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June 1, 2015 Vol. 70 No. 10 Back to Bulletin Main Page

CANADA: Supreme Court Recognition of Duty of Honest Contractual Performance Impacts IP License Agreements

The Supreme Court of Canada recently recognized a duty of honest contractual performance in Bhasin v. Hrynew, 2014 SCC 71, a contract dispute. While the subject matter of the contract at issue in Bhasin did not concern IP, the decision has implications for all contracts, including IP license agreements.

Prior to the decision in Bhasin, Canadian law was divided on whether contracting parties were required to discharge their contractual obligations honestly or whether the principle of good faith and duty to perform contracts honestly only applied to specific types of contracts, such as employment agreements. The Supreme Court’s ruling in Bhasin recognizes that a duty of honest performance applies to all contracts. The duty requires parties to be honest and not knowingly mislead each other in relation to the performance of their respective contractual obligations. The parties cannot contract out of the duty.

The Bhasin case concerned a renewable contract and therefore is particularly applicable to trademark licenses with renewal terms. Bhasin was a dealer of educational savings plans (ESPs) provided by Canadian American Financial Corp (Can-Am). Bhasin and Can-Am had a dealership contract with a three-year term that would automatically renew unless written notice of non-renewal was provided six months before the end of the contract’s term. Can-Am wanted to restructure its business and repeatedly misled Bhasin about issues regarding its business. Can-Am then threatened to terminate the agreement. Subsequently, Can-Am gave notice of non-renewal to Bhasin.

Bhasin lost the value of his business because the ESPs were no longer available to him once the contract ended. The Court found for Bhasin, assessing damages in the amount of the value of Bhasin’s business at the time the contract was terminated.

Practice Tips
The Bhasin decision applies to trademark license agreements, and particularly to circumstances where the licensee could lose access to authorized use of the licensed trademark and consequently its ability to operate its business. Therefore, trademark licensors must be careful to act honestly and not lie or knowingly mislead; otherwise, they may be liable for damages based on the business value lost in addition to other remedies that may be available to the licensee. Conversely, licensees must also act honestly, e.g., by accurately reporting royalties owed to the licensor; otherwise, they could be found in breach of the duty as well as in breach of their royalty reporting and other obligations under the license.

Although every effort has been made to verify the accuracy of items in the INTA Bulletin, readers are urged to check independently on matters of specific concern or interest.

© 2015 International Trademark Association