Canada’s Top Court Clarifies ‘Good Faith’ Requirement for Parties Under Contract

In 2014, the Supreme Court of Canada imposed a duty of good faith on parties to contract, in the case Bhasin v. Hrynew. In that decision, the Court moved towards establishing clarity around the duty of honest performance and good faith in contractual relationships. The Court noted that the law had developed piecemeal prior to this decision, and the ruling was meant to “recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”

In the past several months, the Supreme Court has both expanded upon and placed limitations on this principle, in two significant decisions. Below, we will review the decisions and how they have each affected the doctrine of good faith and its applicability to contract law in Canada.

Expanding the Duty of Good Faith Under Contract

Under Bhasin, the SCC imposed a general duty of good faith and honesty upon those carrying out duties under a contract. In 2020, a new case placed an additional obligation to the notion of good faith and honesty: correcting false presumptions. In a case called C.M. Callow Inc. v. Zollinger, a group of condominium corporations had a multi-year contract with a service provider for winter maintenance including snow removal, as well as for summer maintenance duties. The contract covered the years 2012 and 2013, but contained a clause whereby the condominium group had the option to terminate the contract early by providing ten days’ notice.

In the spring of 2013, the condominium group made the decision to terminate the contract early but had not yet informed the service provider. Further, a representative of the group had a conversation with a representative of the service provider that led the provider to believe the contract would be renewed beyond the existing term. The service provider went on to provide additional services free of charge throughout the summer of 2013. The condominium group was aware there was a false belief the contract would be renewed but said nothing. At the end of the summer, the condominium group informed the provider that it would be cancelling the remainder of the contract.

The case eventually went before the Supreme Court of Canada, which ultimately found that the condominium group had knowingly misled the service provider for several months. While the group’s silence alone would not necessarily have amounted to a breach of contract, the fact was that the condominium group was aware that the provider had a false impression that the contract would be renewed. By failing to correct that misapprehension, the group had deceived the provider and breached the contract.

Contractual Discretion and The Good Faith Principle: Limitations

In a more recent decision, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the SCC took the opportunity to place limitations on the duty of good faith when it comes to exercising contractual discretion. In this case, a statutory corporation in charge of waste disposal for the Metro Vancouver Regional District (Metro) engaged Wastech, a waste transportation company to transport waste to several facilities. Wastech earned a different rate depending on the distance to the specific facility – the closer the facility, the less profit Wastech earned. The contract between the two parties gave Metro complete discretion to allocate waste to each disposal facility as it saw fit.

At one point during the contract, Metro reallocated waste away from the furthest facility to one that was closer. This caused Wastech’s profits to drop significantly below target. Wastech alleged breach of contract because Metro’s decision prevented Wastech from reaching its target profit for the year.

The SCC found that parties must exercise contractual discretion reasonably and in good faith, in accordance with the purposes for which the discretion was granted. For this reason, the parties to a contract must ensure that the purposes for discretion be clearly spelled out in the terms of a contract. In this case, the Court found that the discretion was granted to allow Metro to make decisions designed to “maximize efficiency and minimize costs of the operation”. The decision to reallocate the waste was in line with this purpose, and therefore the exercise of discretion was reasonable.