Over the past decade, Ontario’s contract law has undergone a transformation regarding the duty of good faith in business agreements. What was once a vague moral concept has become an enforceable legal duty requiring parties to act honestly in performing their contracts. This article explores how courts have expanded the duty of good faith (starting with the landmark Bhasin v. Hrynew decision) and what it means for businesses today. We’ll review key cases shaping this duty, analyze how courts apply it, and provide practical tips for businesses to draft and perform contracts in compliance with these evolving obligations.
Table of Contents
- Case Law Review: Evolution of the Duty of Good Faith
- Legal Analysis: Scope and Implications of the Good Faith Duty
- Practical Guidance for Businesses: Staying in Good Faith
- Conclusion: The New Normal of Honest Contracting
Case Law Review: Evolution of the Duty of Good Faith
Bhasin v. Hrynew (2014 SCC 71): The Landmark Decision
The modern journey begins with Bhasin v. Hrynew, where the Supreme Court of Canada recognized a “general organizing principle of good faith” in contract law and a new duty of honest contractual performance.
In Bhasin, an Alberta business relationship went sour when Can-Am (a financial company) exercised a non-renewal clause to end its dealership agreement with Mr. Bhasin in order to favor a competitor (Mr. Hrynew). Can-Am had “acted dishonestly” with Bhasin about its intentions, misleading him during the contract’s performance.
Justice Cromwell, for a unanimous Court, held that parties must not lie or knowingly mislead each other about matters directly linked to the performance of the contract. This duty of honest performance is a “minimum standard” of honesty that applies to all contracts, giving every contracting party a basic assurance of fair dealing.
Importantly, the Court distinguished this duty from a fiduciary duty or a duty to disclose everything to the other side – you don’t have to share all information or put the other’s interests first, but you cannot actively deceive. The duty of honest performance is not merely an implied term the parties can contract out of; it is a general doctrine of contract law that operates regardless of the parties’ intentions.
Bhasin thus cracked open the door – cautious but clear – establishing that good faith is a general principle and that at minimum, outright lies or intentional misrepresentations in contract performance are breaches of contract.
The Supreme Court Trilogy: Expanding the Doctrine
Following Bhasin, courts and commentators wondered how far this new duty would go. It didn’t take long for further cases to refine and expand the principle. Six years later, the Supreme Court issued two major decisions (now forming, with Bhasin, a “good faith trilogy”):
C.M. Callow Inc. v. Zollinger (2020 SCC 45)
This case took the honest performance duty a step further. Callow involved a winter maintenance contract that allowed a group of condominium corporations to terminate on 10 days’ notice. The condos decided in spring to terminate after the current season, but intentionally kept silent about this decision and even led the contractor (Callow) to believe a renewal was likely, so that Callow performed extra free work in the summer.
When the condos later gave the 10-day termination notice, Callow sued, alleging bad faith. The Supreme Court agreed that this behavior breached the duty of honest performance. Even though the contract gave a seemingly unfettered termination right, the condos crossed the line by actively misleading Callow – by their conduct and half-truths – to think the contract was safe.
The Court expanded the duty of honesty to confirm it isn’t limited to lies in the strictest sense. It held that “half-truths, omissions, and even silence, depending on the circumstances,” can breach the duty if they knowingly mislead the other party. In plainer terms, if you know your counterparty is operating under a false impression due to your actions, you must correct it once you’ve made a firm decision — you cannot hold your tongue to deceptively string them along.
Callow underscored that a party cannot rely on a contractual right (like a no-fault termination clause) to excuse dishonest conduct in exercising that right. However, the Court also noted that honest performance does not equal a positive duty to disclose every plan. The key difference is whether one side actively induces the other’s misunderstanding.
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (2021 SCC 7)
One year later, the Supreme Court addressed another aspect of good faith: the duty to exercise contractual discretionary powers in good faith. Unlike Bhasin and Callow, which focused on honesty, Wastech dealt with a contract giving one party broad discretion that adversely affected the other.
Wastech was a waste transport company whose compensation under the contract depended on allocation of waste among disposal sites. The regional district had an “absolute discretion” to allocate waste, and it made a choice that, while cost-efficient for itself, caused Wastech to lose expected profit.
The Supreme Court held that even an “absolute” discretion must be exercised in good faith – meaning in line with the purpose for which the discretion was granted, and not capriciously or arbitrarily to undermine the other party’s benefits. The test is whether the discretion was exercised in a manner “connected to the purposes underlying the discretion”.
