The Duty to Perform in Good Faith

• Author: John D. McCamus
• Pages: 908-968

908

CHAPTER 21

THE DUTY TO PERFORM

IN GOOD FAITH

A. INTRODUCTION

In its ground-breaking decision in BhasinvHrynew,1 the Supreme

Court of Canada recognized the existence of a general organizing prin-

ciple underlying various existing aspects of contractual doctrine to

the effect that parties “generally must perform their contractual dut-

ies honestly and reasonably and not capriciously or arbitrarily.”2 The

Supreme Court indicated that this underlying principle of good-faith

performance provided the proper foundation for three existing lines

of authority requiring f‌irst, that contractual parties cooperate in order

to achieve the objects of the contract, second, that they exercise con-

tractual discretionary powers for the purpose for which they were con-

ferred, and third, that they not engage in behaviour designed to evade

contractual obligations. Further, the court indicated that although a

party relying on the good-faith principle will normally be required to

rely upon one of the existing lines of authority, the general principle

is nonetheless capable of generating additional more precise rules in

the future. By way of illustration of this capacity, the court recognized

a new rule spawned by the organizing principle requiring parties to

agreements to comply with a “duty of honest performance.” Many will

1 2014 SCC 71 [Bhasin].

2 Ibid at para 63.

The Duty to Perform in Go od Faith909

consider Bhasin to con stitute an important milestone in the development

of the Canadian law of contract.

Before turning to an examination of the decision in Bhasin and

its possible implications, it will be useful to provide a brief sketch of

the traditional reluctance of Anglo-Canadian jurisprudence to openly

recognize a comprehensive doctrine of good faith and of the different

approach taken to this issue in other systems. It will also be useful to

brief‌ly review the arguments for and against the recognition of the doc-

trine of good-faith contractual performance.

Civilian systems typically recognize the existence of a general duty

of this kind. Indeed, the origins of the concept can be traced to Roman

law.3 A doctrine of good fait h forms part of t he contract law of Quebec.4

Although one can f‌ind supportive references to concepts of good faith

in eighteenth-century English authorities,5 referred to by Cromwell J

in his opinion for the Court in Bhasin,6 the modern English common

law has been resistant to the idea. In 1989, Bingham LJ compared the

English and civilian systems in the following terms:

In many civil law systems, and perhaps in most legal systems out-

side the common law world, the law of obligations recognises and

enforces an overriding principle that in making and carrying out

contracts parties should act in good faith. . . . English law has, char-

acteristically, committed itself to no such overriding principle but

has developed piecemeal solutions in response to demonstrated

problems of unfairness.7

3 See R Powell, “Good Faith in C ontracts” (1956) 9 Curr Legal Probs 16.

4 See, for example, Banq ue Canadienne Nationale v Sou cisse, [1981] 2 SCR 339;

Houle v Banque Cana dienne Nationale, [1990] 3 SCR 122; Dunkin’ Brands Canada

LtdvBertico Inc, 2015 QCCA 624. And see Civil Code of Quebec, LQ 1991, c

64, arts 6 & 7. See also S Gra mmond, A-F Debruche & Y Campagnolo, Quebec

Contract Law (Montreal: Wilson & L af‌leur, 2011) ch 1.

5 See AleynvBelchier (1758), 1 Eden 132, 28 ER 634 at 637 (to the effect that “a

person hav ing a power, must execute it bona f‌ide for the end designed”) [Aleyn];

CartervBoehm (1766), 3 Burr 1905, 97 ER 1162 at 1164 (“a good faith forbid s

either part y by concealing what he privately k nows”); MillishvMotteux (179 2),

Peake 156, 170 ER 113 (“in contract s of all kinds, it is of the hig hest importance

that court s of law should compel the observa nce of honesty and good faith”). For

a detailed hi storical study of Lord Man sf‌ield’s judgment in Carter, see S Watterson,

“CartervBoehm (1766)” in C Mitchell & P Mitchell, eds, La ndmark Cases in the

Law of Contracts (Oxford: Har t Publishing, 2008) ch 3.

