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Contracts - Duties of Good Faith and Honesty (3). Royal Bank of Canada v. Peace Bridge Duty Free Inc.
In Royal Bank of Canada v. Peace Bridge Duty Free Inc. (Ont CA, 2025) the Ontario Court of Appeal dismissed an appeal, here from a tenant's motion (in an application) denial of "rent adjustment or abatement" under a 'material adverse effect' negotiation lease provision, during the COVID pandemic.
The court considers whether the lease negotiation provision imposed any substantive duty of the landlord to actually reach a rent adjustment, here under the contractual doctrine of good faith:(3) Did the motion judge err in finding that the Landlord did not breach its duty of honest performance in negotiating a rent adjustment under s. 18.07?
[53] The parties acknowledge that they were required to fulfill their obligations under s. 18.07 of the lease and negotiate a rent adjustment in good faith. However, they disagree as to what constitutes compliance with that obligation.
(a) The Governing Principles
[54] In Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, the Supreme Court recognized that good faith in contractual performance is “a general organizing principle of the common law of contract” in Canada and requires parties to act “honestly and reasonably and not capriciously or arbitrarily” in the performance of their contractual duties: Bhasin, at paras. 33, 63.
[55] Generally, good faith obliges each party to a contract: to co-operate in order to achieve the objects of the contract; to exercise discretionary power in good faith; not to evade contractual duties; and to perform contractual obligations honestly and reasonably: 2161907 Alberta Ltd. v. 11180673 Canada Inc., 2021 ONCA 590, 462 D.L.R. (4th) 291, at para. 44; Bhasin, at paras. 33, 47.
[56] This case focuses on good faith performance in the negotiations required by s. 18.07 of the lease, which engages the discretionary power of each party. A party exercising contractual discretion must do so reasonably and “in a manner consistent with the purposes for which it was granted in the contract”: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, [2021] 1 S.C.R. 32, at para. 63.
[57] The cases recognize and reconcile competing tensions: a party’s duty of good faith performance, on the one hand, and the party’s achievement of its legitimate economic self-interest, on the other hand. The duty of good faith in contractual performance must be balanced with other bedrock principles of contract law, such as a party’s freedom to act in its own self-interest in accordance with commercial realities. The Supreme Court noted in Bhasin, at para. 70: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, [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, [2002] 2 S.C.R. 601, at para. 31. [58] The Bhasin court added an important caution, at para. 70:The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. [59] In other words, good faith performance “does not require that contracting parties serve each other’s interests”: 2161907 Alberta Ltd., at para. 43; see also C.M. Callow Inc. v. Zollinger, 2020 SCC 45, [2020] 3 S.C.R. 908, at para. 82. Put differently, “A contracting party can act in its own best interests, but it must not seek to undermine the legitimate interests of the other party in bad faith”: Lafarge Canada Inc v. Bilozir, 2018 ABCA 416, at para. 5, citing Bhasin, at para. 65.
[60] The duty of good faith in contractual performance will not produce mutually agreeable results in every fact situation. The duty’s purpose is to ensure a “standard that underpins” contractual performance and is afforded “different weight in different situations”: Bhasin, at para. 64. Accordingly, “The duty’s animating principle is focused on good faith performance of contracts, not the creation of a generalized duty of good behaviour”: Potash Corporation of Saskatchewan Inc. v. HB Construction Company Ltd., 2022 NBCA 39, at para. 163.
[61] Finally, I note that in examining whether a party has breached its duty to exercise contractual discretionary power in good faith, the court must determine whether the party exercised its discretion for an improper purpose, that is, one unconnected to the purpose for which the contract granted the discretion; if so, the party has not exercised the power in good faith: Wastech, at para. 69. . Quebec (Attorney General) v. Pekuakamiulnuatsh Takuhikan
In Quebec (Attorney General) v. Pekuakamiulnuatsh Takuhikan (SCC, 2024) the Supreme Court of Canada dismissed a Quebec Crown appeal, that from an allowing by the Federal Court of Appeal, and that from a dismissal of the action at the Federal Court - the action being grounded in the allegation that "Canada and Quebec were in breach of good faith, the obligations flowing from the honour of the Crown or any fiduciary obligation" over a contract whereby the band provided it's own police service and the governments funded it.
