The Duty of Good Faith Revisited

For anybody who is concerned about rights and obligations in contracts, C.M. Callow Inc. v Zollinger, 2020 SCC 45 [“Callow”] and Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech] provide notable clarifications of the scope of the doctrine of good faith first enunciated in the ground-breaking decision in Bhasin v. Hyrnew, 2014 SCC 71 [“Bhasin”].

The Supreme Court of Canada [“SCC”] in Bhasin acknowledged an “organizing principle” of good faith, which requires that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. Bhasin left Court watchers with questions about the scope of the organizing principle.

Callow clarifies that “good faith” is not to be used to i) imply a new contractual term or ii) as a guide to interpretation of contractual language. Rather, the duty of honesty as a contractual doctrine has a “limiting function” and attracts damages where one’s manner is dishonest while exercising one’s rights.

One cannot lie or knowingly deceive one's counterparty in a matter directly linked to the performance of a contract. Notably, the doctrine goes further than prohibiting outright lies. The doctrine applies also to half-truths, omissions, and even silence, depending on the facts. One can mislead through action, by saying something directly to the counterparty, or through inaction, by failing to correct a misapprehension caused by one's own misleading conduct.

In the case of Callow, one party intentionally withheld information in anticipation of exercising a termination clause. This party knew that such silence, when combined with its active communications, had deceived the other. By failing to correct the misapprehension, the terminating party breached its contractual duty of honest performance and the counterparty was awarded damages.

Wastech signals to court watchers that the bounds of the good faith principle have limits, however. While the doctrine mandates that a contracting party should have appropriate regard to the contractual interests of contracting partners and the doctrine may constrain the exercise of discretionary powers in a contract, the duty of good faith does not displace a detailed, negotiated contract as the primary source of justice between parties. In the case of Wastech, the contract gave one party the absolute discretion to determine and amend the minimum amount of waste to be transported by the other to certain facilities. The party who had negotiated for its discretion did not commit any “identifiable wrong” when it exercised it.

The SCC clarifies good faith duty does not require one party to subordinate its interests to the other, nor does it require that one party confer a benefit on the other that stands beyond the purposes of the contract.

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