The Trouble with Tort: Why Deception in Bhasin Cannot Presently Be Deceit

I. Introduction

In an earlier piece I set out to critique the Supreme Court of Canada’s decision in Bhasin v. Hrynew and to propose an alternative explanation for what the decision means.^[1] My principal tasks in doing so were to explain what the Court’s new “duty of honest performance” (“DHP”) achieved in that case, and whether there is a better way to attain the same end; or a better way to understand how the SCC attained that end. My efforts in that piece culminated with a proposal to reformulate DHP as “promissory” estoppel as it has developed in Australia, on the basis that it provides a solution that is both more workable and more consistent with the existing framework of Anglo-Canadian private law than the Court’s own. In this paper, I will consider the tort of deceit and will focus upon the one aspect that I argue renders it presently inapplicable to cases like Bhasin before suggesting how it might be changed, either through a broadening of the existing tort or the recognition of a new one.

II. What Happened in Bhasin?

In order to make the theoretical discussion of Bhasin intelligible for readers who are not intimately familiar with the facts of the case, or my earlier paper, a summary of the facts and outcome is in order. As such, I offer the following truncated explanation from my earlier article.

The parties to the Bhasin case included the plaintiff Harish Bhasin (carrying on business as Bhasin & Associates), and the defendants Larry Hrynew and Heritage Education Funds Inc. (formerly known as Allianz Education Funds Inc., formerly known as Canadian American Financial Corp. (Canada) Limited) (“Can-Am”).^[2]

Can-Am’s business was the marketing of education savings plans through retail dealers, known as enrolment directors, such as Bhasin.^[3] Enrolment directors working under Can-Am were effectively small business owners and not unlike franchisees.^[4] Unfortunately for Bhasin, enrolment directors such as Bhasin were not in fact franchisees under their contract with Can-Am, or otherwise for the purposes of Alberta law.^[5] An enrolment director’s agreement entered into on November 4, 1998 governed the relationship between Bhasin and Can-Am.^[6] The agreement was for an initial term of three years, with automatic renewal, unless either party gave written notice of termination at least six months prior to the renewal date.^[7] Such a termination notice was given to Bhasin by Can-Am on May 4, 2001, which was exactly six months prior to the expiry of the then extant agreement—effectively the last possible moment.^[8] Although termination on notice was expressly permitted by the parties’ agreement, the circumstances surrounding the termination, and Can-Am’s behaviour in the lead up in particular, motivated Bhasin to allege that the termination was wrongful and to bring suit.

The crux of the dispute between Bhasin and Can-Am related to the way in which Can-Am represented certain matters relating to another enrolment director, and large competitor of Bhasin, namely Hrynew. Hrynew’s agency enjoyed a very strong market position as the largest agency of its kind in Alberta, as well as a very positive relationship with the Alberta Securities Commission i.e. the regulator that oversaw the operations of firms like Can-Am.^[9] In the lead up to Can-Am’s notice of termination, Hrynew used its position to pressure Can-Am into compelling a merger between his firm and Bhasin’s.^[10] Bhasin for his part had consistently indicated to both Can-Am and Hrynew that he was unwilling to merge his agency with Hrynew’s.^[11] The refusal aside though, Bhasin understood that Can-Am might attempt to force the issue of a merger, and in August 2000 asked Can-Am whether a merger would be required.^[12] To quote the Supreme Court decision, Can-Am’s response to Bhasin’s enquiry was “equivocal”, and no indication was given that Can-Am and Hrynew had decided that such a “takeover” of Bhasin’s business would take place.^[13] As a result, the termination notice came as a surprise to Bhasin when it was finally delivered. The result of this unexpected termination was a rather sharp change of fortunes for Bhasin. Left facing the impending loss of the ability to continue marketing and selling the products that his business was built on, and little time to adjust to the new reality, Bhasin wound up losing the entire value of his business.^[14] Most of his employees elected to leave Bhasin’s agency and to join Hyrnew’s, which effectively resulted in the takeover that Hrynew had sought.^[15]

After the demise of his business, Bhasin commenced an action against Can-Am alleging that Can-Am violated an implied duty of good faith in their agreement.^[16] This argument ultimately failed, but as we know, the Supreme Court of Canada ultimately found for Bhasin on the basis of the new duty of honest performance in contract.

