The Implied Duty to Perform in Good Faith

• Author: John D. McCamus
• Pages: 835-868

835

CHAP TER 21

THE IMPLIED DUTY TO

PERFORM IN

GOOD FAITH

A. INTRODUC TION

The general principles upon which terms can be held to be implicit in

contracts have been considered i n a previous chapter.1 Here we consider

whether Canadian common law recognizes the e xistence of a general

duty, perhaps in the form of an implied term, requiring contr acting

parties to perform t heir agreements in good faith. Civilian systems typ-

ically recognize t he existence of a general duty of this kind. Indeed, the

origins of the concept can be t raced to Roman law.2 English common

law, on the other hand, has been resist ant to the idea. In 1989, Bingha m

L.J. compared the English and civilia n systems in the following terms:

In many civi l law systems, and perhaps in most le gal systems outside

the common law world, the law of obligations recog nises and en for-

ces an overrid ing principle that in maki ng and carrying out contr acts

parties should act i n good faith . . . . English l aw has, char acteris-

tically, committed itsel f to no such overriding pr inciple but has de-

veloped piecemeal solution s in response to demon strated problems

of unfairness.3

1 See Chapter 19, Section D.

2 See R. Powell, “Good Fait h in Contracts” (1956) 9 Curr. Legal Probs. 16.

3Interfoto Picture Lib rary Ltd. v. Stiletto Visual Programmes Ltd., [1989] Q.B. 433 at

439 (C.A.).

THE LAW OF CONTR ACTS836

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

formance has been shar pened by the increasing inf‌luence of European

law on the English law of contracts,4 a general duty to perform con-

tracts in good faith h as not yet emerged in English law.

A very different story unfolded in the United St ates. The recognition

of a general duty of good faith performance was given a subst antial im-

petus in American law and, indeed, a statutory ba se, when such a duty

was explicitly provided for in the Uniform Commercial Code,5 a model

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

country. There are several references to good faith in the Code.6 In due

course, the inf‌luence of the American Code and t he vast body of caselaw

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

the inclusion of an article on good faith in the Restatement of Contracts

2d,7 published in 1981. Section 205 of the Restatement of Contracts 2d

provides as follows: “Every contr act imposes upon each par ty a duty

of good faith and fair dealing i n its performance and its enforcement.”

Alone among the common law jurisdictions, then, the United States

appears to have adopted a generalized duty of good faith contractual

performance.

The interest of Canadian common law l awyers in the duty of good

faith appears to have been stimulated, in part at lea st, by the work of the

Ontario Law Reform Commission on sale of goods law8 and contract

law.9 In its reports on both topics, the Commission recommended that

legislation be enacted giv ing recognition to the doctrine of good faith. In

the latter report, the Commi ssion reasoned that “statutory recognition of

the doctrine of good faith would ser ve to synthesize t he various strands

of good faith analysis in t he caselaw. Moreover, the literature reveals

4 See generall y G. Teubner, “Legal Ir ritants: Good Fait h in British Law or How Uni fy-

ing Law Ends Up i n New Divergences” (1998) 61 Mod. L. Rev. 11; R. Brownsword,

“‘Good Fait h in Contracts’ Revi sited” (1996) 49 Cur r. Legal Probs. 111.

5 Articles 1-203 and 2-103 [the Code]. See generally, R.S. Summers “‘Goo d Faith’

in General Cont ract Law and in the Sales P rovisions of the Uniform C ommer-

cial Code” (1968) 54 Va. L. Rev. 195 [Summers].

6 Article 1-203, for example, provides as follows: “Ever y contract or duty within

this Act impo ses an obligation of good faith i n its performance or enforce ment.”

And see E.A. Far nsworth, “Good Faith in C ontract Performance” in J. Beat son

& D. Friedmann, e ds., Good Faith and Fault in Contract Law (Oxford: Clarendon

Press, 1995) 153 at 155 [Farnsworth].

7Restateme nt (Second) of the L aw of Contracts (St. Paul: American Law I nstitute,

1981) [Resta tement of Contracts 2d].

8 Ontario Law Reform Com mission, Report on Sale of Good s (Ottaw a: Ministry of

the Attorney Gener al, 1979).

9 Ontario Law Refor m Commission, Report on A mendment of the Law of Contract

(Toronto: Ontario Law Reform C ommission, 1987).

The Implied Duty to Per form in Good Faith 837

that a generalized doct rine of good faith would conform to commercial

realities.”10 To date, however, although some provinces have enacted

legislation imposing good faith or fai r dealing duties in the specif‌ic

context of franchise agreements,11 neither Ontario nor any other com-

mon law province has enacted general legislation of the kind recom-

men ded b y the Comm iss ion. In re cent y ear s, ho wever, Can adia n cou rts

have frequently made reference to the duty of good faith perform ance

and, in numerous cases, appear to have assumed that such a duty is

an existing feat ure of the Canadian common law of contracts.12 In this

chapter, we examine the leading ca ses in which recognition of the doc-

trine is either assumed or advocated. As well, an attempt will be made

to identify recurring themes in the factual patterns of these cases, with

a view to demystify ing the doctri ne and giving the doctrine more con-

crete content. In turn, this exercise may provide a working def‌inition

of the concept of good faith. Before turning to ex amine the casel aw,

however, we begin by brief‌ly describing the Can adian debate concern-

ing recognition of the duty and identifying the principal a rguments

advanced by the doctrine’s advocates and its detractors.

There are two principal arguments m ade by advocates of recogni-

tion of a generalized duty of good faith performance, both of which

appear to have had some inf‌luence on the thin king of the Ontario

Commission. The f‌irst argument mini mizes the extent of the change

involved in recognizing t he doctrine and suggests that t he common law

has already, in effect, recognized such a doctrine, though not by name.

Thus, it has been suggested that recognition of the doctrine “would

simply consolidate existing doctrinal approaches and prov ide a more

10 Ibid. at 174. And see E.P. Belobaba, “Good Faith in Canad ian Contract Law” in

Law Society of Upp er Canada, Special Lectures 1985, Commercial L aw: Recent

Developments an d Emerging Trend s (Don Mills, ON: R. de Boo, 1985) at 73, a

revised ver sion of a background paper prepare d for the Commission [Belobaba].

11 Franchises Act, S.A. 20 00, c. F-23, s. 7; Arthur Wishart Ac t (Franchise Di sclo-

sure) 2000, S.O. 2000, c. 3, s. 3. And see Shelanu In c. v. Print Three Franchising

Corp. (2003), 226 D.L.R. (4th) 577 (Ont. C. A.) [Shelanu]. And see generally

S.K. O’Byrn e, “Breach of Good Faith in Perform ance of the Franchise Contra ct:

Punitive Dam ages and Damages for Intang ibles” (2004) 83 Can. Bar Rev. 431.

12 See generally S .K. O’Byrne, “Good Faith in Cont ractual Performance: Re cent

Developments” (1995) 74 Can. Bar Rev. 70; D. Stack, “The Two Standards of

Good Faith in Ca nadian Contract Law ” (1999) 62 Sask. L. Rev. 201; J.D. McCa-

mus, “Abuse of Discretion, Fa ilure to Cooperate and Evasion of Dut y: Unpack-

ing the Common L aw Duty of Good Faith Contractu al Performance” (2004) 29

Advocates’ Q. 72. For a disc ussion that includes recent deve lopments in Aus-

tralia a nd New Zealand, see A.T. Mason, “Contract, Go od Faith and Equitable

Standard s in Fair Dealing” (2000) 116 Law Q. Rev. 66.