A 'First Look': The Canadian Courts' Treatment of Good Faith Contractual Performance Post-Bhasin

Author:Brandon Pasternak
Position:JD Candidate, University of Toronto Faculty of Law
Pages:124-150
© 2016 Brandon Pasternak and Dublin University Law Society
A “FIRST LOOK”: THE CANADIAN COURTS
TREATMENT OF GOOD FAITH CONTRACTUAL
PERFORMANCE POST-BHASIN
BRANDON PASTERNAK*
Introduction
The Supreme Court of Canada’s decision in Bhasin v Hrynew1 reflects a
growing recognition amongst common law jurisdictions of the need for
good faith to govern contractual relationships.2 More than a century before
Bhasin, the seminal case of Parker v The South Eastern Railway Company3
set in motion the incremental and inconsistent development of this area of
the law throughout the common law world. The ad hoc nature of good
faith’s role in contract law was later brought to light by Bingham LJ (as he
then was) in Interfoto Picture Library v Stilletto,4 where he discussed how
the law of England and Wales had refused to acknowledge an overriding
principle of good faith but instead developed piecemeal solutions in
response to demonstrated problems of unfairness, recognising specific
duties of good faith in certain contexts.5 Bingham LJ also made reference to
the role that Parliament has played in implementing a duty of good faith in
specific contractual settings.6 In the years following Interfoto, European
Union Directives7 have spurred significant growth in this area of the law8
and have been given effect in a number of countries, including Ireland,
* JD Candidate, University of Toronto Faculty of Law. The author would like to dedicate this
article to God, his wife, Shannon, and parents, Kathy and Gary, for their continued support.
The author would also like to extend a special thanks to Seán-Patrick Dunne for his exceptional
assistance and is also grateful to Professors Geoff Hall and Stephen Waddams for their
insightful comments.
1 [2014] SCC 71; [2014] 3 SCR 494 [hereinafter Bhasin].
2 MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC283 (Comm),
at 97.
3 [1877] 2 CPD, at 427.
5 [1989] QB433, at 439 [hereinafter Interfoto].
6 [1989] QB433, at 439.
7 Council Directive 93/13/EEC of 5 April 1993 on unfair contract terms in consumer contracts,
OJ L 95/29, 21 April 1993.
8 MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC283 (Comm).
2016] A “First Look”: The Canadian Courts Post-Bhasin
125
where they have sculpted the rhetoric of good faith.7 In Ireland, this rhetoric
has incorporated a variety of fairness-based concepts, such as fair dealing,
and has defined good faith in a number of ways, including as:
[a]sking no more than that the parties to an agreement act honestly
and in accordance with the spirit of that agreement to be gleaned from
the wording used and construed in the context in which it was
reached.8
Nevertheless, the Anglo-Canadian jurisprudence has not always been
entirely consistent or clear in establishing what role good faith would serve
in the law of contracts. The Supreme Court of Canada was well aware of
this complex and troublesome jurisprudence, and it was against this
backdrop that the Bhasin decision was released. In particular, Bhasin
represents an attempt to both clarify and expand how good faith applies to
the performance of contracts. The Supreme Court sought to do so in a
manner consistent with the “dynamic and evolving fabric of…society.”9
However, as is common following the release of Supreme Court
judgments, Cromwell J’s verdict in Bhasin (McLachlin CJ, LeBel J, Abella
J, Rothstein J, Karakatsanis J and Wagner JJ all concurring) created an array
of new questions that remain unanswered and left important issues
unaddressed. Not before long, academics and practitioners identified these
gaps left by the Court, recognising that it will be up to both future litigants
and Canada’s lower courts to interpret the Bhasin decision moving
forward.10 Nevertheless, the academic literature on good faith contractual
performance post-Bhasin has yet to provide a comprehensive review of how
courts have reacted to this development in the law. In response to this gap
7 SI 27/1995 European Communities (Unfair Terms in Consumer Contracts) Regulations.
8 Flynn & Anor v Breccia & Anor [2015] IEHC 547, at [156].
9 R v Salituro [1991] 3 SCR 654, at 670.
10 For academic commentary, see Chris Hunt, “Good Faith Performance in Canadian Contract
Law” (2015) 74(1) CLJ 4; Geoff Hall,Bhasin v Hrynew: Towards an Organising Principle of
Good Faith in Contract Law” (2015) 30 BFLR 335 [hereinafter Hall]; and for practitioner
commentary, see Brad Hanna and Calie Adamson, “Let’s Be Honest: The New Duty of Good
Faith in Contractual Performance” (2014) McMillan Litigation Bulletin
New-Duty-of-Good-Faith-in-Contractual-
Performance>; Peter Kryworuk, “Good Faith in Performance of Contracts” (2015) Lerners
Articles & Publications ; Tim Pinos, Ted Frankel, Colin
Pendrith, and Christopher Selby, “Supreme Court Expands Obligations of Good Faith and
Honesty in Contract Performance” (2014) Cassels Brock Resources
th_and_Honesty_in_Contract_Performance>.
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in the literature, this article will provide an introductory analysis of how
Bhasin has been applied by lower courts in the year following its release
and argue how these decisions might be interpreted in the context of future
litigation. Furthermore, it is contended that although the Court has not
successfully accomplished what it set out to do through Bhasin - that is, to
bring coherence and predictability to this area of Canadian contract law, the
resulting uncertainty is an essential part of how the law develops vis-à-vis
the “judicial dialogue” approach.
The argument proceeds as follows. Part I provides an overview of
Bhasin, including what the Court set out to accomplish through the decision
and its contribution to the law of good faith contractual performance. Part
II analyses how the subsequent case law in Canada has responded to Bhasin.
Building upon this, Part III contends that the Supreme Court did not
successfully accomplish its goals of fostering coherence and predictability.
Finally, this article concludes by presenting the “judicial dialogue”
approach to legal development as a potential justification for the resulting
uncertainty.
I. The Bhasin Decision
A. The Facts
The appellant, Mr. Bhasin, was in the business of selling educational
savings plans for Canadian American Financial Corporation (hereinafter
Can-Am), one of the respondents.11 Both parties had entered into a
dealership agreement that would automatically renew at the end of each
three-year term unless six monthsies had entered into a dealership agreeof
the term.12
When the Alberta Securities Commission required Can-Am to appoint
an officer to review Can-Am dealers for compliance with Alberta’When the
Alberta Securities Commission required Can-Am to appoint an 13 Hrynew
was also a Can-Am dealer and thus Bhasin’s competitor, and the two had a
history of animosity.14 Bhasin complained about Hrynew’s appointment,
largely because Hrynew would be auditing his competitors’ agencies and
have access to their confidential business information.15
11 [2014] SCC 71, at [2]-[3].
12 [2014] SCC 71, at [4], [6].
13 [2014] SCC 71, at [10].
14 [2014] SCC 71, at [7].
15 [2014] SCC 71, at [10].
