Two Views of the Cathedral: Civilian Approaches, Reasonable Expectations, and the Puzzle of Good Faith's Past and Future.

• Author: Reynolds, Nicholas

Introduction

1. The First View of the Cathedral: Towards a Civilian Framework

   1. A Brief History of Canadian Common Law Good Faith

   2. The Empirical Common Law and the Normative Civil Law

   3. The Future of Duties of Good Faith as Implied Terms

   4. A Comparative Case: The View from Quebec in Churchill Falls (Labrador) Corp v Hydro-Quebec

   5. The Doctrine of Frustration Provides a Precedent of Stability

2. The Second View of the Cathedral: Reasonable Expectations as a Basis for Change

   1. Survey of the Academic Literature and Common Law Jurisprudence

      (i) Robert Summers' Excluder Analysis

      (ii) Steven Burton's Foregone Opportunities Analysis

      (iii) Allan Farnsworth's Objective Standard

      (iv) Canadian Literature and Common Law Jurisprudence

      (v) Conclusion

   2. The Is-Ought Problem and Forsaking Autonomy

      (i) A Descriptive Approach to Reasonable Expectations Does Not Justify What They Ought to Be

      (ii) A Multi-Jurisdictional Approach to Reasonable Expectations Re-Instantiates the Debate over Foreign Influence on Domestic Judgments

      (iii) A Multi-Jurisdictional Approach May Frustrate Commercial Expectations of Common Law Canada

      Conclusion

      Introduction

      Canadian common law has long struggled with the concept of good faith in contracts, bereft of organization and overall coherence despite a fairly well-developed body of case law and ample critical analysis from academia and the bar. The Supreme Court of Canada's decision in Bhasin v Hrynew (1) was therefore rightly hailed as a landmark development in common law good faith jurisprudence, not only for the measure of conceptual coherence that its principled approach ostensibly brought, but also for the Court's progressive stance in seeking to advance the law in harmony with modern commercial realities. While the decision was not without criticism, commentary was largely of the view that the Court's move to recognize (2) a free-standing duty of honesty in contractual performance was a welcome step in clarifying and developing Canadian contract law. (3)

      Such consensus, however, belies an important question that Bhasin poses for the future of Canadian common law good faith law (4) as a result of the theoretical steps taken by Cromwell J to arrive at his conclusion. As many critics have noted, the clarity that Bhasin brought is matched by the uncertainty it offers for the future of good faith in Canadian law; (5) this paper attempts to offer an answer to that uncertainty, providing a common law perspective for civilian, as well as common law and civilian, lawyers. In providing a descriptive critique of the bases on which Cromwell J's analysis relied, I argue that the radical nature of Bhasin's logic (6) provides a blueprint for sweeping, fundamental changes to good faith.

      In turn, I attempt to forecast the future of good faith law, offering two potential outcomes that are in stark contrast--indeed, sometimes contradictory. Much as Guido Calabresi and A. Douglas Melamed observed that a single analytical framework only gives one view of the law, or what they would call one view of the Rouen Cathedral, (7) so too does this paper not restrict itself to a single perspective. The first "view of the cathedral" proposes as a more desirable consequence that if radical changes do come, their effect will be much the same as Bhasin's "incremental change", (8) giving good faith the benefit of further doctrinal consolidation and coherence. In other words, the creation of a standalone duty of good faith in Bhasin reflects a more civilian flavour of adjudication in introducing a mandatory standard that exists apart from the parties--one that is both desirable and appropriate, notwithstanding the departure this signals from the common law's historical tendency to focus on contextual elements of parties' actual contracts to determine good faith duties. A comparison of the common law "implied terms" mode of good faith with the civilian approach reveals the truly paradigmatic shift adopted by Cromwell J in recognizing a good faith duty that operates irrespective of parties' intentions. Far from being an incremental change, Bhasin's method in fact runs contrary to fundamental considerations of the common law of contracts--possibly foreshadowing a migration of good faith doctrines away from implied terms to free-standing status. Analogizing to the history of frustration, this migration may in fact be much ado about nothing and instead achieve the coherence and clarity that Cromwell J prioritized.