A party can prefer its own interests (this is not a fiduciary duty), so long as the decision is within the reasonable contemplation of the contract’s objectives. In Wastech, the Court actually found no breach – the district’s choice, though harmful to Wastech, was made for the very purpose the discretion existed (to allocate waste efficiently).
The takeaway is that freedom to act in self-interest remains, but within limits: If a discretionary power is used “in a manner unconnected to the contract’s purpose” or in a malicious or arbitrary way, then it breaches the duty of good faith. In other words, you can’t use a contractual right as a pretext to hurt the other party in a way the deal didn’t envision.
Ontario Courts Apply the Trilogy
Ontario courts have embraced these principles, often referring to the Bhasin/Callow/Wastech trilogy. For example, the Ontario Court of Appeal in 2161907 Alberta Ltd. v. 11180673 Canada Inc. (2021) applied the SCC’s framework to a dispute over a cannabis store franchise termination.
In that case, a licensor terminated several agreements on a mistaken belief that the operator had breached the contract. The Court found the termination was wrong in law (no valid contractual ground), but crucially, it also found the licensor had not acted in bad faith. There was no evidence of dishonesty or ulterior motive — just a mistake.
This illustrates that not every breach or bad decision is a “bad faith” breach. The duty of good faith in performance still requires some element of improper intent, dishonesty, or unreasonableness beyond merely getting the law wrong.
Limits to the Expanding Duty
A noteworthy case from Alberta (pre-Wastech) shows a limit to the expanding duty. In Styles v. AIMCo (2017 ABCA 1), an employee was terminated before his bonus vested, under a contract that clearly stated no bonus if not employed on the vesting date.
The Alberta Court of Appeal firmly stated Bhasin‘s organizing principle “does not give courts the ability to review the fairness of a contract’s terms” or imply new duties beyond those recognized. Since the contract unambiguously provided no bonus upon termination (and the termination was lawful), there was no discretionary power to review – the employer owed no further duty of fairness in that situation.
Styles signaled that good faith can’t be used to re-write clear contract terms or impose obligations the parties never agreed to. The later Wastech decision is consistent with this – it focuses on exercising granted discretion in good faith, but if a contract outcome is fixed by clear terms (no discretion), good faith won’t save a party from a bad bargain.
Recent Developments – Remedies and Loss
One recent Ontario case dealt with how to remedy breaches of the duty. In Bhatnagar v. Cresco Labs Inc. (2023 ONCA 401), the Court of Appeal clarified that a breach of the duty of honest performance does not automatically entitle the wronged party to damages without proof of loss.
The plaintiffs sold their business and stood to gain earn-out payments, but the buyer failed to inform them of a delay in a merger that affected those payments. The court agreed it was dishonest not to update them, but found no evidence the sellers could have done anything to avoid the loss even if informed.
This illustrates that while the duty of good faith is robust, it isn’t a ticket to windfall damages. A claimant still must prove the breach caused actual loss (or lost opportunity) to get substantial damages.
Overall, in the decade since Bhasin, Canadian courts (including Ontario’s) have firmly established that good faith is a baseline expectation in contract performance. The case law has evolved from simply “don’t lie” to “don’t actively mislead or undermine the deal’s purpose”. But courts also carefully balance this with freedom of contract, ensuring that good faith is a shield against misconduct – not a sword to rewrite bargains or impose unagreed duties.
Legal Analysis: Scope and Implications of the Good Faith Duty
What Good Faith and Honest Performance Mean in Ontario
Ontario courts interpret the duty of good faith in line with the SCC’s guidance – as an overarching principle that parties perform their contractual obligations honestly and fairly in substance. At minimum, each party is entitled to a basic level of honesty from the other about contract performance.
This means a party should not knowingly lie or deceive their counterparty about something related to fulfilling the contract. For example, if a supplier knows it will not be able to meet a deadline, it cannot falsely assure the customer that “everything is on track” just to keep the customer from cancelling – that would be dishonest performance.
However, good faith does not require absolute candor or altruism. As courts often stress, the duty “is not a fiduciary duty” and “not an affirmative duty of disclosure”. You don’t have to volunteer information that the contract doesn’t require you to share, as long as you aren’t misleading the other side by your silence or words. In essence, the line is active dishonesty or deceit – which includes half-truths or omissions that intentionally mislead.
Beyond honesty, Ontario courts recognize that good faith performance also implicates how discretionary powers in a contract are used. If a contract lets one party make a decision that affects both (such as an option to renew, an approval of work, or allocation of tasks), the court expects that power to be exercised in good faith.