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In response, Can-Am misled Bhasin by explaining that Hrynew would
be bound by confidentiality, which was not true, and that the Commission
had rejected the appointment of an outside auditor.16 In reality, the only
outside auditor that Can-Am considered had not met the necessary
requirements.17 Can-Am was also considering a restructuring plan that
involved merging Bhasin and Hrynewality, which w18 In effect, the merger
would force Bhasin to begin working for Hrynew.19 When Bhasin inquired
as to whether the merger was final, Can-Am responded “equivocally” even
though the plan had been formulated months before.20 It was these events
that led the trial judge to conclude that Can-Am had acted dishonestly with
Bhasin, especially with respect to its intentions concerning the merger.21
Can-Am ultimately notified Bhasin that it would not be renewing their
agreement when Bhasin refused to allow Hrynew to audit his records.22 As
a result, Bhasin lost the value of his business and was forced to find work
elsewhere.23
B. The Problem
The Supreme Court’s decision in Bhasin was motivated by a deep
disapproval of the state of the law at that time as it pertained to good faith
contractual performance.24 Canadian courts have disagreed over what role
good faith should play in the law of contracts. Some judges, including Kelly
J in Gateway Realty Ltd v Arton Holdings Ltd, have viewed good faith as
requiring a minimum standard of commercial behaviour in all contracts.25
In contrast to this view, others, notably O’ notably O to Transamerica Life
Canada Inc v ING Canada Inc, have endorsed limiting the application of
good faith to particular contexts in fear of undermining freedom of contract
and commercial certainty.26 Although Anglo-Canadian common law has
refused to acknowledge a general duty to perform contracts in good faith,27
16 [2014] SCC 71, at [12].
17 [2014] SCC 71, at [101].
18 [2014] SCC 71, at [101].
19 [2014] SCC 71, at [11].
20 [2014] SCC 71, at [11]-[12].
21 [2014] SCC 71, at [15].
22 2014] SCC 71, at [12].
23 2014] SCC 71, at [13].
24 2014] SCC 71, at [32], [59].
25 [1992] CanLII 2620 (NS CA), at [38]; 112 NSR (2d) 180, cited in [2014] SCC 71; [2014]
3 SCR 494, at [38].
26 [2003] CanLII 9923 (ON CA), at [103]; 234 DLR (4th) 367; 127 ACWS (3d) 235.
27 [2014] SCC 71, at [32].
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exceptions have been made in specific circumstances where the courts
decided that justice required a duty of good faith contractual performance.28
The Court recognised that the problem with this “piecemeal”
development of the law was that it lacked consistency and coherence.29
There was no “overarching rationale” to illustrate how these seemingly
unrelated exceptions were connected, other than the simple fact that good
faith was somehow involved in each case.30 For example, the courts have
found that a duty of good faith governs contractual conduct as varied as the
manner in which an insurer investigates an insured’s claim and the
consideration of bids submitted in the tendering context.31 Moreover, in the
absence of guidance as to when new exceptions should be recognised, there
was the risk that judges were more likely to be swayed by their subjective
sense of justice and create new duties on a purely ad hoc basis.32 It was in
response to these problems that the Supreme Court in Bhasin decided to take
a new “incremental” approach to this area of the law.33
C. Bhasin’s Solution: The Organising Principle
In Bhasin, the Supreme Court sought to clarify and expand how good faith
applies to the performance of contracts through two incremental steps.
The first step was an attempt to bring clarity by recognising good faith
contractual performance as a general organising principle of contract law
[hereinafter the organising principle].34 The Court’s recognition of good
faith as an organising principle indicates what role good faith will have in
the law of contracts as it pertains to contractual performance.35 However,
before understanding what function good faith will serve, it is important to
first consider what the Court had in mind when it spoke of good faith.
As Hall comments,Bhasin provided no comprehensive definition of
good faith.36 Nevertheless, the language that the Court used to describe
28 [2014] SCC 71, at [42].
29 [2014] SCC 71, at [42].
30 Hall, note 2, at 335.
31 702535 Ontario Inc v Non-Marine Underwriters, Lloyd’s London, England (2000) 184 DLR
(4th) 687, at [29]; 95 ACWS (3d) 556 (Ont CA), cited in Fidler v Sun Life Assurance Co of
Canada [2006] SCC 30; [2006] 2 SCR 3, at [36]; Martel Building Ltd v R [2000] SCC 60;
[2000] 2 SCR 860, at [88]..
32 [2014] SCC 71, at [70].
33 [2014] SCC 71; [2014] 3 SCR 494, at [33].
34 [2014] SCC 71, at [63].
35 Unless otherwise stated, the term “good faith” will refer specifically to “good faith
contractual performance.”
36 Hall, note 2, at 336.
2016] A “First Look”: The Canadian Courts Post-Bhasin
129
good faith can be interpreted as giving rise to three definitions, each
presenting different aspects or facets of what good faith requires as an
organising principle.37 The organising principle of good faith contemplates
that parties should perform their contracts (1) “honestly and reasonably and
not capriciously or arbitrarily,” [hereinafter Definition 1]38 (2) honestly,
candidly, forthrightly, and reasonably, [hereinafter definition 2]39 and with
(3) “appropriate regard to the legitimate contractual interests of the
contracting partner,” which “merely requires that a party not seek to
undermine those interests in bad faith” rather than requiring them to
prioritise the contracting partner’s interests [hereinafter Definition
3].40Although some aspects of good faith are repeated (ie, honesty and
reasonableness are found in the first and second definitions), these
definitions help to capture the language that is available to judges and
litigants when applying the organising principle.
Moreover, good faith will function as a principle. Although there may
be a temptation to interpret the above definitions as a list of legally-
enforceable obligations, this organising principle is not an independent and
general duty of good faith contractual performance.41 Both the organising
principle and general duty of good faith are general in that they apply to all
contracting parties regardless of the type of contractual relationship.
However, the difference between an independent duty and a principle is that
the latter merely sets out what justice would require in any given instance.42
As the Court articulated, it is simply “a standard,” the function of which is
to help “understand and develop the law in a coherent and principled way,”43
and thus is more normative in its application. Unlike a free-standing rule or
duty, the organising principle is not a legal obligation that parties can call
upon courts to enforce.44
Another feature of the organising principle is that it manifests itself in
the form of particular duties. The Court made it clear that all of the existing
circumstances in which courts have recognised a specific duty to perform
contracts in good faith are manifestations of this organising principle
37 The Court refers to the organising principle in these terms at three different points in the
judgment, although not explicitly as definitions.
38 [2014] SCC 71, at [63].
39 [2014] SCC 71, at [66].
40 [2014] SCC 71, at [65].
41 [2014] SCC 71, at [64].
42 [2014] SCC 71, at [64].
43 [2014] SCC 71, at [64].
44 [2014] SCC 71, at [64].
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[hereinafter manifestations].45 It is in this sense that the concept of good faith
helps to organise the existing law.