III. Why DHP is a Poor Fit as a Contract Doctrine

In the introduction to this paper I alluded to the concern that inspired me to tackle the issues raised in Bhasin, which is primarily DHP’s lack of fit with the law of contract. As such, the basis of my objection bears some explanation given that it is also my principal reason for suggesting that some alternative is necessary. Since I have already canvassed this issue in some detail in my earlier paper, however, I will confine myself to brief remarks and refer readers to the first paper for a more fulsome treatment.^[17]

The first obstacle to the inclusion of DHP within the larger structure of contract doctrine is the fact that there is quite simply no such thing as an extra-contractual contractual duty. Indeed, it seems nigh on oxymoronic to suggest otherwise, prior experiments with the idea notwithstanding.^[18] Nomenclature aside though, a second, and more pressing reason, unique to DHP, is the SCC’s statements in Bhasin to the effect that DHP is effectively immune to the parties’ contract.^[19] That is to say that according to the SCC, DHP cannot be excluded by the parties, or significantly modified, which by necessary implication also means that DHP is apt to undermine the entirety of the parties’ allocation of rights, responsibilities, and risk because it may flatly conflict with, and prevail over, the parties actual contract.^[20]

I note that some may object that the concerns listed above are overblown on the basis that other doctrines can already alter the parties agreed upon allocation of rights, responsibilities, and risks—and that the interference may not be so significant in practice.^[21] To respond to such an objection, I would point out that those existing doctrines that presently operate to modify contracts, whether whole or in part, do so in a largely suspensory or negative way.^[22] That is to say that they limit or undo obligations. They do not create them, which makes DHP a very different construct, because it creates a positive obligation where none would otherwise exist, and where the parties may have agreed that none should exist. Bhasin itself is a case in point in this regard because as noted above, the parties had agreed to the notice required for non-renewal of their agreement, but DHP effectively required notice as at the time that Bhasin made his enquiry. In the circumstances of Bhasin’s case, this changed amounted to approximately nine additional months of notice.^[23] I note that this change may not seem like much to some, but I must stress that by agreeing to a specific notice period, the parties effectively agreed that there was no earlier obligation to provide notice, or an effective right to withhold information, and, in the circumstances of Bhasin, DHP effectively permitted Bhasin to unilaterally set that part of their agreement aside.

My criticisms above withstanding, I must emphasise that I do not purport to challenge the outcome in Bhasin in this article. My quarrel instead, if it is not plain, is the way in which that outcome was supposedly reached. Those who have read the decision closely will know that it raises many questions as to the ambit and operation of DHP while providing few answers, and of those answers provided, most, as I indicate above, are unsatisfactory. That is the gist of my complaint. It is of course not where this piece ends, because as mentioned I do agree that the outcome of Bhasin was justifiable. I simply disagree with the SCC as to how it can be justified. In my opinion either equity, as I have explained, or tort, as I will begin to explain below, could provide superior explanations because they, unlike DHP as it is currently, do not immediately face the challenge of explaining how parties may seemingly reprobate and approbate their contract simultaneously or “have their cake, and eat it too.”

IV. How DHP Can be Understood in Terms of Deceit

As noted in the introduction, my intention in this portion of the paper is to explain how deceit falls short of being able to address the circumstances of Bhasin despite its apparent applicability, and how it may nonetheless be made fit for purpose by way of either amendment or the development of a new action in a similar vein. To do so I will first explain the nature of this present deficiency in deceit, before then explaining how it might be overcome in order for deceit or a narrower related tort action to address the peculiar problem of loss apparently inflicted as of right.

A. The Applicability of Deceit Simpliciter

The modern law of deceit is usually traced to the House of Lords’ decision in Derry v. Peek.^[24] In Derry, Lord Herschell laid down a four-part test that has been followed ever since, although it has been variously expressed with some differences in wording that may or may not indicate conscious or intentional changes in meaning.^[25] For present purposes, the definition offered by Klar will be taken as the starting point for discussion. I hasten to add though, that other and further authorities also bear consideration in order to fully elucidate the requirements of “the test”, and these should be considered as part and parcel of any application. Remaining with Klar for the moment, the four elements that must be proved by the plaintiff in order to make out the cause of action are that:^[26]

1. a false representation or statement was made by the defendant;

2. which was knowingly false;

3. was made with the intention to deceive the plaintiff, and;

4. which materially induced the plaintiff to act, resulting in damage.

