was true—and I make no such finding— the indefinite layoff or suspension was not a proportionate response to it.”¹²⁶126 Id. at para 28. The court in Bray suggests that proportionality should be considered for reciprocal dishonesty. Second, Bray and Gordon confirm that the duty of honesty binds non-commercial parties. These were employment cases dealing with wrongful dismissal. Beyond these two cases, it remains unclear how other non-commercial parties are bound by the duty. Third, Bray makes it clear that an agent’s dishonesty can implicate the principal. The Court held Ms. Bray’s employer, the Canadian College of Massage, liable for punitive damages after its scheduling director (one of many employees of the college) was dishonest with Ms. Bray. Fourth, when punitive damages are awarded, there has consistently been a showing of “repeated” dishonesty, rather than an isolated incident. This was the case in both Bray and Gordon. It makes sense that repeated dishonesty helps to trigger punitive damages, because it makes easier to establish that the dishonesty was reprehensible and departed from a standard of decent behavior. Finally, when punitive damages are awarded, it generally appears that the vulnerability of the plaintiff is at least somewhat considered. Bray, for example, was a case about a new mother who was dismissed from her only source of income after maternity.¹²⁷127 Id. at para 6. In Gordon, the plaintiff was likewise dismissed from his main source of income and was bound by a non-compete clause preventing him to work for nearby competitors. It is likely that both judges awarded punitive damages—at least in part—out of sympathy for the plaintiffs.

2. What Is the Scope of “Contractual Performance”?

In this section, we analyze the scope of the expression “contractual performance” as it pertains to the duty of honesty established in Bhasin. The Supreme Court in Bhasin defined the duty as “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”¹²⁸128 Bhasin, supra note 36, at para 73 (emphasis added) It is critical to understand what constitutes the “performance of the contract” and what it means to be “directly linked”. Since Bhasin was rendered, some courts have had difficulty interpreting these two concepts because the terms of a contract may not always be clear.

For example, written employment contracts are substantially incomplete due to the degree of interconnectedness of working relationships. The entire working relationship cannot be fully captured by the stipulated terms of the contract. Would lying to an employee about rescheduling their meeting fall within “contractual performance”?¹²⁹129 Mummé, supra note 40, at 125.

Alternatively, are employers bound by the duty of honesty over informal workplace policies? At the core of these uncertainties are deeper questions about contractual freedom and the role of courts in contract administration: does Bhasin open the door to “judicial supervision” over the “day-to-day administration of [a contract]”¹³⁰130 Id.  and/or does it create a “generalized check on the exercise of discretion?”¹³¹131 Id.   

There are two central questions in this inquiry. First, to understand the meaning of contractual performance in light of the duty of honesty, courts must determine whether the dishonesty was related to one or more of the terms of the contract. Courts must delineate contractual performance by referring to the terms of the contract since “performance necessary to discharge a contract must be in accordance with the terms.”¹³²132 S. Martin Leake and A.E. Randall, Principles Of The Law of Contracts, 602 (London: Stevens and Sons Ltd, 1912). This was not a problem in the Bhasin decision, since the term that related to Can-Am’s dishonesty was not contested. Both parties agreed that the contract included an optional renewal provision. In other cases, however, the parties may disagree about the terms of the contract. Courts may then be forced to interpret the contract’s express or implied terms. Sattva Capital v Creston Moly¹³³133 Sattva Capital v Creston Moly, 2014 SCC 53, [2014] 2 SCR 633 [Sattva].  is Canada’s leading authority on contractual interpretation. While courts have historically treated contractual interpretation as a matter of law,¹³⁴134 See e.g.King v Operating Engineers Training Institute of Manitoba Inc, 2011 MBCA 80 at para 20; Kim Lewison, The Interpretation of Contracts, 173-176 (London: Sweet & Maxwell 5th ed., 2011); Geoffrey R.  Hall, Canadian Contractual Interpretation Law 125-126 (Toronto: LexisNexis, 2d. ed. 2012). they have slowly abandoned that approach culminating in the Sattva decision where interpretation is considered “an exercise involving either a question of law or of mixed law and fact.”¹³⁵135 Sattva, supra note 133, at para 45. See e.g. 269893 Alberta Ltd v Otter Bay Developments Ltd, 2009 BCCA 37; Hayes Forest Services Ltd v Weyerhaeuser Co, 2008 BCCA 31 at para 44. According to Sattva, “the surrounding circumstances of the contract”¹³⁶136 Sattva, supra note 133, at para 46. give meaning  to words and the nature of the relationship. Contractual interpretation should be driven by “an overriding concern to determine the intent and understanding of the parties.”¹³⁷137 Id. at para 47. It is a “practical, common-sense approach not dominated by technical rules of construction.”¹³⁸138 Id.

