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The Bhasin crystal ball: predicting the future using Altantic Lottery Corp. Inc. v Babstock

8 minute read

There is much discussion about the Supreme Court of Canada’s recent decision in Atlantic Lottery Corp. Inc. v Babstock, 2020 SCC 19, in which the Court decided unanimously that “waiver of tort” is not a cause of action. (See, for example the blog of my colleague, Rebecca Shoom, “The Remedy Tail Can’t Wag the Liability Dog: SCC Brings Clarity to Gain-Based Remedies in Atlantic Lottery Corp. Inc. v Babstock).
However, the case also provides an intriguing “sneak peek” at what the Court may say about Bhasin v Hrynew, 2014 SCC 71, when that case is re-visited in CM Callow Inc. v Zollinger, 2018 ONCA 896, and Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd., 2019 BCCA 66 (to be heard together).

Basic facts and result in Atlantic Lottery Corp. Inc. v Babstock

Defendant Atlantic Lottery Corporation (“ALC”) approved the operation of video lottery terminal games (“VLTs”) in the province of Newfoundland and Labrador. The plaintiffs applied for certification of a class action against ALC, on behalf of every natural person resident in that province who paid to play VLTs over a defined period. The plaintiffs claimed that VLTs are inherently harmful, dangerous (because of a risk of addiction and suicidal ideation), and deceptive (because they give an inaccurate picture of the player’s level of control and the odds of winning). Relying upon three causes of action (waiver of tort, breach of contract, and unjust enrichment), the plaintiffs sought as a remedy the profit earned by ALC in licensing the VLTs. ALC moved to strike the claim on the ground that it disclosed no reasonable cause of action. At the same time, the plaintiffs moved for certification of their claim as a class action. The motion judge dismissed the motion to strike and granted certification. The Court of Appeal upheld the motion judge’s decision. The Supreme Court of Canada was divided 5 to 4. The majority allowed the appeal and struck all claims as disclosing no reasonable cause of action. The minority, dissenting in part, allowed the appeal, in part; it would have allowed the breach of contract claim to proceed and remain certified as a class action.

Alleged breach of the duty of good faith under contract

With respect to Bhasin principle, the plaintiffs in Atlantic Lottery Corp. Inc. v Babstock alleged in their statement of claim that ALC had breached an obligation of good faith owed to them under the alleged contract based upon the “vulnerability of the Plaintiffs”, “which requires the Defendant to consider the interests of the Plaintiffs as at least equal to its own and not to offer or supply an inherently dangerous service or product…” The alleged contract was not in writing and was therefore “implied”.

Before Bhasin, the duty of good faith contractual performance was recognized only in certain types of contracts (contracts requiring the cooperation of the parties to achieve the objectives of the contract, contracts that allow for the exercise by a party of contractual discretion, and where a contractual power is used to evade a contractual duty) and relationships (employment, insurance, franchise, and tendering contracts, for example).

Bhasin recognized a new “unifying principle” and found that “good faith contractual performance is a general organizing principle” of contract law. It imposed a new “duty to act honestly in the performance of contractual obligations”, which was intended to “bring a measure of coherence and predictability to the law and…bring [it] closer to what reasonable commercial parties would expect it to be”.

In one of my recent blogs (“Conduct Carrying a Stench: Bhasin and Bad Faith Contractual Performance”) I expressed the view that the application of Bhasin in the courts below has not led to the coherence and predictability that was intended by the Supreme Court of Canada. I noted that a determination of whether there has been a breach of the new duty may still depend upon how the court characterizes the type of contract at issue, even though Bhasin can be read in such a way as to impose the duty of good faith upon all contracts. Moreover, the type of conduct that constitutes bad faith contractual performance (which was deceit in Bhasin) remains unclear; some courts suggest that unreasonableness is sufficient and dishonesty is not required, and there is some support in Bhasin for this view.

The Supreme Court of Canada majority and dissenting decisions in Atlantic Lottery Corp. Inc. v Babstock reflect the differences in approach to the Bhasin principle taken by the lower courts.

Application of Bhasin v Hrynew

The Court considered the plaintiffs’ request for punitive damages in the context of their claim that the defendant breached an obligation of good faith owed to them under the alleged implied contract.

Brown J. (for the 5-judge majority) said the following about Bhasin at para. 65:
As this Court explained in Bhasin…., however, not every contract imposes actual good faith obligations on contracting parties. While good faith is an organizing principle of Canadian contract law, it manifests itself in specific circumstances. In particular, its application is generally confined to existing categories of contracts and obligations (para. 66). The alleged contract [in this case] does not fit within any of the established good faith categories. Nor did the plaintiffs advance any argument for expanding those recognized categories.

Karatatsanis J. (for the 4-judge dissent) said at paras. 132 to 134:
…[T]his Court in Bhasin v Hrynew…has recognized a duty of honest performance applicable to “all contracts as a ‘general doctrine of contract law’” (at paras. 74-75 and 93): parties “must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (para. 73). Bhasin was resolved on the basis of a breach of that duty alone.

The plaintiffs have pleaded a breach of the duty of honest performance recognized in Bhasin. They allege that the contractual relations [in this case] are subject to an implied term of good faith. In addition to this allegation, the pleadings are replete with allegations of dishonesty… In Bhasin itself, Cromwell J. recognized that allegations of dishonesty were sufficient to put the duty of honest performance in issue (para. 19).

Thus, I disagree with Brown J.’s conclusion that the alleged contract…does not give rise to an established duty of good faith. The plaintiffs have specifically pleaded punitive damages, as well as facts to justify such damages with sufficient particularity…. There is no reason to conclude that punitive damages are unavailable to these plaintiffs as a matter of law.

The Bhasin crystal ball

While it is risky to extrapolate and predict, in a few short paragraphs, how the Bhasin principles will be applied by the Court in future in CM Callow Inc. v Zollinger and Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd., it is also tempting.

The manner in which Karakatsanis J. articulated the duty, using specific language from Bhasin, suggests that some judges of the Court require a level of dishonesty, deceit, or conduct that misleads the plaintiff to constitute a breach of the duty of “honest performance” in contractual relations. That is very different from some decisions of lower courts which take other language from Bhasin to support a breach of duty where one party to the contract has acted “unreasonably”, “capriciously”, or “arbitrarily”. However, Atlantic Lottery Corp. Inc. v Babstock (like Bhasin) involved allegations of dishonesty so whether some lesser conduct would be sufficient to constitute a breach of the duty was irrelevant. Moreover Karakatsanis J., emphasized that this duty is applicable to “all contracts as a ‘general doctrine of contract law’”.

On the other hand, Brown J., for the majority, approached the issue from another perspective. He found that the duty is “generally confined to existing categories of contracts and obligations”. He would first inquire into whether the contract at issue falls into a category in which the duty of contractual good faith has already been recognized and, if not, he would have to be persuaded to expand those categories. Brown J. made no comment on the kind of conduct that would constitute a breach of the duty, but referred to it as a “good faith obligation”, which may set the bar lower than dishonesty.

These differences in approach could forecast a narrow split decision by the Court in CM Callow Inc. v Zollinger and Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd., but both suggest a narrower interpretation of the scope of the Bhasin duty than is found in some of the lower court decisions.

Lisa C. Munro, FCI.Arb, Q.Arb

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