From the foregoing, one could conclude that the purpose of deceit is to protect innocent parties from the intentional infliction of loss arising from knowing deception by a tortfeasor. In my view, this can also be said of the SCC’s approach in Bhasin with respect to its application of DHP. It must be said that the Court’s analysis does not make this explicit, and in some respects denies it, and some work must be done in order to make this apparent. Thus, similar to the way in which I approached promissory estoppel in the first article, some work is likely needed in order to explain how Bhasin can be better understood as falling within the sphere of deceit by explaining how the facts of Bhasin satisfy the test quoted above. For present purposes however, a full recount of Bhasin’s circumstances in satisfaction of each of the first three elements is perhaps excessive owing to constraints on space. As such, at the present moment I will instead focus on the fourth element of the test above, which is the point at which deceit’s applicability comes into doubt, and ask the reader for the sake of argument to accept that the first three elements are or could be satisfied until I may revisit the issue at a later date.^[27]

As readers will have noticed, both action and damage must be present in order for this last element to be satisfied. I note that the former component of “action” may appear a little dubious in the circumstances of Bhasin because the point of Can-Am’s deception was to lull Bhasin into inaction, which it did. There is no reason in principle as to why a conscious omission cannot satisfy this requirement though, and indeed other cases have found that very thing.^[28] As such, it appears that Bhasin’s inaction on the faith of Can-Am’s misleading “equivocal” response and the loss he suffered subsequent to that inaction, would satisfy this aspect of the fourth requirement.

Prima facie, the latter component of “damage” appears more obviously made out in Bhasin than “action”, given that Bhasin clearly suffered a significant financial loss as a result of losing his business. However, as I will discuss in greater detail below, this is precisely the point at which deceit, and perhaps any other tort must run into difficulty in application, because there is reason to question whether Bhasin’s change in fortune can be recognized in law, or at least in tort, as “damage” at all. The reason for this uncertainty is the fact that “damage” generally implies some deterioration in the plaintiff’s “dominium”^[29] which presupposes the recognition of the relevant alleged interest as forming a part of a party’s dominium, and, an absence of justification or basis for the change brought about. Neither of which appear present in Bhasin , because of the fact that Can-Am did at least arguably have the right (i.e. a lawful basis) to perform the act that triggered Bhasin’s reversal of fortunes under the parties’ contract, which seems to imply by necessary implication that Bhasin cannot have had any cognizable “right” or “interest” to the contrary.^[30] Although, this perspective can also be challenged on the basis that it rests on an assumption as to what detriment we are considering when we talk about the “damage” suffered in Bhasin, and what damage and cause mean in in the context of deceit more generally. All of that being said, it is possible, on some view of damage and causation, that a qualifying loss can be said to have occurred in Bhasin.^[31] Whether one chooses to say that it did or did not occur, very much depends on whether one thinks that a case such as Bhasin is best dealt with through a wider understanding of deceit, or a novel action of a narrower scope. This, is I would suggest is ultimately for the reader to decide, and as such I will venture only the lawyer’s answer to the question of whether or not the “loss” component of this part of the test for deceit is met, which is to say that it depends. What I will say definitively however, as alluded to in the introduction, is that some reimagining or reconceptualization is necessary in either instance.

1. What does deceit mean by “damage”?

To understand how the concept of “damage” employed by deceit may not reflect or encompass the type of “harm” suffered by Bhasin and may thus presently preclude deceit from responding to cases like Bhasin, it is helpful to first understand what damages in deceit are awarded for. In short, it is apparent that damages for deceit are awarded for the deterioration in the plaintiff’s dominium, broadly speaking, that would not have occurred but for the defendant’s deception, and this extends arguably to any and all deleterious consequences arising given the rejection of remoteness in the assessment of damages on the case.^[32] On its face, I would imagine that this appears clear enough, and not obviously incompatible with a claim like Bhasin’s. Such inconsistency as there is can be highlighted by way of contrast between damages for deceit and remedies available for fraudulent misrepresentation.

In one sense it is apt to say that fraudulent misrepresentation and deceit are on all fours, or almost identical. The sense in which this is true, is that in so far as “tests” go they are both apt to respond to almost identical facts.^[33] As such, the gap between them can best be described as narrow, and in many cases perhaps irrelevant, but for present purposes I argue it is instructive. Readers will likely know that fraudulent misrepresentation and deceit differ in that deceit will sound in damages while the principle remedy for all species of misrepresentation is rescission.^[34] Readers may also recall the maxim of Lord Denning, that “…fraud unravels everything”, and that in so far as any contract has been procured by fraud, it is liable to be set aside.^[35] Furthermore, one should note that this is so irrespective of whether or not there is in fact anything objectionable in the contract itself, or whether it would have any deleterious effect on the plaintiff’s circumstances.^[36] It is simply enough that the plaintiff would not have wanted it, and this marks out a significant difference as between deceit and fraudulent misrepresentation because it is apparent that while fraudulent misrepresentation, within the ambit of its remedy, acts to undo deception, deceit only acts to undo the deleterious consequences thereof. Thus, it is clear that where there is no “damage”, deceit does not respond. ^[37] As such, no remedy in deceit could for instance be awarded if the consequence of deception was a contract that was no better or worse financially than expected.

