The long-awaited (and highly anticipated) Supreme Court of Canada decision in Wastech Services Ltd. v. Vancouver Sewerage and Drainage District, 2021 SCC 7, was released on February 5 and did not disappoint!
It provided clarity on two earlier Supreme Court of Canada decisions that are important to commercial litigation and arbitration practitioners (and which were the subject of several of my blogs in 2020): (1) the application of Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, to appeals of commercial arbitration awards; and (2) the scope of the duty of good faith contractual performance which was recognized in Bhasin v Hrynew, 2014 SCC 71, and has vexed practising lawyers and academics since then.
I deal with this latter issue in this blog, in which I hope to provide brief answers to the most pressing questions that have been asked since Bhasin and which remained even after the release of C.M. Callow v Zollinger, 2020 SCC 45, late last year. You can find a detailed recitation of the facts in Wastech elsewhere. I will deal with the Vavilov issue in the next blog.
1.What is the nature of the duty?
The unanimous Court in Bhasin made two “incremental” developments in the law – it recognized an overarching common law organizing principle of good faith performance that applies to all contracts and, on the facts of that case, a new duty of honest contractual performance derived from the more general standard. It found that the facts did not fit within the “circumstances” and “relationships” in which a duty of good faith contractual performance had been recognized historically – employment, insurance, tendering, and franchise contracts, for example. The Court observed that there are three broad types of situations in which a duty of good faith performance was already held to exist and said that they provide a useful analytical tool: contracts where the parties must cooperate to achieve the objectives of the contract; contracts where one party exercises a discretionary power; and contracts where one party seeks to evade contractual duties. In Bhasin, the Court found that the defendant had lied to the plaintiff but that the facts did not fall within any of the recognized “categories” of contracts in which the good faith duty had already been recognized. Therefore, the Court recognized a new common law duty to act honestly in the performance of contractual obligations, which the defendant breached.
In Callow, the Bhasin duty was applied to conduct on the part of the defendant which did not include outright lies, but constituted knowingly misleading the plaintiff. The Court was clear that this does not give rise to a duty of disclosure.
Wastech was unique in that the plaintiff did not allege any wrongdoing on the part of the defendant, but only that it had acted without due regard to the plaintiff’s contractual interests in a long-term “relational” contract of cooperation. The Court found that the facts of this case fell within one of the previously recognized categories of contracts in which the duty of good faith contractual performance had already been recognized – contracts where one party exercises a discretionary power, which operates in all contracts irrespective of the intentions of the parties. It was essential to the outcome absolving the defendant that the parties had considered the very dispute which arose and chose not to curtail their discretionary power. Therefore, the defendant was free to act in accordance with its own commercial self-interest, even if the result was harm to the plaintiff. There was no breach of the duty to exercise discretion in good faith
2. What is the scope of the duty?
In Bhasin, the Court said that claims based upon this new duty will almost certainly fail unless the contracts fall within one of the established categories and that any expansion of the duty must be done incrementally to ensure commercial certainty and to prevent interference with the fundamental principle of freedom of contract. However, the list of categories is not closed. The duty to act honestly in the performance of all contractual obligations is consistent with this incremental development of the common law. Further, it accords with the reasonable expectations of commercial parties, who must be taken to assume that they will not lie to one another. Therefore, the duty does not involve a moral evaluation by the Court of a party’s conduct but an articulation of what the parties would have agreed to had they foreseen the circumstances giving rise to the dispute.
Because the duty of good faith is an overarching organizing principle, it is not an implied term in every contract, and parties cannot contract out of it. Moreover, the duty is highly fact specific and “contextual”; it may have different “implications” in long-term contracts of mutual cooperation than contracts involving merely transactional exchanges.
These principles were re-stated in both Callow and Wastech, but applied to different contexts, all of which together assisted in clarifying their application.
3. What is “good faith”?
There is no definition of “good faith”.
In Bhasin, the Court said that this new duty is not to be used as a “pretext” to scrutinize a party’s motives (even though the motives of the defendant were in evidence and were considered relevant to the analysis). Therefore, “good faith” is something other than the absence of “bad faith”, but “bad faith” may be sufficient in some cases. What is required is “honest, candid, forthright or reasonable contractual performance” and that the contract be performed “honestly, reasonably, and not capriciously”. On their face, these words suggest that notwithstanding the cautionary language in Bhasin about constraining the development of the law to incremental changes, conduct running afoul of this new duty could range from unreasonable to dishonest.
However, Wastech has explained that those words are to be interpreted from the perspective of the purpose of the contract. There is no consideration of whether the impugned conduct is “morally opportune” or business wise. The negotiated bargain between the parties is the primary source of justice between them and the Court will look to the contract as a whole. The underlying purpose of the contract will determine whether a party’s conduct has been “unreasonable”, “arbitrary”, or “capricious”. Parties are expected to be “loyal to the bargain”, which does not mean that they must be loyal to each other, as would be expected of fiduciaries, for example. Where it is alleged that the exercise of a power falls outside the range of choices connected to the underlying purpose of the contract, the conduct will fall outside the requirements of good faith. However, the duty does not require one party to subordinate its interests to the other or that the plaintiff receive a benefit that was not contemplated under the contract or which falls beyond the purposes for which the discretion was agreed.
4. What is the measure of damages for a breach of the duty?
A breach of the duty of good faith contractual performance constitutes a breach of contract.
In Bhasin, the contractual measure of damages applied, calculated on the basis of what the plaintiff’s economic position would have been had the defendant fulfilled its duty and performed the contract honestly.
In Callow, the Court was strongly divided. The majority accepted the Bhasin measure of damages corresponding to the expectation interest, while the minority would have applied the tort measure of damages to protect the plaintiff’s reliance interest because the principles applied were akin to those relating to misrepresentations made after contract formation.
In Wastech, the plaintiff was not successful so there was no consideration of damages principles.
5. What are some of the questions that remain to be answered?
There is room for further development and articulation of this new duty to address the following issues:
- To what extent can parties contract out of the duty? In Bhasin, the contract contained an entire agreement clause which did not prevent the Court from finding this new duty. While the parties may not contract out of a duty of honesty, they may circumscribe how they are to perform their obligations. Therefore, how can careful contract drafting narrow or expand the scope of this duty?
- Are the laws of Quebec and the United States, which both recognize a good faith doctrine in contract law, useful to define the scope of the duty in any particular case? In Bhasin, the unanimous Court found that the common law might benefit from a review of U.S. law and Quebec civil law and the decision provided a brief summary of the relevant principles. In Callow, the majority incorporated Quebec law into its analysis, which the minority thought was unnecessary and inconsistent with the Court’s accepted practice of legal analysis. In Wastech, the majority considered Quebec law and concluded that the outcome would be no different. The minority strongly disagreed with this approach and called it “unnecessary, ill-advised, and “wholly misplaced”.
- How do these principles apply to the enforcement rather than performance of a contract (if at all)?
- What is the proper measure of damages and, since the contractual and tort measures of damages will, in many cases, be the same, in what circumstances will they be different?
I am sure that others will come up with other questions that Wastech does not address, but the case should be lauded for moving us toward a greater understanding of the Bhasin principles by considering them in other contexts. (And some predictions can perhaps be made - the majority seems to have been influenced significantly by the thinking of Professor John McCamus, who has written extensively on this topic.)
This decision surely advances our understanding of the good faith duty. Now if only the Court could achieve unanimity! The 3-justice concurring minority decision in Wastech reads, in parts, like a dissent and the implications of its nuanced differences of opinion with the 6-justice majority will likely require yet another case before the Supreme Court of Canada to understand.