Written contracts should be interpreted by reading the contract as a whole, “giving the words used their ordinary and grammatical meaning.”¹³⁹139 Id. Where parties disagree about the meaning or existence of certain terms, courts must read the contract in a manner that is “consistent with the surrounding circumstances known to the parties at the time of formation.”¹⁴⁰140 Id. This approach recognizes that understanding the intention of the parties is difficult when looking exclusively at the words of a contract. “[W]ords alone do not have an immutable or absolute meaning”¹⁴¹141 Id. and “[n]o contracts are made in a vacuum: there is always a setting in which they have to be placed.”¹⁴²142 Id. citing Reardon Smith LineLtd v Yngvar Hansen-Tangen, [1976] 1 WLR 989, Lord Wilberforce.  Accordingly, this means that courts have some discretion when interpreting the meaning and performance of a contract. If after such an analysis, a term is still ambiguous, then the doctrine of contra proferentem (i.e. interpretation against the draftsperson) will apply. In a recent Ontario Court of Appeal decision, the court added the doctrine of contra proferentem with a consideration of the doctrine of good faith in contractual performance to find that an employer could not exercise its rights under the termination clause in an unfettered manner.¹⁴³143 See Mohamed v Information Systems Architects Inc, 2018 ONCA 428.

Once courts have delineated the scope of contractual performance, they must interpret whether the defendant’s dishonesty was “directly linked”¹⁴⁴144 Bhasin, supra note 36, at para 73.  to the performance of the contract. The Supreme Court in Bhasin provides some guidance for understanding the “directness” requirement. Writing for the Court, Justice Cromwell found, “dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of the agreement with Mr. Bhasin and its exercise of the non-renewal provision.”¹⁴⁵145 Id. at para 103. He went on to add “but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to retain the value of his agency.”¹⁴⁶146 Id. at para 109.  This reasoning suggests that the duty of honesty is breached when dishonest misconduct pushes a plaintiff to act on a term of the contract that, but for the dishonest misconduct, would have not been acted upon. This also includes omissions. Whether the plaintiff suffered damage by acting or failing to act on the terms seems to be important under the Bhasin decision as the Court pointed out that the duty was invoked in the case to “bring a measure of justice to the appellant, Mr. Bhasin.”¹⁴⁷147 Id. at para 1.

Hypothetically, if an employer lied to her employee about salaries earned by other employees, it seems that under the Bhasin decision, a breach of the duty of honesty should only be invoked if the employer’s dishonest misconduct pushed the employee either to act or not act on a term of the employment contract. For example, if the employer lied about the high salaries of upper management to persuade the employee to renew her employment contract and if the employee remained with the company on the basis of the dishonesty, this would likely be construed as dishonesty “directly linked to the performance of the contract.”

