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

• Author: Flaczyk, Conrad

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." (1) 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, (2) they are generally larger and more common than ever before. (3)

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. (4) Indeed, Canada has historically embraced the House of Lords' cautious and piecemeal approach for awarding punitive damages in civil cases. (5) For example, in Rookes v Barnard (1964), (6) 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." (7) 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;" (8) 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." (9) In early English cases, punitive damages for pure breach of contract were typically considered "beyond the pale." (10)

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]. (11) 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." (12) 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;" (13) and second, the alleged conduct deserved to be punished because of its "harsh, vindictive, reprehensible and malicious nature." (14)

Unfortunately, McIntyre J.'s use of the expression "actionable wrong" had "plagued [the] reasoning in lower courts" (15) since it was unclear whether the Court intended to depart from an "actionable tort" standard. (16) 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. (17) 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 plaintiff (18)... [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. (19) The availability of punitive damages for pure breach of contract was revisited by the Supreme Court of Canada in Whiten v Pilot Insurance [Whiten]. (20) 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." (21) 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." (22) 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. (23) Moreover, it reaffirms the test set out in Vorvis: (1) apart from the breach sued upon, did the defendant commit an "independent actionable wrong;" (24) and (2) if yes, was the defendant's "conduct so reprehensible and high-handed that he should be punished for his behaviour." (25)

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" (26) of Anglo-Canadian remedies. (27) 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. (28)

This increased to $800,000 with the Supreme Court of Canada's decision in Hill v Church of Scientology of Toronto in 1995. (29) 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." (30) 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." (31) 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." (32) Although punitive damages have a "long-established existence in Anglo-Canadian jurisprudence", (33) they have historically been limited to specific "categories of cases" (34) (as described by Lord Devlin in Rookes v Barnard and reiterated by McIntyre J.'s description, "neat classification of remedies"). (35) 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." (36) 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." (37) These situations are characteristic of what the common law refers to as uberrima fides contracts, or contracts "requiring the utmost good faith". (38) 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." (39) Thus, punitive damages for breach of good faith have typically been limited to certain contracts.

However, the law on punitive damages was potentially (40) transformed yet again by the Supreme Court of Canada's decision in Bhasin v Hrynew [Bhasin]. (41) In what has been called, "perhaps the most important contract decision of the past 20 years," (42) the Supreme Court took "two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just." (43) The Court made an unprecedented decision to recognize "a general organizing principle of good faith" (44) in contractual performance and a specific "manifestation" (45) of that principle--the "general duty of honesty in contractual performance." (46) 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...