Accordingly, parties can claim that the organising principle manifests
itself in the specific contractual circumstances that they find themselves in
and that the duty that is recognised as a result of the manifestation is
enforceable. This litigation strategy is available because the list of possible
manifestations is not closed.46 By way of advice, the Court instructed that
new manifestations should be recognised “where the existing law is found
to be wanting and where the development may occur incrementally….”47
Manifestations must also be “consistent with the fundamental commitments
of the common law of contract,” including the freedom to pursue individual
self-interest.48
In particular, this article proposes the following classification as a tool
for understanding the types of manifestations that could be recognised and
how litigants might articulate their claims for new manifestations moving
forward. New and existing manifestations could be analysed with reference
to both their “content” and “application,” each of which could be either
“general” or “specific.” In terms of “content,” each of the three definitions
above reveal different aspects or facets of the organising principle (eg,
honesty, reasonableness, etc.). Each manifestation draws from these
aspects. Furthermore, “application” refers to the range of contractual
relationships (eg, insurance contracts) or specific circumstances within
those relationships (eg, investigating an insured’s claim) in which the
manifestation would apply to require good faith conduct.
Table 1 illustrates the different possibilities. For example, a
manifestation could be general in terms of content if it requires conduct in
line with every aspect of the organising principle, yet be specific in
application if this behaviour is required only in a particular contractual
setting, such as employment contracts.
45 [2014] SCC 71, at [63]-[64].
46 [2014] SCC 71, at [66].
47 [2014] SCC 71, at [66].
48 [2014] SCC 71, at [70].
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Table 1: Manifestations of the Organising Principle
Application of the Manifestation
GENERAL
[applies to all
contractual
relationships]
SPECIFIC
[applies to one
or a few
contractual
relationship(s)]
GENERAL
[includes all
aspects of the
organising
principle (ie,
Definitions 1,
2 and 3)]
General duty of good
faith contractual
performance (not yet
recognised)
Duty of good
faith contractual
performance
governing the
manner of
termination
under
employment
contracts
(similar to
Wallace)
SPECIFIC
[includes one
or a few
aspect(s) of
the
organising
principle (eg,
honesty,
reasonablenes
s, etc.)]
Duty of honest
contractual performance
(Bhasin)
Duty of
forthright
contractual
performance
governing
suspensions
under
employment
contracts
(similar to
Potter,
described in Part
II)
The second step that the Court took in Bhasin helps to further illustrate this
classification. After acknowledging the role of the organising principle, the
Court proceeded to expand the application of good faith by recognising a
new manifestation, the duty of honest contractual performance, requiring
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that contracting parties “must not lie or otherwise knowingly mislead each
other about matters directly linked to the performance of the contract,” but
not requiring disclosure.49 Although Bhasin refers to this as a general duty
because it applies to all contracts (ie, its application is general in nature) it
is still content-specific in that it draws from a particular aspect of the
organising principle.
With respect to the facts in Bhasin, the Court concluded that Can-Am
was dishonest with Bhasin and that its dishonesty was “directly and
intimately connected” to Can-Am’s performance under the contract and use
of the non-renewal provision.50 Accordingly, Can-Am breached the duty of
honest performance.51
D. The Supreme Court of Canada’s Objective
Before venturing into an analysis of how subsequent court decisions have
responded to Bhasin, it is worth considering what the Supreme Court of
Canada planned to accomplish through this decision. In particular, these
objectives will serve as the standard against which its efforts can be
measured. Although the Court recognised that its proposed solution was not
a panacea,52 it anticipated that its two step approach would nevertheless
create “a measure of coherence and predictability.”53
Coherence and predictability work together. Looking backwards,
“coherence” speaks to the Court’s desire to clarify how specific duties of
good faith contractual performance that have already been recognised are
connected and fit together as manifestations of the organising principle. In
contrast, “predictability” is about understanding the way forward. It
concerns the Court’s attempt to guide judges as they recognise new
manifestations and, accordingly, settle the expectations of contracting
parties in this respect.
II. The Response to Bhasin
This section will provide an overview of how courts have responded to the
Bhasin decision in the year following its release. This analysis does not
purport to be exhaustive. Nevertheless, it will focus on those decisions that
49 [2014] SCC 71, at [73].
50 [2014] SCC 71, at [103].
51 [2014] SCC 71, at [94].
52 [2014] SCC 71, at [41].
53 [2014] SCC 71, at [41].
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133
are most effective in illustrating the impact of Bhasin on how this area of
the law has continued to develop.
A. Supreme Court of Canada Decisions
Potter v New Brunswick (Legal Aid Services Commission)54 is the first and
only Supreme Court of Canada decision to cite Bhasin. Although the Court
briefly referred to Bhasin only once in this case, it is worth examining Potter
to assess how the Bhasin decision has been treated by the very court that
handed it down less than a year earlier.
The Court’s decision in Potter addresses the concept of good faith in
the employment law context. In particular, the Court considered what
factors are relevant for determining whether the administrative suspension
of an employee is wrongful.55 Writing for the majority, Wagner J (Abella,
Rothstein, Moldaver, Karakatsanis, JJ concurring) stated that courts must
identify whether the suspension is justified.56 WGood faith on the
employer’s part” will always be a relevant factor in making that
determination.57
Wagner J went on to cite Definition 2 from Bhasin, commenting that
“acting in good faith in relation to contractual dealings means being honest,
reasonable, candid, and forthright.”58 In this case, the respondent employer
did not act in good faith because its failure to provide the appellant
employee with any reason for his suspension was not being forthright.59
Wagner J concluded that a suspension will only be justified, and thus not
wrongful, if the employer acts in good faith by providing legitimate business
reasons.60 Indeed, a suspension amounts to a breach of contract if it is not
authorised by the contract.61 Given that there is no implied authority to
suspend an employee in the absence of legitimate business reasons for doing
so,62 failing to exercise good faith by not disclosing these reasons results in
a breach of contract.
54 [2015] SCC 10; [2015] 1 SCR 500 [hereinafter Potter].
55 [2015] SCC 10, at [97].
56 [2015] SCC 10, at [97].
57 [2015] SCC 10, at [97].
58 [2015] SCC 10, at [99].
59 [2015] SCC 10, at [99].
60 In Potter, at [98], the Court noted that legitimate business reasons may not be required in the
context of a disciplinary suspension.
61 [2015] SCC 10, at [45].
62 Potter [2015] SCC 10, at [98].
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The Court appeared to be creating a new manifestation of the
organising principle in the context of employment law. In addition to an
employer’s existing duty to dismiss employees in a good faith manner,63
Potter suggests that employers might also have an obligation to act in good
faith when issuing suspensions. However, the Court did not explicitly state
that this is what it was doing.
Although this is only one possible reading of Potter, there are at least
a few considerations that weigh in favour of this interpretation. First, the
fact that the Court was not explicit about identifying a new manifestation in
this context vis-à-vis a specific duty of good faith does not necessarily mean
that it did not intend to do so. Indeed, there may be room for litigants to
“read between the lines” in an attempt to identify what is being implied. The
Court may have avoided an explicit reference to the organising principle
here not because it was not being contemplated, but for other reasons. To
begin with, one might think that if the Court intended to recognise a new
manifestation, it may have wanted to take the opportunity to flesh out
Bhasin’s advice concerning when and how lower courts should recognise
these new manifestations.64 Moreover, it could have been useful to illustrate
this process to the courts with the help of the specific facts in Potter.