Finally, how have other courts interpreted the term “directly linked” to the performance of the contract? The dispute in Gordon v Altus was similar to the dispute in Bhasin. Gordon and Altus entered into an asset purchase agreement under which profits were to be shared between the parties.¹⁴⁸148 Gordon, supra note 50, at para 24. The rate of profit sharing was to be adjusted every three years by both of the parties. Following the sale of the assets from Gordon to Altus, Gordon also became an employee of Altus.¹⁴⁹149 Id. at para 25. When the adjustment period was approaching, Altus did not want Gordon in the company because he would have access to information about the profitability of the company. Altus decided to fire Gordon, alleging that he was “not producing effectively and was a very unpleasant person”.¹⁵⁰150 Id. at para 5.  These allegations were   “unfounded”¹⁵¹151 Id. at para 39. and intended to “get rid of [him] as they approached arbitration for the determination of adjustments in the asset purchase agreement price.¹⁵²152 Id.

As a result, Gordon successfully brought a claim against Altus by alleging that Altus breached its duty of honesty by lying about the reasons for firing Gordon. Like in Bhasin, the defendant’s dishonesty was intended to influence how Gordon agreed to adjustments under the asset purchase agreement. It can reasonably be inferred in the Gordon case that but-for the defendant’s dishonesty and dismissal, Gordon would have requested a higher sum of profits since the company was prospering at the time of the conflict. Gordon also suffered clear damages since he was dismissed by his employer. The duty of honesty may be breached when ‘dishonesty’ is a but-for-cause of damage related to a contractual term.

3. Is “Honesty” An Implied Duty or A Doctrinal Principle?

In this section, we analyze a third source of uncertainty surrounding Bhasin and the new general duty of honesty in contractual performance—is the duty an implied duty into the contract or an externally imposed doctrinal principle? Historically, Canadian common law courts have implied duties of good faith in certain categories of contracts, whether or not the parties explicitly agreed to those duties.¹⁵³153 See e.g.Young, supra note 36. However, this is not what the Supreme Court envisioned for the new general duty of honesty in contractual performance, which applies to all contracts and not just uberrima fides contracts. According to Cromwell J., it should not be read as an implied duty but rather as a “general doctrine of contract law.”¹⁵⁴154 Bhasin, supra note 36, at 74.

I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.¹⁵⁵155 Id.

The difference between the common law’s former implied approach and Bhasin’s new doctrinal approach has created some uncertainty, particularly where parties to a contract are bound by an entire agreement clause.¹⁵⁶156 See e.g. Finkelstein et al, supra note 40, at 369-370. In cases where courts incorrectly interpret Bhasin—conceiving the duty of honesty as an implied duty—they risk engaging in unnecessary analysis over whether terms should be implied into the contract. This was precisely the case in Industrial Alliance Insurance and Financial Services Inc v Brine,¹⁵⁷157 Brine, supra note 118.   where the Nova Scotia Court of Appeal interpreted the duty as an “implied duty”.¹⁵⁸158 Id. at paras 98—99.  

In Bhasin, the trial judge, to whom the Supreme Court deferred for the facts, found that Can-Am had acted dishonestly in the exercise of its contractual discretion to terminate by notice. [It] held that Can-AM breached its implied duty, and owed damages… As with any implied contractual term, there may be an issue whether an express term excludes the implication.¹⁵⁹159 Id. (emphasis added).

The Nova Scotia Court of Appeal in Brine mischaracterized the duty of honesty as an implied duty into the contract, rather than an externally imposed doctrinal duty. While implied duties are often treated as matters of interpretation that are imposed by a contract itself to fulfill the intentions of the parties,¹⁶⁰160 See Pasternak, supra note 39, at 138. See also Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd, [1994] ABCA 94, 15, 149 AR 187. under  a doctrinal approach, the source of the duty is “a doctrine of contract law that exists outside of  the  contract.”¹⁶¹161 Pasternak, supra note 39, at 138. Like estoppel or unconscionability, duties imposed by doctrine cannot be excluded by the parties.¹⁶²162 Id. This distinction has practical implications for contracting parties because it means that parties cannot exclude the duty of honesty by stipulating an entire agreement clause. In fact, the contract between Bhasin and Can-Am included an entire agreement clause, leading some commentators to wonder if the Supreme Court in Bhasin favored a doctrinal approach to avoid implying a duty into the contract.¹⁶³163 See e.g. id. at 139. Cromwell J. in Bhasin acknowledged that “[i]t would be difficult to say that a duty of good faith should be implied in this case on the basis of the intentions of the parties given the clear terms of an entire agreement clause in the Agreement.”¹⁶⁴164 Bhasin, supra note 36, at para 72. One overarching concern with the doctrinal approach is that the duty of honesty might not be rooted in the express or implied intentions of the parties.¹⁶⁵165 Pasternak, supra note 39, at 139. This is particularly true where parties stipulate an entire agreement clause and could be argued to be interfering with freedom of contract and commercial certainty. The Supreme Court in Bhasin only casually addressed these concerns, writing, “[r]ecognizing a duty of honesty in contract performance poses no risk to commercial certainty in the law of contract. A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance.” Though to what extent is this true?

