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Contracts - Duty of Good Faith

Contracts - Duty of Honest Performance

CM Callow Inc. v. Zollinger (Ont CA, 2018)

In this case the Court of Appeal elaborates on the contractual duties of good faith and honest performance:
The duty of good faith and honest performance

[10] The Supreme Court held in Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 S.C.R. 494, at para. 33, that good faith contractual performance “is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.” In addition, the Court held that there is a duty of honest performance “which requires the parties to be honest with each other in relation to the performance of their contractual obligations”: at para. 93.

[11] The Court was at pains to emphasize that the concept of good faith was not to be applied so as to undermine longstanding contract law principles, thereby creating commercial uncertainty. Cromwell J. explained at para. 70:
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: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12 (CanLII), [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), [2002] 2 S.C.R. 601, at para. 31. 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.
[12] The same is true of the new duty the Court recognized as flowing from the good faith organizing principle, the duty of honesty in contractual performance. As Cromwell J. explained, at para. 73:
[The duty] means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.
[13] This, he emphasized at para. 73, was a “modest, incremental step” in the development of the law of contract.

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