Although it is not unheard of for the Court to readdress issues that it has
already dealt with in a recent decision,65 it would not be surprising if the
lack of explicitness and detail in this case could be explained by the Court’s
unwillingness to formally revisit Bhasin so soon after its release.
Furthermore, it is also relevant that Potter was heard six months
before the Court’s judgment in Bhasin was released. The Potter decision
was then handed down less than one year later. Accordingly, the parties did
not have the opportunity to consider this new case in their written or oral
submissions. Although the Court could have delved into a substantial
discussion of Bhasin without the parties’ input, it would have likely
requested or allowed further submissions from the parties in response to
Bhasin, as was the case in the Ontario Court of Appeal decision of High
63 Wallace v United Grain Growers Ltd [1997] 3 SCR 701; 152 DLR (4th) 1 (SCC), at [95]
[hereinafter Wallace].
64 See [2014] SCC 71, at [66], [69]-[70].
65 Leave to appeal to the Supreme Court of Canada was recently granted following two
contractual interpretation cases a little over a year after the Supreme Court addressed the
standard of review for questions of contractual interpretation in Creston Moly Corp v Sattva
Capital Corp [2014] SCC 53; [2014] 2 SCR 633. The two cases are Ledcor Construction Ltd
v Northbridge Indemnity Insurance Co [2015] ABCA 121; 386 DLR (4th) 482 and British
Columbia v Teal Cedar Products Ltd [2015] BCCA 263; 386 DLR (4th) 40.
2016] A “First Look”: The Canadian Courts Post-Bhasin
135
Tower Homes Corp v Stevens.66 That the Court did not do so here may
suggest that Bhasin would not have had a profound effect on the outcome
of its decision. Indeed, the Court’s primary task in Potter was to clarify the
law on constructive dismissal. Wagner J’s treatment of good faith comprised
only a small part of that analysis and Cromwell J, who wrote for the majority
in Bhasin but dissented in Potter, did not mention the concept of good faith
once in his dissent. Accordingly, the Court may have deliberately avoided a
discussion of the organising principle because it would have been too
tangential.
Secondly, the Court’s brief reference to Bhasin could be interpreted
as an acknowledgement of what Bhasin stands for and an acceptance of its
application to the facts in Potter. As aforementioned, Wagner J cited Bhasin
for one of its explanations of what good faith requires. However, this
particular explanation, Definition 2, can be traced back to much earlier
cases, including Wallace v United Grain Growers Ltd.67 It was in Wallace
that the Supreme Court recognised a duty of good faith with respect to the
manner of dismissal in employment contracts68 and defined good faith in
that context as requiring, “at a minimum, candid, reasonable, honest and
forthright” behaviour.69 The Court’s use of this definition in Potter rather
than one of the other definitions articulated in Bhasin likely speaks to its
recognition of the need for consistency in how good faith is interpreted in
the employment context. Indeed, confusion is avoided if a requirement of
good faith in employment contracts requires the same type of behaviour
irrespective of whether it applies to the manner of dismissal or to
administrative suspensions.
Although both Wallace and Bhasin define good faith contractual
performance in terms of candid, reasonable, honest, and forthright
behaviour, Wallace goes further by specifying that this is merely the
minimum level of conduct required.70 Potter mimics this specific language,
which was not present in Bhasin. This suggests that the Court may have had
Wallace in mind when defining good faith in the context of administrative
suspensions. Given that Wallace considers what good faith requires in
employment contracts, the same context as in Potter, and that the Court
seemed to be drawing from the specific “at a minimum” language used in
Wallace, one might then ask why Wagner J cited Bhasin instead. One likely
66 [2014] ONCA 911; 123 OR (3d) 81, at [36] [hereinafter High Tower Homes].
67 [1997] 3 SCR 701; 152 DLR (4th) 1 (SCC).
68 [1997] 3 SCR 701; 152 DLR (4th) 1 (SCC), at [95].
69 [1997] 3 SCR 701; 152 DLR (4th) 1 (SCC), at [98].
70 [1997] 3 SCR 701; 152 DLR (4th) 1 (SCC), at [98].
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explanation is that Bhasin is the most recent Supreme Court decision to
recognise a duty of good faith contractual performance. However, there is
another possibility. The Court could have been signaling both its awareness
of Bhasin and the applicability of that decision, as well as implicitly drawing
attention to one of its main conclusions: that courts can recognise new
manifestations of the organising principle and the direct application of that
conclusion to the facts in Potter. In other words, it points to the Court’s
recognition of the holding in Bhasin that there is an organising principle of
good faith that manifests itself in new contexts, and that the facts of Potter
illustrate one of those contexts.
Finally, regardless of whether the Court intended to apply Bhasin to
the facts of Potter by informally recognising a new manifestation, it could
be argued that this was nevertheless the effect of the Court’s decision.
Indeed, similar interpretations of Potter have been articulated by
practitioners.71 At the very least, this provides an indication of how litigators
may try to spin the Potter decision in future cases.
When the Court in Potter stated that a party breaches a contract if they
fail to exercise good faith in particular circumstances,72 this suggests that
the contract is imposing a duty to act in good faith in those circumstances.
It is as if this requirement of good faith is a term of the employment contract,
similar to the recognised implied term of good faith governing the manner
of termination.73 In such a case, employers seeking to suspend an employee
are only authorised by the contract to do so if they exercise good faith by
providing reasons for the suspension.74 When conducting suspensions,
therefore, employers are obliged by the contract to act in good faith. This
suggests that even if non-disclosure is not contrary to the duty of honest
performance, it can still be contrary to another specific duty of good faith.
To summarise, although the Supreme Court was not explicit about
acknowledging a new manifestation in Potter, the Court’s judgment
nevertheless suggests that there is a specific duty of good faith to provide
legitimate reasons for employment suspensions and that this duty takes the
71 See Joshua Concessao, “Indefinite Suspensions With Pay: The SCC Clarifies the Test for
Constructive Dismissal” (2015) Hicks Morley Case in Point
with-pay-the-
scc-clarifies-the-test-for-constructive-dismissal/>; Stephanie Brown and Joel Smith, “Honesty,
Good Faith and Constructive Dismissal: Supreme Court Clarifies Employer Obligations”
(2015) Shields O’Donnell MacKillop LLP Blog
.
72 [2015] SCC 10; [2015] 1 SCR 500, at [45], [98].
73 [2014] 3 SCR 494, at [53]-[54].
74 [2015] SCC 10, at [98].
2016] A “First Look”: The Canadian Courts Post-Bhasin
137
form of an implied term. This development is likely in line with Bhasin’s
“incremental” approach. However, the Court did not formally consider
Bhasin’s advice in this respect.