Two recent appellate court decisions confirm that Bhasin’s duty of honesty should be interpreted as a doctrinal duty rather than an implied duty. First, in High Tower Homes Corp v Stevens,¹⁶⁶166 High Tower Homes Corp v Stevens, 2014 ONCA 911 [High Tower Homes]. the Ontario Court of Appeal cited Bhasin, writing, “[Bhasin] clarified the duty of good faith should not be thought of as an implied term. He recognized a new duty of honest contractual performance as a general doctrine of contract law that operates irrespective of the intentions of the parties. As such, parties cannot exclude it by an entire agreement clause.”¹⁶⁷167 Id. at para 36. The Appeal Court for British Columbia affirmed both High Tower Homes and Bhasin, reiterating, “Bhasin clarifies that good faith is not an implied term but is an organizing principle that manifests in particular doctrines, such as the duty of honesty.”¹⁶⁸168 Moulton Contracting Ltd v British Columbia, 2015 BCCA 89 at para 67.  Given  this support, the duty of honesty should be assumed to be a doctrinal duty.  

Concurrent Implied and Doctrinal Duties. By creating a new doctrinal duty of honesty in contractual performance, the Court in Bhasin produced a situation that encourages “overlap” in legal reasoning. Since Bhasin was rendered, only a handful of decisions have evoked this duty for punitive damages. As discussed earlier, most of those decisions fall within existing categories of good faith; Bray and Gordon involved wrongful dismissal, while High Tower Homes and Brine involved insurance contracts. Should courts decide these hybrid cases via the concept of an implied duty of good faith or a doctrinal duty of honesty? As seen in Bray, courts will often have the option because dishonest behavior can also be described as “bad faith” behavior. This can create confusion for courts and practitioners. Consider how the court in Bray performed an “honesty” analysis, writing, “the failure to disclose this matter to Ms. Bray [involved] a question of [the defendant’s] honesty,”¹⁶⁹169 Bray, supra note 52, at para 76. though the court ultimately ruled that this was a “violation of the duty of good faith performance.”¹⁷⁰170 Id. The Court in Bray drew on the doctrinal duty of honesty but ruled on an implied duty of good faith for wrongful dismissal. As courts recognize additional manifestations of the “general organizing principle of good faith”¹⁷¹171 Bhasin, supra note 36, at 62. it   could become unclear how the existing categories of good faith will interact with concurrent doctrinal duties.

C. How Should Punitive Damages Be Quantified?

Punitive damage analyses have always been plagued by concerns about ‘quantum’ as judges enjoy a relatively high degree of discretion for awarding these damages. Unlike compensatory damages, punitive damages must be proportionate to damages actually sustained. The Supreme Court in Whiten presented guidelines to help courts reach an “assessment of a quantum [of punitive damages] that is fair to all parties.”¹⁷²172 Whiten, supra note 2, at para 45. According to the Court, the governing rule for assessing the quantum of punitive damages is proportionality.¹⁷³173 Id. at para 73. “The overall award, that is to say compensatory damages plus punitive damages plus any other punishment related to the same misconduct, should be rationally related to the objectives for which the punitive damages are awarded (retribution, deterrence, denunciation).”¹⁷⁴174 Id. In assessing whether the award is rationally related to the court’s objectives, courts “should relate the facts of the particular case to the underlying purpose of punitive damages and ask how, in particular, an award would further one or other objectives of the law, and ask what is the lowest award that would serve that purpose.”¹⁷⁵175 Id. at para 71. Moreover, the Court rejected a formulaic approach for assessing quantum (e.g. using a fixed cap or ratio) and proposed that courts should focus on the defendant’s misconduct rather than the plaintiff’s loss.¹⁷⁶176 Id. at para 73. Above all, the Court cautioned that punitive damages are the “exception” not the rule.¹⁷⁷177 id. at para 94.

Only a handful of decisions have considered punitive damages for a breach of the duty of honesty in contractual performance. Of those decisions, Gordon and Bray are the only ones that have awarded punitive damages. In Gordon, the Ontario Superior Court of Justice awarded $100,000 in punitive damages after finding the defendant breached his employment contract and failed to perform his contract honestly.¹⁷⁸178 Gordon, supra note 50, at paras 41—42. $100,000 in punitive damages was a relatively large award in this case considering that compensatory damages totaled $168,000. Punitive damages amounted to roughly 60% of compensatory damages. The Court justified the award by emphasizing at numerous times that the “transaction was valued at several million dollars”¹⁷⁹179 Id at para 2.  and went so far as to clarify “when talking of money, I mean millions of dollars.”

The court described the defendant’s conduct as “outrageous because Altus got mean and cheap in trying to get rid of an employee as they approached arbitration for the determination of any adjustment in the asset purchase agreement.”¹⁸⁰180 Id. at para 39. It added, “Altus expected Alan Gordon to act within the contract terms in not competing… [but Gordon] got nothing… That appears to me to amount to Altus wanting to have its cake and eat it.”¹⁸¹181 Id.  The court described the conduct as “harsh” and “terrible conduct.”¹⁸²182 Id. at para 42. In Bray, the Ontario Superior Court of Justice awarded $5,000 in punitive damages, while compensatory damages were capped at $20,000. Unlike in Gordon, punitive damages in Bray constituted only 25% of compensatory damages. In assessing punitive damages, the court cited Binnie J. in Whiten, writing, “[k]eeping in mind the need for proportionality in such awards… I would fix the amount of punitive damages at $5,000.”¹⁸³183 Bray, supra note 52, at para 78.

Both decisions are similar in that the dishonest misconduct clearly deserved some form of additional punishment from a decent behavior standard. In Gordon, the plaintiff was dismissed without cause, lied to about the reason, and forbidden to work in a related field because of a strict non-compete clause. In Bray, a young mother was dismissed from her only source of income after returning to work following her maternity leave. Though, the courts in both cases—in fact the same court—awarded vastly different proportions of punitive damages when compared to compensatory damages awarded. While the Court in Gordon emphasized that the defendant had deep pockets, this could also be inferred about the Canadian College of Massage and Hydrotherapy in Bray. What, then, led the Court in Gordon to award a substantially larger amount of punitive damages? One common theme in both cases was that the courts offered little justification for the awards. For example, in Bray, the Court merely wrote that the award keeps in mind “the need for proportionality.”

In reality, what does this mean—and why did both courts overlook the relatively stringent process for assessing the quantum of punitive damages set forth in Whiten? Neither court related the facts of the particular case to an “underlying purpose of punitive damages” or asked “how, in particular, an award would further one or other objectives of the law, or [asked] what is the lowest award that would serve that purpose.”¹⁸⁴184 Id. Without this analysis, the awards in punitive damages appear to be nothing more than “palm tree justice.”¹⁸⁵185 Young, supra note 36, at 91.

