Summary of the Doctrine of Good Faith in Contract Law
Bhatnagar v. Cresco Labs Inc., 2022 ONSC 1745 (CanLII)
The Duty of Good faith and Honesty in contracts
The recent decision of Bhatnagar further refined the court’s interpretation of the contract law duty of good faith. Below are excerpts from the case, with direct citations from previous rulings by the Supreme Court of Canada on contractual doctrines.
[32] The goal of contract interpretation is to determine the objective intent of the parties and the scope of their understanding at the time the contract was made. To do this, legal principles are applied to the words of the contract, considered in light of the factual matrix or circumstances: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47 and 50. Bhatnagar v. Cresco Labs Inc., 2022 ONSC 1745 (CanLII), at para 32,
[53] The importance of the organizing duty of good faith in contractual performance was affirmed by the Supreme Court of Canada in the case of Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. It requires that parties "generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily." A contracting party must have "appropriate regard" for the "legitimate contractual interests" of the contracting partner: see Bhasin, at paras. 60, 63, and 65.
[54] The Supreme Court further clarified in the case of Callow (at paras. 80, 81 and 83) that, while the duty to act honestly does not impose a duty of loyalty or of disclosure or require a party to forego advantages following from a contract, it can give rise to a duty to speak up (or make disclosure) to correct a misapprehension that the other party is operating under in respect of a matter that is directly linked to the performance of the contract.
[55] In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1, at para. 70, the Supreme Court further considered the good faith obligation in the exercise of a contractual discretion. The Court concluded that the duty to exercise contractual discretion is breached where the discretion is exercised unreasonably, which means in a manner unconnected to the purposes underlying the discretion.
[56] In Bhasin, although not directly at issue in that case, the Supreme Court also affirmed (at para. 49) the previously recognized duty of parties to co-operate in good faith to achieve the objects of the contract (citing Dynamic Transport Ltd. v. O.K. Detailing Ltd., 1978 CanLII 215 (SCC), [1978] 2 S.C.R. 1072).
[76] The court is mindful of the Supreme Court’s caution from Bhasin, at para. 70, that:
The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest . . . . The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or "palm tree" justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.
[84] The presumption that the Supreme Court refers to in Lamb and Callow is one that deals with evidentiary difficulties, but it still requires an evidentiary premise. The injured party has an onus to prove the facts upon which damages are estimated, but where the assessment is difficult because of the nature of the damages proved, that will not be a ground for refusing substantial damages. See Borrelli v. Chan 2018 ONSC 1429, at para. 935, leave to appeal refused, 2019 ONCA 525.
Summary of the Doctrines
Bhatnagar provides insight into how the court may treat a breach of contract claim brought under the duty of good faith (Bhasin) and the duty of honesty (Callow), further expanding the analysis of commercial contracts in this case. In summary, the courts will look to the following when assessing whether a breach of contract existed, on the basis of a breach of the duty of good faith doctrine.
Duty of Good Faith:
First of all, the duty of good faith doctrine has three facets:
The duty to perform the contract honestly;
The obligation to exercise contractual discretion reasonably; and,
3. The general duty of cooperation under the agreement.
Duty of Good Faith is a Separate Cause of Action
Secondly, a party must ensure to bring forward a claim for tortious misrepresentation as a separate cause of action instead of claiming a breach of the duty of good faith occurred and evidence of same can be found in the conduct identifying misrepresentation. The two doctrines are separate, and must be pleaded separately. The duty of good faith is not a substitute for misrepresentation in tort.
Duty of Honesty
Thirdly, as the SCC identified in Callow, there is a duty of honest contractual performance and if there is mistake or misapprehension as to the contract, the parties have a duty to correct each other on those mistakes or misapprehensions.
Evidentiary Basis to Substantiate Damages is Essential
Finally, the proof of loss must be directly flowing from the damages claimed. Lost opportunity claims arising out of breach of contract (doctrine of detrimental reliance) must be supported by an evidentiary record. (Note at [84] The presumption that the Supreme Court refers to in Lamb and Callow is one that deals with evidentiary difficulties, but it still requires an evidentiary premise. The injured party has an onus to prove the facts upon which damages are estimated, but where the assessment is difficult because of the nature of the damages proved, that will not be a ground for refusing substantial damages. See Borrelli v. Chan 2018 ONSC 1429, at para. 935, leave to appeal refused, 2019 ONCA 525.
When claiming in contract, where it is evident that a party has acted dishonestly or with particular bad faith, a claimant should tailor their Statement of Claim to not only provide the particulars of the offending bad faith conduct, but to ensure that if misrepresentation at tort is in fact drawn out through the facts and the evidence, that it is not forgotten, and is included as a separate claim. Finally, the claimant should ensure to particularize its damages to ensure that the claims for damages flow directly from the bad faith conduct, and provide a sufficient evidentiary basis and record to support those allegations.