Duty of Good Faith Trilogy

All contracting parties owe a duty of good faith to one and other at law. The duty of good faith involves a duty imposed at law on contracting parties to act honestly and reasonably with each other and not in a capricious or arbitrary manner. The importance of this development is that the duty of good faith will be applied even where the contract is silent. The duty was first recognized to apply to all contracts in 2014 by Canada’s highest court, the Supreme Court of Canada (“SCC”). Since that time, there have been two more SCC cases which deal with the extent to which the duty of good faith will be imposed.

The trilogy of cases are: Bhasin v. Hrynew, 2014 SCC 71 [Bhasin], CM Callow Inc. v. Zollinger, 2020 SCC 45 [CM Callow] and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech].

In Bhasin, the court found that a contracting party cannot actively mislead or deceive the other contracting party.

In CM Callow, the SCC held that if a party to a contract remains silent when it learns that it has caused the other party to misapprehend a matter which is directly connected to the performance of a right under a contract, that party can be found liable for breaching the duty of good faith and honest performance recognized in Bhasin.

The decision in Wastech deals with the exercise of discretionary power. It places limits on the exercise of discretion to a manner which is consistent with, and connected to, the purposes for which it was granted in the contract. Where such a connection is missing, the party’s exercise of discretion will be considered unreasonable and a breach of the duty of good faith.

An example of how the duty of good faith can be applied in a real estate conveyance will illustrate the importance of keeping the duty in mind when engaged in a contract. A home buyer cannot simply rely on a “subject to financing” clause to get out of a binding contract of purchase and sale where financing is available. If financing is available then a party cannot rely on this subject to end a contract, as that could be considered dishonest and unreasonable.

Bhasin, CM Callow, and Wastech, known colloquially as the “Good Faith Trilogy”, operate to impose a set of duties and obligations on all contracting parties which are not found in the language of the contract itself. It is important to be aware of the Trilogy, and how the duty of good faith governs the conduct of contracting parties.

If you have questions or require legal counsel, the Business Disputes Team at Alexander Holburn would be happy to help you.