Furthermore, the Court adopted Definition 2 of the organising
principle, emphasising that good faith requires forthright conduct and that
providing reasons for a suspension is an example of forthrightness. Finally,
this manifestation would be classified as content-specific (ie, forthrightness)
and applicationspecific in that it applies not only to the specific
employment relationship, but also the specific context of employment
suspensions.
B. Lower Court Decisions
At the time of writing there were one-hundred and twenty-seven lower court
decisions that considered Bhasin.75 Sixteen of these were Court of Appeal
decisions. In particular, eighteen of the trial level decisions and each Court
of Appeal decision were reviewed. Although only a few of these decisions
respond meaningfully to Bhasin, those that engage Bhasin (i) draw attention
to some of the probing questions that it left unanswered, (ii) help to illustrate
what future manifestations might look like, and (iii) demonstrate what
aspects of the organising principle have been emphasised.
i.!Probing Questions: Are Manifestations Implied Terms or
Doctrines?
Bhasin is explicit about courts being able to recognise new manifestations
of the organising principle,76 but it remains unclear what form those
manifestations and their respective duties will take. For example, some of
the existing manifestations that were explicitly mentioned in Bhasin have
taken the form of an implied contractual term.77 However, Cromwell J took
the effort to point out that the newest manifestation of the organising
principle, the duty of honest performance, “should not be thought of as an
implied term, but [as] a general doctrine of contract law that imposes as a
contractual duty a minimum standard….”78 Moreover, the Court referred to
doctrines at numerous points in the judgment.79
75 This number is based on “key cite” data generated on WestlawNext on February 14, 2016.
76 [2014] SCC 71, at [66].
77 [2014] SCC 71, at [53]-[54].
78 [2014] SCC 71, at [74].
79 [2014] SCC 71, at [35], [42], [63], [66].
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These comments might indicate that new manifestations can no longer
take the form of duties implied by the contract itself and should be routed
instead through more general doctrines.80 The first approach traces the
specific duty of good faith to an implied term in the contract. Implied terms
are often recognised as a matter of interpretation, and thus are imposed by
the contract itself and fulfill the partieshe contract i81 Under the second
approach, what will be called the “doctrine” approach, the source of the duty
is a doctrine of contract law that exists outside of the contract.82
Two recent appellate court decisions have responded to this issue in
favour of the doctrine approach, concluding that manifestations should not
be interpreted as implied terms. In High Tower Homes, the Ontario Court of
Appeal cited Bhasin for the proposition that “the duty of good faith should
not be thought of as an implied term.”83 However, what Cromwell J actually
wrote in Bhasin was that the “new duty of honest performance…should not
be thought of as an implied term.”84 The duty of honest performance is only
one example of a specific duty of good faith. Accordingly, it is unclear
whether Cromwell J’s remark concerning the correct classification of the
former can be extended to the latter more generally. Cromwell J clarified
his position: “I am at this point concerned only with a new duty of honest
performance.” This may suggest that his comment was not intended to have
this extended application.85 Nevertheless, the Court of Appeal appears to
read Cromwell J’s statement as applying to not only the duty of honest
performance, but to all specific duties of good faith.
The British Columbia Court of Appeal came to a similar conclusion
in Moulton Contracting Ltd v British Columbia.86 When the respondent
attempted to rely on Bhasin87 the Court confirmed its support for the Ontario
Court of Appeal’s decision in High Tower Homes, stating explicitly that
Bhasin clarifies that good faith is not an implied term, but…manifests in
particular doctrines...”88 Regardless of whether the interpretations adopted
80 It is noted that the difference between doctrines and duties is hard to pin down and that the
Bhasin decision does not bring clarity to this distinction. How these terms are articulated here
is an attempt to create a degree of clarity.
81 Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd (1994) 149 AR 187, at
[15]; [1994] ABCA 94 (CanLII) (Alta CA), cited in [2014] SCC 71, at [74].
82 Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd (1994) 149 AR 187, at
[15]; [1994] ABCA 94 (CanLII) (Alta CA), cited in [2014] SCC 71, at [74].
83 [2014] ONCA 911; 123 OR (3d) 81, at [36].
84 [2014] SCC 71, at [74].
85 [2014] SCC 71, at [74].
86 [2015] BCCA 89; 381 DLR (4th) 263 [hereinafter Moulton].
87 [2015] BCCA 89, at [65].
88 [2015] BCCA 89, at [67].
2016] A “First Look”: The Canadian Courts Post-Bhasin
139
by these courts of appeal are what the Court in Bhasin had in mind, litigants
in both Ontario and British Columbia might now have to frame their
requests for new manifestations as the recognition of doctrines rather than
of implied terms.
However, it is worth considering the practical effect of these different
approaches. A valid concern with the doctrine approach is that the newly-
recognised duty does not arise out of the parties intentions (express or
implied) and thus that the approach interferes with parties’ freedom of
contract.89 The distinction between these approaches appears to be
somewhat artificial though in that the effect of either approach is likely to
be similar. Regardless of whether a duty is implied as a term of the contract,
and thus reflects the parties’ implicit intentions, or is imposed by an external
doctrine with no connection to the parties’ intentions, one can still be critical
of the fact that both the implied term and doctrine impose an obligation on
the parties, even if it was not expressly contemplated by them. Indeed, the
difference between a court stating “the parties implied that there was a duty”
and “a doctrine imposes a duty” may be insignificant given that the source
of both the doctrine and the implication is often a similar assumption about
parties’ reasonable expectations.90
Nevertheless, as the Court highlighted in Bhasin, there is a key
difference between these approaches. A duty imposed by doctrine cannot be
excluded by the parties because it is external to the agreement.91
Accordingly, it does not have to compete with an ‘entire agreement’Aclause
or express terms that might point towards a different result.92 The presence
of an ‘entire agreement’ clause in Bhasin explains why the Court opted to
characterise honest performance as a doctrine-imposed duty.93 Indeed, the
Court stated that it would have been “difficult to say that a duty of good
faith should be implied in this case on the basis of the intentions of the
parties.”94 It wanted to avoid implying a term into the contract when the
“entire agreement” clause illustrated that the parties expressly intended to
avoid such a result.95
Whether new manifestations can take the form of implied terms also
has an effect on the proper interpretation of the Potter decision. Although
89 [2014] SCC 71, at [39], [76].
90 [2014] SCC 71, at [76].
91 [2014] SCC 71, at [75].
92 [2014] SCC 71, at [75].
93 [2014] SCC 71, at [72].
94 [2014] SCC 71, at [72].
95 [2014] SCC 71, at [75].
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the language in Potter could be interpreted as pointing to a duty of good
faith as an implied term in employment contracts, it does not allude to the
existence of any doctrine-based duty. If manifestations are limited to the
latter form, it would be harder to assert that a new manifestation was
recognised in Potter.
However, there are two additional reasons why it still might be
possible for further manifestations to be characterised as implied terms.