The court firstly considers the lower courts' treatment of the 'good faith' aspects of the case [at paras 96-103], which are drawn in this case immediately from the Quebec Civil Code but still using the similar substantive law of the common law provinces [para 70: "...the private law analysis of the requirements of good faith in the performance of such a contract would be governed by the relevant common law principles ..."].
From here the court continues it's own analysis, presenting a useful review of the good faith doctrine:[104] The tripartite agreements are contracts entered into by the governments of Canada and Quebec and Pekuakamiulnuatsh Takuhikan. Under art. 1376 C.C.Q., the general rules in Book Five of the Civil Code — “Obligations” — apply to the State, to the extent that they are not excluded or altered by other rules of law. The tripartite agreements are therefore governed by the general law of obligations, including art. 1375 C.C.Q. on good faith. This Court recently noted that good faith is an enacted standard of public order that applies at every stage of the contractual relationship (Ponce, at para. 70, relying on arts. 1375 and 1434 C.C.Q.). This point is not in dispute here.
[105] No party argues that the public order rule of good faith is excluded by an incompatible rule of public law. In this regard, it should also be noted that the “entirety of the parties’ undertakings and responsibilities” clause (cl. 1.1) does not exclude the public order standard of good faith (see Développement Olymbec inc. v. Avanti Spa de Jour inc., 2019 QCCS 1198; C. Lebrun, “La clause d’intégralité au Québec” (2008), 67 R. du B. 39, at pp. 47 and 56). Commenting on Quebec jurisprudence, author Catherine Valcke writes that [translation] “[s]uch a clause cannot . . . exclude the obligation of good faith provided for in article 1375 C.C.Q.” (J. Pineau et al., Théorie des obligations (5th ed. 2023), by C. Valcke, at No. 859, fn. 971).
[106] The parties are therefore correct in recognizing, as the trial judge did (at para. 55), that Quebec was required to perform its contractual undertakings in good faith.
(a) Duties Flowing From the Obligation To Act in Good Faith
[107] Although the obligation to act in good faith applies to every contract, “its implementation varies with the circumstances” (Ponce, at para. 71; see also Churchill Falls, at para. 104). The respondent’s arguments in this regard are focused on the need to perform contractual obligations in accordance with the requirements of good faith pursuant to art. 1375 C.C.Q. In alleging that the governments of Canada and Quebec breached their obligation to “negotiate” in good faith, Pekuakamiulnuatsh Takuhikan is clearly not referring to the initial negotiation of their relationship during a pre‑contractual phase going back to 1996 — in theory, a source of extracontractual liability and, in any event, far removed from the period at issue. The respondent is not focusing on a possible obligation to renegotiate a contract in good faith in the absence of any renewal mechanism set out in the contract. Nor is it relying on the unforeseeable occurrence of deficits to justify the need for good faith negotiation. Renewal was contemplated by the parties, who viewed it, in the very text of the tripartite agreements, as a means of ensuring the maintenance of the police force.
[108] Given that the maintenance of the SPM is a purpose of the agreements and that, for most of the period at issue, the agreements were annual, the parties specifically provided for an extension mechanism in clause 6.10.2 to facilitate renewal in the event that the negotiations were not completed before the agreements expired. Pekuakamiulnuatsh Takuhikan raises the renewal negotiations contemplated notably by clause 6.10.2, which were, however, not always conducted through that clause, in arguing that Quebec’s refusal to discuss an increase in funding constitutes unreasonable conduct contrary to the requirements of good faith.
