B. Analysis of the Leading Cases

AuthorJohn D. McCamus
ProfessionProfessor of Law. Osgoode Hall Law School, York University
Pages784-798

Page 784

The debate concerning the desirability of recognizing an explicit duty of good faith performance has attracted increasing judicial attention in recent years. Accordingly, it may be asked whether Canadian common law now recognizes the existence of such a duty. The answer to this question lies in a careful examination of what appear to be the leading decisions making reference to good faith. An examination of these cases will also provide some insight into the extent to which the common law already addresses, through more traditional means, problems that might be addressed by the concept of a duty of good faith performance.

Before turning to an examination of the decisions, however, a number of preliminary observations may be made. First, as we shall see, it is a striking fact that in not one of these cases is the analysis of or reference to the good faith performance obligation necessary to the decision in question. In each case, the result could have been, and indeed was, explicitly grounded in the application of traditional contract doctrine. On the basis of these authorities, then, it would be difficult to make a compelling argument that a duty of good faith performance has now been recognized at common law in Canada. Further, the Canadian cases in which the concept of good faith is invoked appear to fall into three categories: those imposing duties to cooperate in achieving fulfilment of the objectives of the agreement; those imposing limits on the exercise of contractual discretionary powers; and those precluding parties from evading contractual obligations. Whatever might be said to be the status of the doctrine of good faith performance at the present time, the recognition, in appropriate cases, of implicit contractual obligations of these three kinds appears to be an established feature of Canadian contract doctrine. Thus, these decisions offer some support for the argument that a good faith performance obligation is manifest

Page 785

in a number of existing common law doctrines that, in effect, require the performance of contractual obligations in good faith.17Interestingly, the fact situations in which Canadian courts have considered application of the duty to perform in good faith bear a remarkable similarity to those covered by the good faith performance rubric in American law. Thus, the illustrations of the American doctrine identified in the Restatement18typically involve either the control of the exercise of discretionary contractual powers or the imposition of obligations to cooperate in the accomplishment of the objectives of the agreement or, at least, to refrain from engaging in evasive strategies to defeat the objectives of the agreement. Accordingly, it appears that much, though possibly not all, of the work being accomplished by the good faith doctrine in the United States is being accomplished in Canadian common law by more traditional means.

1) Good Faith, Best Efforts and the Duty to Cooperate

Advocates of the good faith duty place considerable importance on the decision at trial in Gateway Realty Ltd. v. Arton Holdings Ltd.,19 a decision upheld, in the result, by the Nova Scotia Court of Appeal.20This case involved a dispute between owners of neighbouring mall properties. Zellers was initially the anchor tenant in the mall owned by Gateway. Hotly pursued by developer Arton, Zellers eventually moved its business to the Arton mall and Arton took an assignment of the remaining seventeen years of Zellers’ lease with Gateway. That lease had permitted Zellers to occupy the premises, leave them vacant, or assign the lease to a third party, all without Gateway’s consent. The upshot, then, was that Gateway’s major competitor, Arton, was now the assignee of the anchor lease without any obligation to occupy the premises or seek a suitable subtenant. This problem appeared to be solved, however, when the parties entered into an agreement to "use their best efforts" to lease the space formerly occupied by Zellers. When it became apparent to Gateway that Arton was refusing to sublet to prospective tenants that Arton considered would give Gateway a competitive advantage, Gateway brought an action claiming that Arton was in breach

Page 786

of its contractual obligation to use best efforts and, alternatively, was in breach of a duty of good faith performance.

At trial, Kelly J. came relatively easily to the conclusion that the obligation to undertake "best efforts" is an enforceable and not uncommon obligation in business agreements and that the conduct of Arton constituted a breach of this contractual provision. Kelly J. went on, however, to engage in a lengthy and erudite analysis of the alternative ground urged by the plaintiff, the existence and breach of a duty of good faith performance owed by Arton to Gateway. Placing reliance on existing references to the idea of good faith in Canadian cases and on the American experience, Kelly J. articulated a doctrine of good faith performance in the following terms:

The law requires that parties to a contract exercise their rights under that agreement honestly, fairly and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under the contract. "Good faith" conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breached when a party acts in "bad faith" - a conduct that is contrary to community standards of honesty, reasonableness or fairness. The insistence on a good faith requirement in discretionary conduct in contractual formation, performance, and enforcement is only the fulfilment of the obligation of the courts to do justice in the resolution of disputes between contending parties.21Applying this standard to the facts, Kelly J. concluded that Arton was under an obligation to exercise its discretion to sublease the premises in a reasonable manner and not in bad faith and that Arton was in breach of its obligation. In terms of remedy, Kelly J. concluded that the breach of contract was so serious as to justify termination of the assignment to Arton.

On appeal, the decision at trial was upheld. In a brief oral opinion, the Court of Appeal reiterated and affirmed the central factual findings of Kelly J. and concluded that the failure of Arton "to exercise their ‘best efforts’ to find a suitable tenant or tenants had the effect of literally destroying the viability of Gateway’s plaza shopping centre, contrary to any expectation in the original lease."22The court offered no opinion on the existence or applicability of a duty of good faith performance. Although Kelly J.’s articulate embrace of the good faith duty no doubt

Page 787

makes a valuable contribution to judicial discussion of good faith, it must be noted that, as a matter of authority, the analysis of good faith in his opinion is pure makeweight. The result of the case rests firmly on the express undertaking of Arton to use "best efforts." The discussion of good faith is simply unnecessary.

In the absence of an explicit undertaking to exercise best efforts, however, Canadian courts have found such duties to be implicit in contractual relations in appropriate cases.23Indeed, courts have implied more generalized duties to cooperate in the fulfilment of contractual obligations. Occasionally, such implied obligations have been linked to actions of good faith. Where, for example, performance of the contract is subject to a condition precedent, the fulfilment of which requires the cooperation of one of the parties, an undertaking to provide such cooperation will be readily implied. Although such cases contain references to a requirement to make "best efforts" or to act in "good faith," this doctrine has not yet been linked to the debate concerning the recognition of a good faith performance obligation. Nonetheless, such cases constitute a prime example of existing common law doctrine that appears to implement a requirement of good faith performance.

The leading Supreme Court of Canada decision, Dynamic Transport Ltd. v. O.K. Detailing Ltd.24 was rendered in 1978, a few years before the debate concerning the recognition of a good faith performance doctrine emerged in common law Canada. This case involved an action for specific performance of a contract for the purchase and sale of land. The agreement was subject to a condition precedent that subdivision approval be obtained, but the agreement was silent as to whether the vendor or the purchaser would obtain that approval. Dickson J., for the Court, held that the person who proposes to carry out the subdivision prior to sale is the vendor and, accordingly, construed the agreement as containing an implied undertaking on the part of the vendor to make a proper application for a subdivision and "use his best efforts" to obtain the approval. He further explained that "the vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale."25

As Dickson J. noted, this holding was based on a substantial body of case law standing for the more general proposition that "the court will

Page 788

readily imply a promise on the part of each party to do all that is necessary to secure performance of the contract."26

2) Good Faith and the Control of Discretionary Powers

Canadian judges have referred to a duty of good faith in a series of recent cases involving what one might refer to as abuse of a discretionary power conferred by contract. In each case, the defendant was required to exercise the power in question in a reasonable fashion. In Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd.,27for example, the underlying transaction involved the sale by the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT