SCC Cases and Business Ethics

This blog post is part of a series on “SCC Decisions and more” written by CIAJ’s collaborator James Hendry. Read all his posts here.

Business ethics were advanced recently by the Supreme Court of Canada

I want to examine a couple of cases from the Supreme Court of Canada that demonstrate a growth of ethical principles in contracts that underpin much of the economy. The Court very recently considered contractual ethics under the Civil Code of Quebec in Ponce just as it had earlier done for the common law in Bhasin. These cases show the kind of ethical leavening in the law like that produced by human rights legislation, the Charter and Indigenous law. Even the most selfish person has a principled interest in the happiness and fortunes of others wrote Adam Smith long ago in his Theory of Moral Sentiments before publishing his theory of capitalism in the Wealth of Nations.

In Ponce, two presidents of a group of three insurance companies bought up the shares of the companies and sold them to Industrial Inc., keeping the relevant information about the deal from the shareholders by papering it over with non-disclosure agreements. The presidents made a considerable profit. The problem was that the presidents and the shareholders were parties to a contract governing their relationship where they agreed to advance the business of the three companies, including potential sales, and providing the presidents with pay incentives.

The shareholders were unhappy. They claimed the failure to inform them of Industrial’s interest in their shares breached the Civil Code: article 1375 requiring the parties to a contract to conduct themselves in good faith for the duration of the contract and article 1434 binding the parties to their contract and incidental usage, equity or law.

The presidents said their duty was to their companies and not the shareholders. Withholding the information about the sale was just business.

Kasirer J for the Court held that the presidents’ failure to inform the shareholders was a breach of an implied term of the contract pursuant to article 1434, that related to its content. However, I want to focus on his more ethically important finding a breach of article 1375 requiring the parties to perform their contract in good faith enacted for all as a matter of contractual public order that establishes “a general attitude – even a state of being”. Kasirer J goes on to say that the Code’s statutory concept of good faith carries with it two duties. First, a prohibitive duty against dishonestly and unreasonably increasing the burden on the others and upsetting the equilibrium of the contract by failing to look out for the interests of the other parties. Second, a duty to proactively assist the other party, including a duty of providing information of mutual importance, to achieve mutual goals. These duties were contractual and did not rise to a mandatary’s duty created by a purpose subordinating their interests to those of the shareholders (comparable to a fiduciary duty at common law). The scope of the duty applied in this case flowed from its particular context: the presidents knew all about the deal, this information was important to the shareholders who were stonewalled but were entitled to expect it and could not find it out for themselves.

Accordingly, the Court returned the profit from the deal to the shareholders as contractual compensation for being blind-sided by the deal and not as a disgorgement of profits for breach of a mandatary’s duty.

A few years ago, the Court was moved to find that the common law required good faith in the honest performance of contractual obligations in Bhasin.

C marketed education savings plans through agents including B and H under contract renewable every three years. H sought to merge with B’s lucrative business but was refused. The Trial Judge found that C acted dishonestly with B: misleading him about its plan for merger with H and not communicating to B that it was working closely with H to restructure with H as its main agency. C placed H in a position to review the books of the agencies and refused to renew its contract with B when he refused to allow a review. B lost the value of his agency.

Cromwell J held that H and C breached their duty to perform their contracts honestly, a duty that would make the law more certain, accord with the reasonable expectations of the contracting parties, and provide justice to H.

He finds incoherence in the source of the ethical principle across the patchwork of categories of cases in which it had been found. But was it a matter of intention or a matter of law? The common law contains organising principles that are not necessarily freestanding rules but are instantiated in other more specific legal principles. The principle of good faith means a contracting party should consider the legitimate interests of the other party and not undermine them. Cromwell J uses the language of ethics: honest, candid, forthright, and reasonable performance.  Good faith here does not create a fiduciary duty. Cromwell J proposes the courts should draw on this organising principle incrementally to fill in the patchwork of existing good faith obligations to provide order and certainty in contract.

Cromwell J holds in this case that a duty of general honesty in performing contracts should be derived from the organising principle of good faith: a duty not to lie or mislead the other party. He states that honest performance is a general doctrine of contract law imposing a limit on freedom of contract, irrespective of contractual intent, that the parties are not free to exclude. He defends his choice of ethical principle by asking what reasonable person would expect their contract to be executed reasonably? He also notes that the duty of honest performance reflects the Quebec law and law of many US jurisdictions where it developed in the courts before being enacted, without impeding contractual stability.

At a time when businesses seek to increase profits increasing economic inequality, the Court has asserted and developed the ethical principle of good faith to ensure the parties at least get what they bargained for. The blank slate of contract law is not a common place to find ethical lines. But defining the obligation of good faith in these two cases protects the parties to a contract against unexpected or unknown unethical conduct. It goes some way to enforce Adam Smith’s view that even the most selfish person’s concern need to see the good fortune of others.

***Not for use as legal advice

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