6 Bhasin, above note 1 at para 35.

7 Interfoto Picture Librar y LtdvStiletto Visual Programmes Ltd, [1989] QB 433 at

439 (CA).

THE LAW OF CONTR ACTS910

Although English interest in the civilian doctrine of good-faith per-

formance has been sharpened by the increasing inf‌luence of European

law on the English law of contracts,8 a general duty to perform con-

tracts in good faith has not yet emerged in English law.9

A very different story unfolded in the United States. The recogni-

tion of a general duty of good-faith performance was g iven a substantial

impetus in Americ an law, and indeed, a statutory base, when such a duty

was explicitly provided for in the Uniform C ommercial Code,10 a model

law, in the 1950s. The Code, in turn, was enacted as state law acros s the

country. There are several references to good faith in the Code.11 In due

course, the inf‌luence of the America n Code and the vast body of c aselaw

on good faith that surrounded, and to some extent, preceded it, led to

8 See generally G Teubner, “Legal Irrita nts: Good Faith in British L aw or How

Unifyi ng Law Ends Up in New Divergences” (1998) 61 Mod L Rev 11; R

Brownsword, “‘G ood Faith in Contracts’ Rev isited” (1996) 49 Curr Legal Probs

111.

9 MSC Mediterranean Shipping Co SAvCottonex Anst alt, [2016] EWCA Civ 789

at para 45. But see, however, Yam Seng Pte LtdvInter national Trade Corp Ltd,

[2013] EWHC (QB) [Yam Se ng]. In Bhasin, ab ove note 1 at para 57, Cromwell J

referred to Yam Seng as some evidence of i ncreasing prominence of good fa ith

in English la w notwithstanding it s traditional hosti lity to the concept. He also

referred to sim ilar developments in Austra lia and more particul arly to Renard

Constructio ns (ME) Pty LtdvMinister for Public Works (1992), 26 NSWLR 234

(CA) and Burger King Corp orationvHungry Jack’s Pty Ltd, [2001] NSWCA

187, 69 NSWLR 558. And see E Peden, Good Faith in Performa nce of Contracts

(Sydney: Butterworth s, 2001).

10Articles 1-203 and 2-103 [the Code]. See, generally, RS Summers, “‘ Good

Faith’ in General C ontract Law and in the Sale s Provisions of the Uniform

Commercial Co de” (1968) 54 Va L Rev 195 [Summers]; SJ Burton, “Good Faith

Performance of a Cont ract Within Article 2 of th e Uniform Commercial Code”

(1981) 67 Iowa L Rev 1. Making refer ence to a leading 1933 American deci sion,

Cromwell J noted in Bhasin, above note 1 at para 85, that Amer ican courts had

recognize d a general duty of good faith before the de velopment of the UCC. The

leading ca se referred to is Kirke La Shelle CovArm strong Co, 263 NY 79 (1933).

11Article 1-203, for example, prov ides as follows: “Every contract or duty w ithin

this Act impo ses an obligation of good faith in it s performance or enforcement.”

See EA Farn sworth, “Good Faith in Contract Per formance” in J Beatson &

D Friedman n, eds, Good Faith and Fault in Contract Law (Oxford: Clare ndon

Press, 1995) 153 at 155 [Farnsworth]. See, generall y, SJ Burton & E Andersen ,

Contractual Good Faith: Form ation, Performance, Breach and Enforcem ent (Boston:

Little, Brown a nd Co, 1995) [Burton & Andersen]. For concise account s of

American e xperience, see JT Robert son, “Good Faith as an Organi zing Principle

in Contract La w: Bhasinv.Hrynew— Two Steps Forward and One Step B ack”

(2015) 93 Can Bar Rev 811 at 823–29 [Robertson]; S O’Byrne & R Cohen, “The

Principle of Good Fa ith and the Duty of Honesty” (2015) 53 Alta L Rev 1 at

21–33 [O’Byrne & Cohen].