II. Mitigating Uncertainty: Recommendations

In light of the uncertainty surrounding Bhasin and the duty of honesty for punitive damages, we offer three recommendations for mitigating uncertainty in real-world practice. First, contractual parties must understand that the duty of honesty does not require parties to “subordinate [their] interest to that of the other part[ies].”¹⁸⁶186 Bhasin, supra note 36, at para 86. Accordingly,  when parties have information that is contrary to the interests of their contracting partners (information that arouses dishonest performance) it may be preferable to disclose the information in an honest and forthright manner rather than lie or conceal the information. Second, although Bhasin does not allow parties to completely avoid the duty of honesty by contract, it does allow parties to “relax” certain aspects of the duty. Since the duty of honesty can be breached by agents of the principal, companies must train their agents accordingly.

Contracting parties may elect to communicate their interests to contracting partners in an honest and forthright manner, even if those interests will surely harm the commercial interests of their partners. The Supreme Court in Bhasin remarked, “A party to a contract has no general duty to subordinate his or her interest to that of the other party. However parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.”¹⁸⁷187 Id. The Supreme Court makes it clear that the duty of honesty is not intended to prevent contracting parties from harming their partners’ commercial interests, but rather to give parties access to honest information from which they can make their own decisions. In a case like Bray, the Canadian College of Massage and Hydrotherapy was not happy with Bray’s ability to teach classes for one or more reasons. It claimed that Bray had received a negative review by one of the College’s customers. Rather than addressing the problem directly with Ms. Bray or dismissing Ms. Bray directly for inadequate performance, the College decided to deceive Ms. Bray by telling her that they faced low demand for their services. This unnecessary deception only served to innerve Ms. Bray and clearly violated the duty of honesty set out in Bhasin.

Second, if it is of interest to contracting parties, they may be able to relax the duty of honesty in contractual performance. As discussed earlier, the honesty requirement may take many different forms, including both acts or omissions, outright deception, refusal to answer, mis-representation, or withholding certain information. While the Supreme Court in Bhasin clearly stated that the duty of honesty “operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines that limit the freedom of contract”,¹⁸⁸188 Id. at para 74.  the Court  also recognized that “[t]he precise content of honest performance will vary with contexts and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.”¹⁸⁹189 Id. at para 77. It is unclear what the Supreme Court means by “minimum core requirements”, although it seems to allow contracting parties to exclude certain aspects of the duty. According to Finkelstein et al., parties may choose to “reduce litigation risk by including a clause or clauses in contracts clarifying the circumstances in which the duty will and  will   not  arise.”¹⁹⁰190 Finkelstein et al, supra note 40, at 374. One example of such a clause would be to stipulate that “failure by one party to provide information to the other that is not otherwise required will not constitute deception or a breach of the duty of honesty, as long as no misleading information is communicated.” This clause appears to respect the minimum core requirements of the duty as there is no bad faith performance.

Third, since agents of a principal can breach the duty honesty, larger commercial parties should consider whether and how to train their agents and promote a culture of “honesty.” The Ontario Court of Justice in Bray made it clear that agents of a principal can breach the duty of honesty. In that case, Ms. Johnson, the Director of Education for the College, was in charge of scheduling massage therapy instructors. Ms. Johnson’s decision to deceive Ms. Bray in multiple emails regarding the reasons for her dismissal was interpreted by the Court as a breach of the duty of honesty in contractual performance. Ms. Johnson may have initially thought she was benefitting her employer by hiding the real reason why Ms. Bray was being dismissed. However, this seemed to have backfired on the employer after the Ontario Superior Court of Justice awarded damages. Following the Bhasin decision, employers should take steps to train their employees in order to mitigate future risks.

