New Law Protects Your Contracts

You think you have a binding contract and are carrying out your side of the bargain. But what if you find out the other side isn’t dealing with you in good faith – telling you one thing about your arrangement while doing something different behind your back? A recent decision from Canada’s top court has added important new safeguards to help protect you.

These safeguards require good faith performance of a contract, establishing this as a fundamental “organizing principle” underpinning our contract law.

The case involved a retail dealer’s contract with Abco (all names changed), a company that marketed education savings plans through dealers. Dealers were assigned certain markets and had to engage their own sales people to sell the plans.

Mike and Brian were two such dealers and business competitors. Mike had built up his business over ten years in a lucrative niche market and Brian badly wanted to take it over. When Mike rejected repeated merger proposals from Brian, Brian got Abco involved, threatening to quit if Abco didn’t help him get hold of Mike’s business.

Abco had regulatory troubles and used these as a pretext to try and get Mike to open up his books for inspection to Brian, whom it appointed as a compliance monitor for the regulator. When Mike refused and pointed to Brian’s conflict of interest (being a competitor of Mike’s), Abco falsely told him Brian would have to treat the information as confidential.

Unbeknownst to Mike, Abco also restructured its organization to, in effect, put Brian in charge of Mike’s business. But when Mike got wind of this and asked whether the restructuring was final and a “done deal,” Abco said no, even though this was untrue – it had already presented the reorganization to the regulator.

Mike’s contract with Abco allowed Abco to end its three-year, automatically renewable commercial dealership contract with Mike on six months’ notice. Abco chose to end Mike’s contract. This resulted in most of Mike’s sales force being wooed by and joining Brian, allowing Brian to effectively expropriate Mike’s business without compensation. Mike sued, and ultimately won against Abco.

One of the specific duties flowing from the overarching principle requiring good faith performance of a contract is a duty not to lie or mislead the other party to the contract, said the court. Because Abco had breached that duty (which meant Mike couldn’t take steps to protect his business), Abco was liable to Mike and had to compensate him for the loss of his business, to the tune of some $87,000.

This is one of the most important contract law decisions from our top court in many years. For the first time, “good faith” performance is now recognized as a standard underlying all contracts. The duty not to lie or mislead the other side to a contract (or be held responsible for the consequences) is just one example of what it stands for. It gives our judges a flexible new tool to ensure that contracting parties deal fairly with each other.

Written by Janice and George Mucalov, LL.B.s with contribution by COBBETT & COTTON. This column provides information only and must not be relied on for legal advice. Please contact COBBETT & COTTON for legal advice concerning your particular case. Names of the parties in reported cases have been changed or removed to protect their identity. Lawyer Janice Mucalov is an award-winning legal writer. “You and the Law” is a registered trade-mark. ©Janice and George Mucalov.

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