Good Faith in Contracts

The Supreme Court of Canada has recently rendered a decision – Bhasin v Hrynew – of importance to all clients engaged in business activity. The issue of “good faith” in regard to contacts and negotiations has been the subject of much litigation over the years. In Bhasin, the court decided that a party to a contract has an obligation to act in good faith when it comes to the performance of its contractual obligations. The court held that there is a broad “organizing principle” of good faith that requires “honest, candid, forthright or reasonable contractual performance”. Parties cannot contract out of this duty.

The degree to which this case conflicts with the economic theory of “efficient breach” is yet to be determined, as are the additional damages to which a party may be exposed for breach of the additional contractual obligation, i.e., the damage from a breach in “bad faith” may be no greater than an innocent breach. Much depends on the particular circumstances of the breach. One thing is predictable for all business clients: the case will give rise to an increase in standardized allegations of “bad faith breach” by litigation lawyers as the details of the “new” doctrine are worked out in future cases.