III. Moving Forward: Future of Good Faith and Honesty

Despite the Supreme Court’s recognition of a general organizing principle of good faith in contractual performance, the role of good faith in Anglo-Canadian contract law is pale compared to some other jurisdictions. In the United States, for example, Section 1-304 of the Uniform Commercial Code provides, “[e]very contract or duty within the [Code] imposes an obligation of good faith in its performance and enforcement.”¹⁹¹191 Uniform Commercial Code 1-304 (2001). Likewise, the Civil Code of Quebec stretches the duty of good faith further by stating at Article 1375 that  “[t]he parties [to a contract] shall conduct themselves in good faith at the time the obligation is created and at the time it is performed or extinguished.”¹⁹²192 Civil Code of Québec, art 1375 [CCQ]. Accordingly, while the Supreme Court in Bhasin took  “two incremental steps”¹⁹³193 Bhasin, supra note 36, at para 33. forward on the law of good faith in Anglo-Canadian contract law, unlike the Uniform Commercial Code or the Civil Code of Quebec, it did not recognize a “general duty of good faith” in contractual performance. Rather, it only went as far as to recognize a “general organizing principle of good faith in contractual  performance”¹⁹⁴194 Id. at para 93. and one “manifestation”¹⁹⁵195 Id. of that principle, the “general duty of honesty in contractual performance.”¹⁹⁶196 Id. at para 73.  This  gives  the duty of good faith ample room to further evolve in Anglo-Canadian contract law, particularly in three ways: (1) imposing a general duty of good faith in contractual performance; (2) imposing a general duty of good faith during contract formation;¹⁹⁷197 See Larizza v Royal Bank of Canada, 2018 ONCA 632at para 14 (where the Ontario Court of Appeal recently stated that the duty of good faith applies in the context of the performance of the contract and not from the circumstances leading up to the formation of the contract).  and (3) developing new manifestations of the general organizing principle of good faith in contract performance.  While the reception of Bhasin has generally been mixed— with some calling the decision a missed opportunity— it may nevertheless serve as a catalyst for future growth in good faith doctrine.

IV. Conclusion

Punitive damages for pure breach of contract have undergone tremendous change under Anglo-Canadian contract law. While punitive damages for pure breach of contract were barred until the Vorvis decision in 1989, today punitive damages can be awarded for a variety of “actionable wrongs”, including breaches of good faith and honesty in performance. While Whiten created a stir by awarding Canada’s first $1 million award for breach of contract, punitive damages awards have remained relatively tamed compared to other common law jurisdictions.¹⁹⁸198 See generally John Y. Gotanda, Punitive Damages: A Comparative Analysis, 42 Colum J.Transnat’l L 391 (2004). 

Nevertheless, those critics who warned of an “Americanization” of Canadian contract law following the Whiten decision¹⁹⁹199 See Pliszka and Butler, supra note 1, at 2. may have been tested yet again by the Supreme Court’s decision in Bhasin. Under this decision, it would appear that a simple lie or misrepresentation could be grounds for finding an “independent actionable wrong” and awarding punitive damages.

Nevertheless, since Bhasin was rendered, only a handful of decisions have considered the duty of honesty for punitive damages, and of those decisions, almost all of them fall within existing categories of good faith at common law. Courts have been hesitant to award punitive damages for a breach of the duty of honesty in situations that have not previously recognized the existence of good faith.

Overall, courts are showing deference to the Supreme Court in Bhasin, where the Court cautioned, “[t]he application of the organizing principle of good faith… should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract.”²⁰⁰200 Bhasin, supra note 36, at para 66. However, in those cases where the duty has been applied for punitive damages, there remain serious issues that need to be addressed. First, because “dishonesty” already carries a negative connotation, some courts might be overlooking Whiten’s requirement to prove that the “dishonest misconduct” was high-handed, malicious, reprehensible, or outside of normal standards of decent behavior.

Second, courts are only showing modest consideration for how Whiten directed courts to quantify punitive damages. The Supreme Court in Whiten outlined ten recommendations for quantifying punitive damages, emphasizing, in particular, the need to identify clear objectives for punitive damages and to explain how the facts are connected to those objectives. Both decisions that awarded punitive damages for breach of the duty of honesty offered little justification for their damages. Without such justifications, awards in punitive damages appear to be nothing more than “palm tree justice.”

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