This is the second in a series of posts that unpacks the Supreme Court of Canada’s 2014 decision in Bhasin v. Hrynew and looks at how conduct matters in commercial contracts, sometimes more than the words of the contract. This post covers the duty to operate in good faith.
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Surprisingly, under Canadian common law, parties to a commercial contract aren’t always expected to act in good faith towards one another. There are, however, circumstances where courts will imply a duty to operate in good faith into the terms of the contract. In those circumstances, acting in bad faith will constitute a breach of contract – no matter what the words say.
What is the duty to operate in good faith?
What’s good faith? The SCC in Bhasin said that “the principle of good faith exemplifies the notion that in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate interests of the contracting partner” and this requires that “a party not seek to undermine those interests in bad faith”.[i]
The SCC acknowledged the existence of specific classes of contracts in which the duty of good faith is implied and other doctrines in which good faith is relevant. The SCC also acknowledged that the list of doctrines where a duty is recognized is not closed, thereby implicitly inviting lower courts to develop new doctrines as appropriate.[ii]
Close to 100 reported decisions involving commercial contract disputes have cited Bhasin since the decision was released. Based on these cases, it would appear Canadian courts have not seized upon the SCC’s invitation to develop new doctrines to recognize a duty of good faith in commercial contracts. Here are excerpts from some key decisions on the duty of good faith both before and after Bhasin:
- Bhasin did not extend the duty of good faith beyond that in the existing authorities.[iii]
- The duty of good faith is not a stand-alone duty. It will be implied when circumstances justify it.[iv]
- Duty of good faith applies to specific classes of contracts such as employment, joint ventures, partnership agreements and in competitive tenders.[v]
- Authorities tend to agree that good faith will be implied in most long-term commercial contracts because a long-term relationship is certain to be based on an assumption that each party will behave in good faith.[vi]
- Good faith is not a fiduciary duty. A party that acts in good faith does not have to subordinate its interest to that of any other party; it simply cannot use the power the agreement gives it in ways that are abusive, unfair or dishonest.[vii]
- If duty to operate in good faith exists, it means that, in exercising your contractual rights, you must have appropriate regard for the legitimate business interests of the other party. Having “appropriate regard” does not require acting to serve those interests in all cases.[viii]
- A discretionary power must, at minimum, always be exercised honestly and in good faith which means one must not act capriciously or arbitrarily.[ix]
- There is a possible implied duty of good faith when negotiating within the confines of an existing contract as a matter of contract interpretation.[x]
- The duty of good faith is breached when a party acts in bad faith.[xi]
What is bad faith?
- In Canada, the test for bad faith does not include the need to show the defendant intentionally acted in bad faith.[xii]
- Bad faith is when a party acts in a manner that substantially nullifies the contractual objectives or causes significant harm to the other, contrary to the original purposes or expectations of the parties.[xiii]
- Conduct that is contrary to community standards of honesty, reasonableness or fairness has been described as bad faith.[xiv]
- Thearbitrary exercise of discretion has been associated with bad faith in a number of cases – arbitrariness alone may ground a decision that a party acted in bad faith.[xv]
Take away
In considering the content of the duty to operate in good faith and bad faith, it’s easy to get lost in the nuanced judicial considerations of what each duty means. Not only are they nuanced, they can seem contradictory at times.
While there is certainly value in understanding the nuances when considering a specific fact situation, to avoid running into legal problems, parties should give appropriate consideration to their partner’s business interests when exercising a right or discretion, such as a right to terminate a contract.
Failure to consider the impact on the other party’s business interests when exercising one’s contractual rights and privileges could give rise to legal claims.
In my next post, I’ll look at the duty to be reasonable when exercising one’s contractual rights in commercial agreements.
[i] Bhasin, supra, at para.65.
[ii] Bhasin, supra, at para.66.
[iii] Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2016 BCSC 68 (CanLII) at para. 53.
[iv] Wilson Fuel Co. Ltd. v. Power Plus Technology Inc. 2015 NSSC 304 (CanLII) at para 27. See also: Kangas v. Souster 2009 SKPC 46 (CanLII); MHR Board Game Design Inc. v. CBC 2013 ONCA 728 (CanLII) at para 5 citing Transamerica Life Inc. v. ING Canada Inc. (2003) 2003 CanLII 9923 (ONCA) at para 53.
[v] Bhasin, supra, at paras 42-56. See also G. Hall, supra, at page 44 and A. Swan, “Canadian Contract Law”, Third Edition at pp 727-728.
[vi] A. Swan, “Canadian Contract Law”, Third Edition at pp 727-728. See also: Wilson Fuel Co. Ltd., supra, at para.25-26
[vii] Bhasin, supra, para 60. See also: A. Swan, supra, page 727.
[viii] Bhasin, supra, para. 65.
[ix] Greenberg v. Meffert et al., 1985 CanLII 1975 (ONCA), page 9; Partec Lavalin Inc. v. Meyer, 2001 ABCA 145 (CanLII) at para 15; 0856464 B.C. Ltd. v. TimberWest Forest Corp. 2014 BCSC 2433 (CanLII) para. 183.
[x] Empress Towers v. Bank of Nova Scotia 1990 CanLII 2207 (BCCA) at page 6. See also G. Hall, supra, page 44..
[xi] Arton Holdings Ltd. et al. v. Gateway Realty Ltd. 1991 CanLII 2707 (NSSC) at page 12/38. Also see A. Swan, supra, at page 312 “The only workable definition of good faith is that it denotes the absence of bad faith”.
[xii] Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. 1994 ABCA 94 (CanLII) at para 14.
[xiii] Mesa, supra. See also: Crawford v. New Brunswick 1997 CanLII 9539 (NBCA).
[xiv] Gateway Realty, supra, para.38; See also: TSP-INTL Ltd. v. Mills 2005 CanLII 3945 (ONSC) at para.68 (overturned on appeal on different grounds).
[xv] London Humane Society (Re), 2010 ONSC 5775 (CanLII) at para.34, however this case deals with a decision made by a Board of Directors under its bylaws and may not fully transfer over to an exercise of a contractual right by a commercial party.
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Read the full Conduct Matters in Contracts series:
Part 1 – The duty to be honest
Part 2 – The duty to operate in good faith
Part 3 – The duty to be reasonable
Part 4 – Beyond the words of the contract