If it is not yet apparent, I believe that the upshot of the above conclusion will become clearer in the following section. Before moving on however, I wish to state plainly what it is that I believe the foregoing tends to show. This is that the mischief targeted by deceit, or at least the mischief to which it responds, is not the mere fact of any change of position as a consequence of fraud, but instead only those changes which match its concept of damage, which must mean by necessary implication that not all fraud or deception is actionable in deceit. At least, that is, as it stands presently, and irrespective of how far the deception involved may go towards satisfying the understood test otherwise.

2. Why “damage” in deceit may NOT reflect the harm done in Bhasin

The concept of damage in tort, and by extension deceit, is not often explicitly defined. Perhaps because there is often little need; most lawyers and laymen alike perhaps define damage simply by knowing it when they see it. At times like the present, the notion bears some unpacking, and there is, I think, no better proposition from which to start than to say that “damage” entails a worsening in the plaintiff’s circumstances.^[38] However, just as deceit will not award damages for an unobjectionable contract or other unobjectionable change of position, we must acknowledge that not all changes in circumstance fall within the ambit of damage in relation to any given tort or tort in general.^[39] Take for instance the case of a landowner who ceases to allow the public to cross his land for free. Any member of the public who might have crossed the land otherwise is worse off than before, but no claim lies for them to pursue. So, we must ask, what “worsening” matters— what “harm” counts as harm? The answer it would seem is only that “worsening” that amounts to a diminution in the victim’s dominium or their use and enjoyment thereof. A person’s dominium here broadly understood as the sum of all rights and interests recognized by law as in their hands,^[40] although vindication of any infringement of one’s dominium must it seems be limited to some extent according to the body of law that gives rise to, or recognizes, the right in question, and thus damage for the purposes of tort must be that interference with or diminution of those rights and interests capable of recognition in tort.^[41]

If the foregoing is correct, and some negative interference with the cognizable “rights” of a victim is the essential core of ‘damage’ in tort one can see, as I will demonstrate, that neither the “worsening” in Bhasin’s circumstances nor the monetary award made by the SCC fit within this paradigm. Starting first with the harm to Bhasin, it is difficult to see, as I have alluded to above, where exactly an infringement of a right cognizable in tort that was sufficient to constitute “damage” occurred. Remembering of course, that Bhasin’s contractual entitlement to notice of cancellation was only to six months’ notice prior to the date of (automatic) renewal, not the 15 months that Bhasin would have had if Can-Am had answered honestly when approached by Bhasin in August 2000. Of course, one might argue that the six months’ notice requirement did not necessarily occupy the field so as to preclude any earlier entitlement to notice. However, it is difficult to explain how any such right (sufficient to ground a tort action) could arise at law^[42] because it would conflict with the terms of the parties’ then extant agreement, and the apparent obstacle that, by necessary implication, a minimum notice requirement itself ought to preclude any right to earlier notice than that prescribed. To cast the situation in Hohfeldian terms, one could accurately saythat Bhasin was in a position of “No Right” vis-à-vis Can-Am under the parties’ contract with respect to earlier notice, and further, that short of contractual variation it does not appear possible for this to have changed.^[43] If this is correct, then the question as to “what diminution of Bhasin’s dominium occurred as a consequence of Can-Am’s apparent deception?” must be answered: none.

Given the apparent absence of an infringement sufficient to constitute damage it is consequently also difficult to see what there was for a damages award in deceit to respond to in Bhasin’s case, or how the award in Bhasin could be explained as being consistent with a remedy appropriate to deceit. Although the remedy, which amounted to damages equal to the amount of loss that Bhasin could have avoided with earlier notice, is consistent with the deprivation of earlier notice, it is frankly illogical to make that case if Bhasin is acknowledged to have had no right to said notice before it was delivered on May 3, 2001.^[44] Thus, it must be said that if there was mischief for which damages were the appropriate response in Bhasin, it is clear that they could not arguably have been provided pursuant to deceit. At least, that is, as it stands now.