First, Cromwell J’s description of the duty of honest performance in Bhasin
as a doctrine rather than as an implied term might stem from this duty’s
general application to all contractual relationships (ie, it is application-
general). In contrast, the majority of the existing manifestations have arisen
in “specific types of contracts and relationships” (ie, they are application-
specific).96 As is illustrated by Cromwell Jifestations have arisen in of
unconscionability,97 a doctrine might simply be better suited to
manifestations that have a general application. Accordingly, it might not be
out of the question for future application-specific manifestations to continue
to take the form of implied terms.
Secondly, where there is an existing manifestation in a particular
contractual context, and that manifestation takes the form of an implied
term, consistency would be achieved if further manifestations in that context
also took the same form. Therefore, in the employment context where the
duty to terminate in good faith was implied as a contractual term, it would
not be unreasonable to conclude that the Court in Potter might have implied
a new duty to provide reasons for suspension as a contractual term as well.
There are valid reasons for arguing that new manifestations are rooted
in doctrines rather than in implied terms, namely the need to avoid the effect
of “entire agreement” clauses. Nevertheless, the above discussion
demonstrates that Cromwell J’s characterisation of the duty of honest
performance as doctrine-based does not necessarily mean that all future
manifestations will take the same form, especially given the breadth of
existing manifestations in the form of implied terms. If newly-manifested
duties are implied as contractual terms, future litigants will have to consider
to what extent these duties can be modified or displaced by the express terms
of the agreement.98
96 [2014] SCC 71, at [36], [42], [44].
97 [2014] SCC 71, at [75].
98 [2014] SCC 71, at [77] indicates that the doctrine-imposed duty of honest performance can
be modified by the terms of the contract as long as the “core” of the duty is respected. However,
it is unclear to what extent an “entire agreement” clause will affect an implied duty of good
faith (ie, whether it can be displaced entirely).
2016] A “First Look”: The Canadian Courts Post-Bhasin
141
ii.! Possible Manifestations of the Organising Principle
The Alberta Court of Appeal articulated a possible manifestation of the
organising principle in Stewart Estate v 1088294 Alberta Ltd.99 Although
the concept of good faith only arose in this case in the context of a discussion
concerning damages for the tort of trespass, the Court’s words provide some
insight into what a specific duty of good faith might look like.
Of particular relevance is McDonald JA’s comment concerning the
sophistication of the parties in this case: “we are dealing with large,
sophisticated and well-informed corporations on the one hand, and lay
people…on the other. The need for the former to act in good faith when
discharging their contractual obligations to the latter has been
highlighted…in Bhasin.”100 Here, McDonald JA emphasised the need for
good faith behaviour when contracting parties have different levels of
bargaining power. However, his remarks fall short of explicitly requiring a
specific duty in this context and thus cannot likely be interpreted as
implying such an obligation. Nevertheless, these comments could be used
in future cases to support the argument that a specific duty should be
recognised generally in relationships defined by a power imbalance, rather
than only in “certain classes of contracts such as employment…and
insurance…” where power imbalances are found.101 This manifestation
would likely be content-general (ie, not focusing on a particular aspect of
good faith) and application-specific (ie, relationships defined by a power
imbalance).
Another case that could be interpreted as articulating a new
manifestation, or at least the need for one (as in Stewart), is Directcash ATM
Management Partnership v Mauriceculating a new manifestatio102 In this
New Brunswick Court of Appeal decision, the appellants entered into
processing agreements with the respondents to provide services that would
connect the respondents’ ATMs to an Interac network.103 In particular, these
contracts contained a right of first refusal.104 Upon expiry of the agreements
the respondents were required to give notice to the appellants if the
respondents received any offers from other companies to provide similar
99 [2015] ABCA 357; 237 ACWS (3d) 517 [hereinafter Stewart].
100 [2015] ABCA 357, at [313].
101 [2014] SCC 71, at [44].
102 [2015] NBCA 36; 387 DLR (4th) 50 [hereinafter Directcash].
103 [2015] NBCA 36, at [2].
104 [2015] NBCA 36, at [4].
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services.105 The appellants would then be entitled to enter into a new
agreement with the respondents under the terms of that offer.106
The Court’s analysis is relevant because of its application of Bhasin
to the processing agreements at issue in this case. The central issue for the
Court was whether the disclosure clause in the agreements had been
breached by the respondents.107 The Court ultimately concluded that the
respondents’ failure to provide the appellants with the “specific terms” of
the new offer that they had received was a breach of that disclosure clause.108
In obiter dicta, the Court also commented on the issue of good faith, even
though the appellants had not alleged that there was any separate breach of
a good faith obligation.109 On this point, the Court determined that the
respondents’ decision not to disclose was made in bad faith.110 In particular,
the respondents had acted capriciously.111
It is worth drawing attention to the respondents’Ispecific conduct
because it exemplifies what courts might classify as “capricious” behaviour,
pursuant to Definition 1. The respondents notified the appellants that they
would not be renewing their contract112 and found a new provider “without
having given [the appellants] the opportunity to bid on the contracts,”113
contrary to the right of first refusal. Despite the appellants’ requests for
specific information concerning the offer and indication that the provision
of this information was required by their contract, the respondents refused
to provide information because it was, in their opinion, not contractually
required.114 The respondents then proceeded to contract with another
company.115
In particular, the Court took issue with the respondents relying on
their own interpretation of the “first refusal” clause without considering the
underlying intent of the agreements as a whole and emphasised that it would
not have been difficult for the respondents to provide the requested
information.116
105 [2015] NBCA 36, at [4].
106 [2015] NBCA 36, at [4].
107 [2015] NBCA 36, at [23].
108 [2015] NBCA 36, at [7], [23].
109 [2015] NBCA 36, at [30].
110 [2015] NBCA 36, at [30].
111 [2015] NBCA 36, at [30].
112 [2015] NBCA 36, at [5].
113 [2015] NBCA 36, at [6].
114 [2015] NBCA 36, at [6].
115 [2015] NBCA 36, at [6].
116 [2015] NBCA 36, at [30].
2016] A “First Look”: The Canadian Courts Post-Bhasin
143
It is unlikely that the Court was acknowledging a specific duty of good
faith contractual performance in this case, largely because its comments on
this issue were obiter. Indeed, the Court’s conclusion that the conduct
resulting in a breach of the disclosure clause had been in bad faith was only
incidental to the central disclosure issue. This is in contrast to Bhasin where
the respondent had not breached the explicit terms of the contract, yet was
liable for beach of the duty of honest performance. Although bad faith
conduct may be reprehensible, there is no added significance absent a
specific duty of good faith that can be breached.
Nevertheless, the New Brunswick Court of Appeal’s language could
be interpreted by litigants as recognising a duty of good faith. The Court
stated that parties have a duty to perform their contracts “honestly and
reasonably and not capriciously or arbitrarily,”117 and then it explicitly
commented that it was “applying the above statement” to the facts of the
case, where it found that the respondents had acted in a “capricious
fashion.”118 This decision could stand for the proposition that there is a
specific duty to avoid capricious conduct (ie, it is content-specific), similar
to the duty of honest performance.
