Good Faith in Canadian Contract Law

The organising principle

Bhasin v Hrynew (2014) recognised good faith as an organising principle of Canadian common-law contract. The principle does not impose a free-standing duty of loyalty. It underpins existing doctrines (cooperation, exercise of discretionary powers, performance) and supports incremental development of new ones.

Bhasin identified the duty of honest performance: a contracting party must not lie or knowingly mislead the other about matters directly linked to the performance of the contract. This duty cannot be excluded by contract.

Callow on termination

CM Callow Inc v Zollinger (2020 SCC 45) extended the duty of honest performance to the exercise of contractual rights including termination rights. A party that intends to terminate cannot actively mislead the counterparty about its intentions.

Callow had an ongoing maintenance contract terminable on notice. The defendants formed an intention to terminate but, during the period leading up to notice, fostered the impression that the contract would be renewed. The SCC found this active misleading was a breach of the duty of honest performance.

The duty is not a duty to disclose an intention to terminate. It is a duty not to lie or actively mislead about it.

Wastech on discretion

Wastech Services v Greater Vancouver Sewerage and Drainage District (2021 SCC 7) addressed the exercise of contractual discretion. Discretionary powers must be exercised in good faith — meaning in accordance with the purposes for which the power was granted. Acting for a purpose extraneous to the contract breaches good faith.

Wastech allocated waste disposal among three sites in proportions set at GVSDD's discretion. GVSDD reallocated to maximise its own efficiency, depriving Wastech of an expected target operating profit. The SCC held the discretion must be exercised consistently with the contract's purpose; the analysis is fact-driven, not a stand-alone "fairness" inquiry.

What good faith does not require

Bhasin, Callow and Wastech do not impose:

• A general duty of disclosure in negotiations.
• A duty to subordinate one's own interests to those of the counterparty.
• A duty of loyalty (which is fiduciary, not contractual).

Good faith does not turn a commercial relationship into a partnership.

Practical implications

For drafters:

• The duty of honest performance cannot be excluded. Drafting "no representations beyond this contract" clauses does not insulate an active lie.
• Discretionary clauses should articulate the purpose for which the discretion is granted. Bare "in our sole discretion" wording offers less protection than purpose-anchored discretion.
• Termination rights remain enforceable. They must be exercised honestly.

For litigators:

• Bhasin claims are fact-intensive. Pleadings should isolate the specific representation, the specific misleading act, and the specific harm.
• Callow turns on active misleading, not silence. Pleading mere non-disclosure rarely succeeds.
• Wastech turns on the contract's purpose. The analysis demands construction of the contractual scheme.