B. The Possibility of an Alternative

As mentioned at the outset of this paper, an avenue around the present inapplicability of deceit to circumstances such as Bhasin’s is open and could occur either within the context of deceit or through the development of a new nominate tort.^[45] Either development must overcome two present aspects of deceit that render it currently inapplicable. These are, of course, the paradigm of damage which as discussed, must exclude the harm suffered by Bhasin from the scope of potential compensation, and the related issue of cause. I note that I have not traversed the issue of cause in detail above as I have the issue of “damage” owing in part to constraints of space. However, it can be said in short that a “but for” approach to causation must struggle in some respects when confronted with the total loss of Bhasin’s business, which would have been suffered in any event owing to the rightful cancellation of Bhasin’s contract by Can-Am. Further, even the more limited loss said to arise as a consequence of only having six months’ notice of termination and not the uncontracted for 15 months effectively claimed, runs afoul of a causation conundrum because Can-Am’s deception only encouraged Bhasin to continue on the path he would have likely taken even if he had not made his enquiry. Again, an enquiry for information that Bhasin had no right to, and information that furthermore could have rightfully changed even moments later if Can-Am had subsequently changed its mind in favour of cancellation.^[46]

This causation issue—though vexing within the present framework for deceit—is perhaps avoided if one takes an alternative perspective on the nature of the “harm” to Bhasin. Quite simply, if tort is to respond to such circumstances it must respond to something other than damage or loss that can be inflicted as of right, and which by necessary implication, cannot be seen as damage or loss in tort at all. Particularly so where, as in Bhasin’s case, such losses has arisen pursuant to a contract. The alternative to this is to look instead to what the injured party has been encouraged to give up, undertake, or endure, and to ask whether, by reference to the least onerous method of performance available, the alleged tortfeasor has obtained more than they were entitled to pursuant to the parties’ contract. If this is done, then an injured party such as Bhasin who had most likely been deceived in order to procure his continuing efforts to effectively run and grow his business may point to the fact of any effort over a contractual minimum, and to seek redress for having provided it following a deceptive act. I note that even if accepted, this approach raises two pressing questions before any such approach could be pressed into service. The first pertains to the limits of recovery and when it is that such “additional hardships” ought to be recoverable, and the second pertains to how any remedy for such ought to be assessed. The answer to the first question ultimately depends on the form of action used to obtain the remedy: or in other words the test of liability. As noted at the outset, this alternative approach to damage could be introduced either by way of an amendment or broadening of the concept of damage in deceit itself, or by way of introducing a new nominate tort whose raison d’être is the amelioration of this specific harm. The respective pros and cons of either approach are worthy of fulsome consideration, as well as what the parameters of any specific new nominate tort ought to be. These will however have to wait till a later day and fuller piece which I hope to pursue in the near future. As such, all I would say for the moment is that either is possible and the reader is welcome to consider which approach it is they think would be best.

To return to the second question as to the assessment of remedy, I note that given the breadth of the concept of hardship I have suggested above, which could be described as being akin perhaps to any “detrimental reliance” upon the deception, the development of a precise formula for assessment is likely to be difficult. It is also likely to depend on the parameters of the cause of action itself as the “right” embodied therein ought to be reflected in the remedy given, teleologically speaking. To speak generally it would seem appropriate for the remedy provided in respect of any harm to be assessed with a view to the opportunity cost of the behaviour encouraged by the tortfeasor.^[47] This no doubt seems also somewhat obtuse, but to take the most pertinent example, in Bhasin’s case it would seem that the opportunity cost of continuing to proactively steward and grow a given business must be the opportunity to have to done the same vis-à-vis some other enterprise, or to extract himself as far as possible from his present business with Can-Am to realize the capital value of the same. Fortuitously one could conclude that the SCC’s actual award of $87,000 in Bhasin is in fact justified on the footing that as the portion of loss that could have been saved by Bhasin, it represents an obvious opportunity cost of pressing onward with his business on the encouraged understanding that his contract would be renewed and said business thus continue. This also appears to circumvent the issue as to “cause” because, given that we are here concerned not with the fact of cancellation, but the efforts prior to it, it ought not matter that Can-Am had the right to cancel their contract because what is in question is the right to the other and greater efforts over the contractual minimum that Can-Am intentionally encouraged and for which Can-Am can justifiably be held responsible given its failing to otherwise correct its deceitful representations and dissembling.

V. Conclusion

What I have tried to demonstrate in this paper is the potential for a tortious solution to the problem of cases like Bhasin, and the problem that DHP was perhaps intended to address, but that it will take some novel redevelopment of tort doctrine if it is to be achieved. Should this occur though, I believe that tort, like promissory estoppel, could provide a superior solution to this issue as compared with DHP. The reasons for DHP’s rejection being fairly clear given the challenges to recognizing such a development as part and parcel of the wider framework of contract are too significant to ignore. Doubtless, there is much more work that must be done in order to adequately make the case for a novel tort doctrine in its place, including the proposal of a proper test and standard for the imposition of liability, but, in the meantime, we perhaps have food for thought.