However, this manifestation would likely only apply to those narrow
circumstances in which, as was the case here, there is a disagreement
concerning the scope of a contractual term (ie, it is application-specific). In
that context, there might be a good faith obligation for a party not to act
capriciously by blindly relying on their own interpretation of the contract to
justify conduct that the other party contends would be a breach of its terms,
especially where little is required to do what the other party suggests is
needed to avoid the breach. At the very least, this is how litigants might
attempt to explain the effect of this decision.
Finally, the Alberta Court of Queen’s Bench’s decision in Styles v
Alberta Investment Management Corp119 presents the most explicit effort to
recognise a manifestation of the organising principle. The plaintiff in this
case was terminated without cause and the primary issue before the Court
was whether he was entitled to any payment under the employer’s Long
Term Incentive Plan.120
After reviewing Bhasin in detail and considering the existing law, the
Court explicitly recognised that a “duty of reasonable exercise of
discretionary contractual powers” was a manifestation of the organising
117 [2015] NBCA 36, at [29].
118 [2015] NBCA 36, at [30].
119 [2015] ABQB 621; 258 ACWS (3d) 539 [hereinafter Styles].
120 [2015] ABQB 621, at [1].
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principle.121 In particular, this duty requires that “discretionary
powers…must be exercised fairly and reasonably and not in a manner that
is “capricious” or ‘arbitrary.’”122 Quoting the language used in Bhasin to
describe the duty of honest performance, the Court stated that the source of
this duty is a general doctrine rather than an implied term.123 Accordingly,
the duty cannot be excluded by the parties.124 As in Bhasin, the Court’s
reliance on the doctrine approach was likely motivated by the existence of
an “entire agreement” clause in the employment contract at issue.125
Although this duty is framed generally, the Court later stated that “it
is designed to deal with…the unfair manner of termination.”126 First, this
language suggests that future litigants might try to restrict the application of
this duty to the specific context of employment relationships. Second, the
above quote also indicates that the Court seemed to be displacing the
existing duty to terminate in a good faith manner, which has been recognised
as an implied term,127 with this more general doctrine-based duty to exercise
discretionary powers in good faith. The true effect of this development will
have to be fleshed out in future decisions.
Additionally, the duty of honest performance that was recognised in
Bhasin was application-general. It is possible that the doctrine-approach
was adopted in Bhasin for that reason. However, in Styles the doctrine-
approach was applied even where the manifestation was application-
specific. This development suggests that manifestations should take the
form of doctrines, even where the application of the duty is specific rather
than general.
Finally, as the Supreme Court highlighted in Bhasin, there have
already been instances in which the courts have recognised a duty of good
faith in relation to the exercise of discretionary power under contracts.128
The Alberta Court of Queen’s Bench recognised this in Styles.129 Although
the Court’s acknowledgement of this manifestation might not appear to be
a “new” development, it is important to remember Bhasin’s advice that
courts should consider “the existing law as the primary guide to future
121 [2015] ABQB 621, at [63].
122 [2015] ABQB 621, at [63].
123 [2015] ABQB 621, at [63].
124 [2015] ABQB 621, at [64].
125 [2015] ABQB 621, at [104].
126 [2015] ABQB 621, at [66].
127 [2014] SCC 71, at [53]-[54].
128 [2014] SCC 71, at [47], [50].
129 [2015] ABQB 621; 258 ACWS (3d) 539, at [59].
2016] A “First Look”: The Canadian Courts Post-Bhasin
145
development”130 and its indication that the law should develop
incrementally.131 In contrast to Stewart and Directcash, Styles is perhaps
more illustrative of the incremental approach that Bhasin had in mind when
giving courts license to recognise manifestations.
iii.! Drawing from the Three Definitions
The lack of clarity in Bhasin concerning the definition of good faith has
made it easy for lower courts to pick at the different aspects of Bhasin’s
fragmented description. In addition to the cases already mentioned,132 the
following decisions illustrate how courts have applied Bhasin’s three
definitions of good faith in different ways.
In Industrial Alliance Insurance and Financial Services v Brine133 the
Nova Scotia Court of Appeal emphasised Definition 3: “appropriate regard
to the legitimate contractual interests of the contracting partner.” This
definition was also applied in Styles. In Styles, the employer had to give
proper consideration to the plaintiff’s entitlements under a Long Term
Incentive Plan, which was deemed to be a legitimate contractual interest.134
The British Columbia Court of Appeal highlighted Definition 1 in
Moulton.135 Here, the respondent entered into an agreement with the
Province of British Columbia that granted him rights to harvest Crown
timber.136 The Court found that the Province’s failure to disclose that a
member of the local First Nations had threatened to disrupt the respondent’s
logging operations was not dishonest, unreasonable, capricious or
arbitrary.137 However, the Court did not consider whether the lack of
disclosure was contrary to the “forthrightness” aspect of good faith, as was
the case in Potter.
Finally, in Shewchuk v Blackmont Capital Inc,138 the Ontario Superior
Court of Justice held that the defendant employer’s response to the plaintiff
employee’s complaints over compensation was not capricious because the
130 [2014] SCC 71, at [69].
131 [2014] SCC 71, at [66].
132 See the previous discussion of Directcash for an example of what the courts have considered
to be “capricious” conduct.
133 [2015] NSCA 104, at [94; [2015] NSCA 104 (CanLII) [hereinafter Industrial Alliance].
134 [2015] ABQB 621; 258 ACWS (3d) 539, at [104].
135 [2015] BCCA 89, at [70].
136 [2015] BCCA 89, at [1].
137 [2015] BCCA 89, at [76].
138 [2015] ONSC 5079; 257 ACWS (3d) 579, at [231], [233].
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employer listened to the employee’s concerns, even if it did not concede to
his demands.
Table 2: Manifestations of the Organising Principle (Arising Out of Cases
Considered)
Application of the Manifestation
GENERAL
[applies to all contractual
relationships]
SPECIFIC
[applies to one
or a few
contractual
relationship(s)]
Content of
the
Manifestation
GENERAL
[includes all
aspects of the
organising
principle (ie,
Definitions 1,
2 and 3)]
General duty of good
faith contractual
performance (not yet
recognised)
Duty of good
faith contractual
performance
governing the
manner of
termination
under
employment
contracts
(similar to
Wallace)
Duty of good
faith contractual
performance in
contractual
relationships
defined by a
power imbalance
(similar to
Stewart)
SPECIFIC
Ie, Honest
(Definition 1/2)
Duty of honest contractual
performance (Bhasin)
Application of the Manifestation
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147
GENERAL
[applies to all contractual
relationships]
SPECIFIC
[applies to one or a
few contractual
relationship(s)]
Content of the
Manifestation
SPECIFIC
Ie, Reasonable
(Definition 1/2)
Duty of reasonable
exercise of
discretionary
contractual powers
in employment
contracts (Styles)
SPECIFIC
Ie, Not
Capricious
(Definition 1)
Duty of “not
capricious”
contractual
performance where
there is a
disagreement
concerning the scope
of a contractual term
(similar to
Directcash)
SPECIFIC
Ie, Forthright
(Definition 2)
Duty of forthright
contractual
performance
governing
suspensions under
employment
contracts (similar to
Potter)
III. Measuring Up
Taken at face value, it is not difficult to see how various aspects of the
Bhasin decision have created problems for the Court’s pursuit of coherence
and predictability. In terms of coherence, the purpose of the organising
principle was to explain how the already-recognised specific duties of good
faith are united by a common origin. Although this metaphor somewhat
helps to understand the existing law, these manifestations of the organising
principle are still exceptions to the absence of a general duty of good faith
contractual performance. Indeed, Bhasin did not create one and they are still
ad hoc in that it remains unclear why some specific duties were recognised
when others were not. As Hall comments,139 and as the Ontario Superior
139 Hall, note 2, at 341.
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Court of Justice’s judgment in Empire Communities Ltd v Ontario140
suggests, Bhasin merely attached a new name or label to the existing law.
