The Duty to Perform in Good Faith

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

908

CHA PTER 21

THE DUTY TO PERFORM

IN GOOD FAITH

A. INTRODUCT ION

In its ground-breaking deci sion in Bhasin v Hryn ew,1 the Supreme

Court of Canada recogni zed the existence of a general organizing prin-

ciple underlying various existing aspects of contractual doctr ine to

the effect that part ies “generally must perform their contractual dut-

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

Supreme Court indicated that thi s underlying principle of good-faith

performance provided the proper foundation for three ex isting lines

of authority requiring f‌ir st, 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 authorit y, the general principle

is nonetheless capable of generating additional more precise rules in

the future. By way of illustrat ion of this capacity, the court recognized

a new rule spawned by the organizing principle requiring par ties 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 Faith 909

consider Bhasin to con stitute an important milestone in the development

of the Canadian l aw of contract.

Before turning to an ex amination of the decision in Bhasin and

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

the traditional relucta nce of Anglo-Canadian jurisprudence to openly

recognize a comprehensive doctri ne of good faith and of the different

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

brief‌ly review the argument s for and against the recognition of the doc-

trine of good-faith contractual performance.

Civilian systems typically recogni ze the existence of a general duty

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

la w.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 eighteent h-century English authorities,5 referred to by Cromwell J

in his opinion for the Court in Bha sin,6 the modern English common

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

English and civili an systems in the following term s:

In many civil l aw systems, and perhaps in most leg al systems out-

side the common law world, the law of obligat ions recognises and

enforces an overr iding principle that in mak ing and carry ing out

contracts par ties should act in good faith. . . . Engli sh law has, char-

acteristica lly, committed itself to no such overridi ng principle but

has developed piecemeal s olutions in response to demonstr ated

problems of unf airness.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

Ltd v Bertico 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 Aleyn v Belchier (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];

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

either part y by concealing what he privately k nows”); Millish v Motteux (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,

“Carter v Boehm (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 Ltd v Stiletto Visual Programmes Ltd, [1989] QB 433 at

439 (CA).

THE LAW OF CONTR ACTS910

Although English interest in the civ ilian 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 h as 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 SA v Cottonex Anst alt, [2016] EWCA Civ 789

at para 45. But see, however, Yam Seng Pte Ltd v Inter 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 Ltd v Minister for Public Works (1992), 26 NSWLR 234

(CA) and Burger King Corp oration v Hungry 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).

10 Articles 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 Bha sin, 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 Co v Arm strong Co, 263 NY 79 (1933).

11 Article 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: Bhasin v. Hryne w — 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].