A long-running investment industry dispute has resulted in a landmark judicial ruling that establishes a new duty of honesty between contracting parties.
The Supreme Court of Canada‘s (SCC) decision in Bhasin v. Hrynew does not represent a sweeping cultural shift in the wealth advisory industry, says Cynthia Spry, partner with Babin Bessner Spry LLP, a Toronto-based law firm. However, she adds, the ruling will be very important for commercial contracts in the industry: “Companies should carefully consider this case when dealing with their agents or advisors.”
In Bhasin v. Hrynew, the SCC ruled that Toronto-based Heritage Education Funds Inc., (formerly known as Canadian American Financial Corp., or Can-Am) breached that duty of honesty in its dealings with one of its former “enrolment directors,” Heritage’s term for retail dealers.
Echoing the country’s highest court, Spry says, the decision imposes “incremental” but significant change in the law governing the reasonable expectations of contracting parties. As a result of the SCC’s decision, contracting parties can continue to act in their own self-interest, but they can’t lie or mislead the other party while doing so. “Lying or cheating in your contractual performance is expressly prohibited,” says Spry.
The facts in the Bhasin v. Hrynew case began in 1998, when Harish Bhasin signed an enrolment director agreement with Can-Am to help to develop Can-Am’s business selling registered education savings plans (RESPs). The contract had a three-year term, which was to be automatically renewed unless either party gave six month’s written notice of termination.
Bhasin went on to build a successful business within a niche market comprising clients of South Asian descent in Alberta, and became one of the Can-Am’s top producers. But trouble began to brew for Bhasin when the company developed other plans.
Larry Hrynew, who also worked under the Can-Am umbrella and was a competitor of Bhasin’s, decided to go after Bhasin’s book of business. Hrynew’s RESP agency was the largest in Alberta, and thus a strong position with Can-Am.
Hrynew made repeated overtures to Bhasin in pursuit of a merger, but Bhasin consistently refused and animosity between them grew. The SCC decision says: “[Hrynew] also actively encouraged Can-Am to force the merger and made ‘veiled threats’ that he would leave if no merger took place…. The trial judge found that the proposed ‘merger’ was in effect a hostile takeover of Mr. Bhasin’s agency by Mr. Hrynew.”
Matters were complicated by the Alberta Securities Commission (ASC), which raised compliance concerns with Can-Am about its business. The ASC required Can-Am to appoint a provincial trading officer (PTO) to review the firm’s practices. Can-Am chose Hrynew, who thus gained the power to audit the records of other Can-Am dealers.
During Can-Am’s discussions with the ASC, it became clear that Can-Am was considering restructuring its agencies in Alberta, including requiring Bhasin and his team to work for Hrynew’s agency. But when Bhasin asked Can-Am about the proposed merger, the firm did not provide him with clear answers.
Can-Am repeatedly misled Bhasin about Hrynew’s role as a PTO, telling Bhasin that Hrynew was under an obligation to treat any information provided by Bhasin to Hrynew as confidential, separate from Hrynew’s own business. However, no such requirement of confidentiality existed.
When Bhasin continued to refuse to allow Hrynew to audit his records in the latter’s capacity as PTO, Can-Am threatened to terminate the 1998 agreement with Bhasin, finally giving notice of non-renewal in May 2001. As a result, Bhasin lost his business, and the sales team he had built up went to work for Hrynew.
Bhasin sued Hrynew and Can-Am; he won against Can-Am, both at trial and at the SCC. However, regarding Hrynew, the SCC noted: “The trial judge specifically found that Mr. Hrynew did not encourage Can-Am to act dishonestly in its dealings with Mr. Bhasin and that Can-Am’s dishonest conduct was not fairly attributable to Mr. Hrynew…. It follows that Mr. Hrynew did not induce Can-Am’s breach of its contractual duty of honest performance.”
In outlining the new requirement of honesty in contractual dealings, Justice Thomas Cromwell of the SCC explained that the common law regarding good faith in contractual performance has been “piecemeal.” The SCC judgment provides what Cromwell calls “incremental steps” to ensure that in the future, good faith will be a “general principle … which underpins … and recognizes obligations of good faith contractual performance.”
In addition, those steps now include a duty to act honestly in contractual performance. This duty does not mean that one party to a contract cannot breach the contract if it’s economically efficient for that party to do so, says Spry. Doing so is allowed under common law, she says, although such action may result in a damages award. What is not allowed now, as Cromwell states, is that parties to a contract “must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”
The Bhasin v. Hrynew case sets an example for the wealth advisory industry, clearly stating that parties with this type of sales structure, common within the industry, must act honestly in their dealings with each other.
David Christianson, principal with the Christianson Wealth Advisors team (which operates under the National Bank Financial Ltd. banner) in Winnipeg and author of The Structure of the Client-Centred Practice, notes that good faith in contractual performance is equivalent to the duty that financial advisors already owe to their clients: “We have to make sure the clients understand everything, which is the opposite of withholding information. [Not doing so] would be analogous to knowingly operating in bad faith in contract law.”
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