      The second view of the cathedral--and less desirable outcome, as this paper posits--sees these radical changes as having produced a theoretical quagmire for which there is no readily apparent solution, and good faith is instead plunged back into the same uncertainty that Cromwell J sought to avoid. Put briefly, the use of the term "reasonable expectations" in defining duties of good faith is neither appropriate nor desirable because it introduces too much uncertainty and inconsistency into future doctrinal developments, and because Cromwell J's reliance on Quebec and United States jurisdictions in establishing the new duty (9) threatens to deprive Canadian common law courts of future autonomy and self-determination. As a result, it may end up reinstating the incoherence and confusion that Cromwell J sought to avoid. Ultimately, I refrain from offering a definitive conclusion as to which of these two views of the cathedral will win out, although I suggest that the first view may be more the more likely of the two. It remains to be seen whether such radical changes will be realized in future jurisprudence, but the possibility will remain for Bhasin to live up to the profound potential many commentators have said it holds.

1. The First View of the Cathedral: Towards a Civilian Framework

   1. A Brief History of Canadian Common Law Good Faith

      Notwithstanding the early common law's broad approval of good faith as a general principle of contracts, (10) the historical trend of common law jurisprudence was to treat the subject very narrowly. Unsurprisingly, the historical approach was aptly characterized as "piecemeal", (11) offering no consistent or principled approach from which Canadian law could find a basis. Accordingly, the life of good faith in Canadian common law began to at least some extent ex nihilo by relying on work done in the United States by Robert Summers, particularly with respect to the Restatement (Second) of Contracts, and Professor Karl Llewellyn, the principal architect of the Uniform Commercial Code (UCC). (12) Starting with the Ontario Law Reform Commission's 1979 Report on the Sale of Goods and its 1987 Report on Amendment of the Law of Contract, Canadian law accordingly favoured a model of good faith in the common law that implied a duty of good faith into contractual performance, (13) similar to the implied covenant of good faith and fair dealing. (14) Subsequent to these reports, there was ample scholarly discussion on this point, with no clear resolution either in favour of or against the duty. (15) The judiciary was similarly slow and reticent to recognize such a duty, although the form was always one of implied terms: while jurisprudence bifurcated along the lines of implied in fact versus implied in law, the role of good faith was always understood to be originating from the contract itself. (16)

      The conservative nature of this approach was made particularly stark in light of the significant developments in the civilian jurisprudence from Quebec that preceded the coming into force of the new Code civil du Quebec in 1994. (17) The Supreme Court of Canada recognized in 1981 that good faith in Quebec civil law, far from being only an organizing principle of the civil law as a whole, was in fact a legal obligation attaching to every contract governed by Quebec law. (18) That obligation's precise content would defy a general definition, instead varying based on the circumstances. The Supreme Court of Canada recognized a similarly expansive view of the doctrine of abuse of rights in Houle v Canadian National Bank: specifically, and notwithstanding a contractual stipulation that the parties could exercise their rights "without notice", the Court found an obligation to provide "reasonable notice" that overrode the express language of the contract. (19) Such was the expansive treatment of extra-contractual obligations in Quebec case law that they were codified by the Code civil du Quebec in articles 6, 7, and 1375. (20) In brief, good faith is and long has been a core feature of Quebec civil law. Rather than according with the common law's confusion and controversy over the extent to which good faith doctrines contained any underlying thread and were (or were not) implied terms of the contract, Quebec civil law instead accepted a broad, fundamental, normative role for good faith.

      It therefore came as a surprise to many that the Supreme Court of Canada in Bhasin eschewed both the jurisprudence and the common law's general stance on good faith by finding that the duty of honesty in performance was not to be understood as an implied term, but rather as a doctrine that operates irrespective of the parties' intentions. As argued below, this move represents a fundamental shift in how good faith fits within the Canadian common law system, reflecting a more civilian-inspired normative framework rather than one centred purely upon empirical (albeit contextual) examination of the bargain. Indeed, Bhasin arguably fits far more comfortably within the civilian tradition than it does within that of the common law. Combined with the recognition of the broader organizing principle of good faith, the overall effects of Bhasin may suggest a greater willingness to recognize similarly normative good faith doctrines in future that relegate questions of interpretation to secondary status. In other words, the fundamental question on this point is this: is good faith still a matter of implication or not?

   2. The...