The law has not become less incoherent as a result.141
In Bhasin, the Supreme Court warned judges that their application of
the organising principle should not give rise to ad hoc judicial
moralism.142 Nevertheless, the effect of the Bhasin decision is primarily
that cautious lower court judges now have somewhat more confidence to
find new instances in which a specific duty of good faith exists, yet are left
with little instruction from Bhasin as to when to do so.
Furthermore, although Bhasin created a degree of predictability in that
the organising principle points the way forward, predictability is also
undermined because Bhasin provided only minimal guidance with respect
to how the organising principle should be applied. The Supreme Court in
Bhasin advised an incremental approach that is consistent with the existing
law,143 but offered little clarity concerning whether new manifestations
should be interpreted as rooted in doctrines or implied terms. Its guidance
was “mostly conceptual” and “may not be easy to apply in practice.”144
In a number of instances, the courts have provided reasonable
interpretations of the Bhasin decision. For example, in Bank of Montreal v
Javed, the Ontario Court of Appeal clarified that Bhasin did not modify or
expand the test for unconscionability.145
However, with the exception of the duty of honest performance,146
subsequent court decisions have frequently misunderstood important
elements of Bhasin. This misunderstanding suggests that the Bhasin
decision was not entirely successful in guiding courts and helping them to
understand the way forward. For example, a few courts have referred to
Bhasin in such a way as to suggest that they interpreted the organising
principle as a general duty, or at least did not take the time to clarify the
difference between the two. In Industrial Alliance, the Nova Scotia Court
of Appeal stated that “the Supreme Court of Canada expanded…implied
contractual duties from…particular contexts into a general contractual
140 [2015] ONSC 5183; 256 ACWS (3d) 791, at [26].
141 Hall, note 2, at 341.
142 [2014] SCC 71, at [70].
143 [2014] SCC 71, at [66].
144 Hall, note 2, at 344.
145 [2016] ONCA 49; [2016] ONCA 49 (CanLII), at [11]-[12].
146 None of the cases considered misinterpreted Bhasin’s duty of honest performance. See, for
example: Canaccord Genuity Corp v Pilot [2015] ONCA 716, at [50; 259 ACWS (3d) 290;
Burquitlam Care Society v Fraser Health Authority [2015] BCSC 1343, at [7; 256] ACWS
(3d) 823.
2016] A “First Look”: The Canadian Courts Post-Bhasin
149
duty.”147 The Court also described the duty of honest performance as an
implied term despite Bhasin’s clear indication to the contrary. 148
Similarly, in Directcash the New Brunswick Court of Appeal
commented that “implicit is the duty of contracting parties to…fulfill their
contractual obligations…‘honestly and reasonably and not capriciously or
arbitrarily,’” after which it stated that “Cromwell J has created a new
common law duty under the broad umbrella of the organising
principle…149 Although the language in the latter quote was taken from
Bhasin’s discussion of the duty of honest performance, the New Brunswick
Court of Appeal did not refer to honest performance once in this decision.
This suggests that the “new common law duty” that it refers to is a duty to
perform contracts honestly, reasonably, etc. No such duty was created in
Bhasin.
In summary, the law of good faith contractual performance remains
relatively incoherent. To the extent that courts have frequently
misinterpreted Bhasin, predictability is undermined as well. Accordingly, it
appears that the Supreme Court has only minimally accomplished what it
set out to do in the Bhasin decision.
Conclusion
Bhasin represents the Supreme Court of Canada’s attempt to develop the
law of good faith contractual performance. Although the Court successfully
expanded this area of the law by recognising a new duty to perform contracts
honestly, its efforts to bring clarity proved to be less than fruitful. This is
illustrated by the difficulties faced by lower courts in interpreting Bhasin.
Indeed, Bhasin has at best brought only minimal coherence and
predictability to this area of the law.
Nevertheless, initial uncertainty is often a necessary by-product of the
manner in which the Supreme Court chooses to develop the law. In Bhasin,
the Court did not attempt to flesh out every issue in relation to good faith.150
Instead, the approach adopted by the Court could be referred to as “judicial
dialogue,”151 one in which additions to or clarifications of the law are
147 [2015] BCSC 1343, at [7].
148 [2015] NSCA 104, at [95], [99].
149[2015] NBCA 36; 387 DLR (4th) 50, at [29].
150 Hall, note 2, at 336.
151 This approach is similar to the notion of Charter “dialogue” theory articulated in Peter Hogg
and Allison Bushell, “The Charter Dialogue Between Courts and Legislatures (Or Perhaps the
Charter of Rights Isn’t Such a Bad Thing After All)” (1997) 35:1 Osgoode Hall LJ 75.
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presented by the Supreme Court and then “discussed” by the lower courts
in response. In this context, judicial dialogue will allow the law of good
faith contractual performance to develop incrementally, most likely in a
non-linear fashion, as Bhasin is applied by lower courts to different
circumstances before eventually being reconsidered by the Supreme Court.
Despite the initial uncertainty that it has created, the organising
principle that was recognised in Bhasin has the potential to settle
expectations and foster clarity over the long-term. Indeed, the absence of a
general organising principle in Ireland has led to a considerable degree of
uncertainty, as is illustrated by the recent Irish High Court decision of Flynn
& Anor v Breccia & Anor.152 As the post-Bhasin analysis presented in Part
III reveals, Canadian courts (appellate courts in particular) have largely
avoided explicit applications of the new organising principle. However,
Canadian litigants can be optimistic that uncertainty will give way to
somewhat greater clarity as court-to-court and court-to-litigant dialogue
continues, as new questions are addressed and as the content of this new
organising principle is fleshed out. Although this analysis has revealed
possible interpretations of the earliest phase of this dialogue, what is
provided within this article should be regarded as a “first look” at how this
area of contract law is continuing to develop. As for the future development
of a general principle in England and Ireland, proponents of an expanded
role for good faith in contract law can find relief in Laggatt J’s comments
in Yam Seng Pte Ltd v International Trade Corporation Ltd:153 a refusal to
recognise any general obligation of good faith would be “swimming against
the tide.”154
154 [2013] 1 CLC 662, at [124].

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