Not Just the Best Policy, but Now the Law: The Impact of the Duty of Honest Contractual Performance on Intellectual Property License Agreements
The Supreme Court of Canada recently decided a contractual dispute, Bhasin v. Hrynew, involving businesses selling educational savings plans (ESPs). In doing so, the Court recognized a duty of honest contractual performance. While the Bhasin decision did not concern intellectual property, the Court’s ruling has implications for all contracts, including intellectual property (IP) licensing agreements.
Previously, Canadian law was divided as to whether parties to a contract were required to discharge their contractual obligations honestly or whether the duty of good faith only applied to specific types of contracts, e.g. employment agreements. The Supreme Court’s ruling in Bhasin recognizes that a duty of honest performance applies to all contracts. This duty requires parties to be honest and reasonable with each other regarding the performance of their respective contractual obligations, and prohibits conduct that is capricious or arbitrary. The parties cannot agree to contract out of this duty.
The Bhasin case is particularly applicable to renewable IP licenses because it concerned a renewable contract. Bhasin was a dealer of ESPs provided by Canadian American Financial Corp (Can-Am). Bhasin and Can-Am had a dealership contract with a three (3) year term that would automatically renew in the absence of six (6) months written notice that the contract would not renew. Can-Am wanted to restructure its business and repeatedly mislead Bhasin about issues regarding the business. Can-Am then threatened to terminate the agreement and subsequently gave notice of non-renewal to Bhasin.
Bhasin lost the value of his business because the ESPs were no longer unavailable from Can-Am. The Court found for Bhasin, assessing damages as the value of Bhasin’s business at the time the contract was terminated.
The Bhasin decision applies to IP license agreements, including those that are renewable, and particularly to circumstances where the licensee could lose access to the licensed IP and consequently its ability to operate its business. Consequently, IP licensors must be careful to act honestly and in good faith, 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 honesty, e.g. by accurately reporting royalties owed to the licensor, otherwise they could be found in breach of the duty as well as breach of their royalty reporting obligations under the license.