[109] After a contract is entered into, [translation] “[t]he obligation to negotiate in good faith may . . . have a contractual basis and flow from the terms of the contract” (B. Lefebvre, La bonne foi dans la formation du contrat (1998), at p. 122), especially where the parties intend to renew the contract in a manner contemplated by it. In Trizec Equities Ltd. v. Hassine (1988), 27 Q.A.C. 167, which was decided under the Civil Code of Lower Canada, Monet J.A. explained that good faith must [translation] “preside over the entire contractual realm . . . over both the performance and the formation of the contract” (para. 9). He held that the imposition of such an obligation was justified in the circumstances given the presence of a renewal clause in a commercial lease. Thus, where parties have provided through a clause that they will have to enter into negotiations, the obligation to conduct the negotiations in good faith flows directly from the contract. Pursuant to art. 1375 C.C.Q., therefore, the performance of contractual provisions that contemplate negotiation must, as with any other contractual obligation, be in compliance with the standards of good faith. A breach of good faith in negotiating a renewal contemplated by a contract may thus be a source of contractual liability (Singh v. Kohli, 2015 QCCA 1135, at para. 67; see also Billards Dooly’s inc. v. Entreprises Prébour ltée, 2014 QCCA 842, at para. 98, and Centre de santé et de services sociaux de l’Énergie v. Maison Claire Daniel inc., 2012 QCCA 1975, at para. 80).
[110] Although good faith requires more than the absence of bad faith, it does not require parties to subordinate their interests to those of the other parties (Ponce, at para. 77). It is well established that good faith does not serve to “transform the objectives of corrective justice [it is] intended to protect into a mechanism of distributive justice that would be unpredictable and contrary to contractual stability” (Churchill Falls, at para. 125). In the case at bar, good faith does not require the parties to forsake their own interests to benefit their counterparties in the performance of the agreement. But as the Court noted in Ponce, “in the pursuit of their interests and the exercise of their rights, parties to a contract must conduct themselves loyally by not unduly increasing the burden on the other party or behaving in an excessive or unreasonable manner” (para. 76).
[111] It is true that no effect can be given to a contractual clause that is contrary to public order, a concept that includes the implied obligation to act in good faith that applies to every contract through the combined operation of arts. 1375 and 1434 C.C.Q. However, enforcement of the rule requiring good faith performance of a contract does not amount to a mandate to [translation] “rewrite” a contract freely entered into (see J.‑L. Baudouin and P.‑G. Jobin, Les obligations (7th ed. 2013), by P.‑G. Jobin and N. Vézina, at No. 415). In this sense, good faith in the performance of a contract must be seen as a standard that does not conflict with the binding force of contracts, but is its ally. Performing a contract in good faith does not require the debtor to renounce its rights.
[112] Similarly, good faith does not permit the creditor to go back on its word. As author Laurent Aynès writes about French law, good faith is [translation] “a duty of conduct that involves making the performance of the contract consistent with what was undertaken” (preface by L. Aynès in R. Jabbour, La bonne foi dans l’exécution du contrat (2016), at p. VII). In the instant case, good faith performance of the clauses contemplating the renewal of the contract cannot serve, for example, to require or impose specific outcomes from the negotiations. That being said, a party that enters into negotiations in good faith must consider the interests of any other party to the negotiations and avoid behaving unreasonably (see Singh, at paras. 67 and 74; Jolicoeur v. Rainville, 2000 CanLII 30012 (Que. C.A.), at para. 51). Negotiating tenaciously in one’s self‑interest — an approach that can be entirely compatible with good faith — does not mean negotiating in an obstinate or intransigent manner that would undermine the counterparty’s legitimate expectations. Good faith requires parties who discuss a renewal clause to negotiate faithfully. Parties are of course free — again, subject to the requirements of good faith — to end their existing contractual relationship. But when they begin renewal negotiations as permitted by the very terms of the contract, they are obliged to behave a manner that is neither excessive nor unreasonable in this final stage of carrying out their agreement (see, e.g., Société sylvicole de l’Outaouais v. Rasmussen, 2005 QCCA 729, at paras. 27‑28). Refusal to act in good faith in the negotiation of a renewal contemplated by the parties may jeopardize the very purpose of the contract where, as here, the achievement of that purpose depends on the existence of a relationship over time (see D. Lluelles and B. Moore, Droit des obligations (3rd ed. 2018), at Nos. 1979‑80 and 1987). At para 113-139 (esp. 134) the court find Quebec to have breached their good faith duty.
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