The decision should align with the contract’s spirit and purpose, not be made for an ulterior motive that the other party never agreed to. That doesn’t mean you can’t prefer your own business interests – it means, for instance, if you have the discretion to reject a deliverable for quality reasons, you can’t reject it just to force the other party into a new bargain or to harm them for revenge.
In Wastech, the court said the party with discretion must have “appropriate regard for the legitimate contractual interests” of the other – essentially, don’t use your rights to sabotage the deal. Ontario courts will ask: Did the decision serve the agreement’s intended purpose? Was it within what the parties would reasonably expect when they made the deal? If yes, it’s likely fine; if it appears capricious, arbitrary, or prompted by an improper purpose, it may breach the duty.
Scope and Limitations
The duty of good faith in Ontario is broad in application – it applies to all contracts and all parties (it’s a general doctrine, not dependent on a special relationship). But it is narrow in what it requires. It does not turn every unethical act or hard bargain into a lawsuit, nor does it impose a duty to be “nice” or self-sacrificing. Parties remain free to act in their own best interests within the bounds of the contract.
For example, a business can still choose to terminate a contract for convenience if the contract allows it – good faith will not forbid lawful termination. The requirement is that in doing so, the business must not lie or con the other party about it, nor violate the agreed purpose of a discretionary right.
As the Alberta Court of Appeal put it, the good faith principle “does not impose a duty of good faith on contracting parties in all situations” or empower judges to enforce abstract fairness beyond the contract’s terms. It comes into play specifically to police egregious conduct: deception, misrepresentation, abuse of a power, or other bad-faith behavior in performing the deal.
Practically, Ontario courts determine breaches of this duty by looking at the evidence of the breaching party’s conduct and intentions. Dishonesty is judged objectively – would an ordinary person, in the circumstances, feel misled by what was said or not said?
In Callow, for instance, the condo board knew Callow was operating under a false belief (that his contract was likely safe) and knowingly chose to reinforce that false belief by accepting free services and friendly assurances. An objective observer would see that as manipulative and misleading – hence a breach.
If, on the other hand, a party genuinely thought they were acting within their rights and communicated poorly but not deceptively, a court might find no bad faith. For example, in the Ontario cannabis store case, the franchisor believed (wrongly) it had cause to terminate; it turned out mistaken, but there was no evidence it tried to trick the franchisee or terminate for a hidden agenda. Lacking any “ill-intent or deception”, the court found no breach of good faith.
So courts will ask: Was there lies or conscious sharp practice? Did the party have a legitimate reason related to the contract’s purposes for what it did?
Practical Guidance for Businesses: Staying in Good Faith
Good faith is not just a legal rule – it’s a business practice that can protect your reputation and partnerships.
Here are some high-level best practices for negotiating, drafting, and performing contracts in Ontario that will help ensure compliance with good faith obligations and mitigate legal risks:
1. Set the Right Tone in Negotiations
Begin relationships with transparency. While you aren’t legally bound by the duty of good faith before a contract is signed, misrepresentations at this stage can poison the well. Avoid making promises you can’t keep.
If you discuss future intentions (renewals, extensions, bonuses), couch them properly: e.g., “subject to satisfactory performance” or “barring unforeseen changes”. This manages the other side’s expectations.
If negotiations involve sensitive plans (like an upcoming merger or a project that could affect the deal), consider a non-disclosure agreement so you can share info candidly rather than concealing it.
Remember: if you agree to negotiate something in good faith (common in letters of intent or MOU clauses), that will be enforceable – so treat those obligations seriously, as courts do.
2. Draft Contracts with Clarity and Good Faith in Mind
When putting pen to paper, be explicit and precise. Key clauses to watch:
- Termination Rights: Specify notice periods and whether reasons are required. If you want freedom to terminate for convenience, provide a fair notice (or payment in lieu) to avoid looking predatory. Clarity here prevents misunderstandings that lead to Callow-like scenarios.
- Discretionary Decisions: If one party can make judgments (pricing, deliverable approval, etc.), define the criteria or purpose. For instance: “Delivery dates may be adjusted by Buyer as reasonably necessary to accommodate its production schedule.” This signals that adjustments must be for schedule needs, not arbitrary. By defining expectations, you reduce the risk of later being accused of doing something unforeseeable or beyond the contract’s intent.
- Good Faith Clauses: It’s okay to explicitly write in a good faith requirement – it reinforces the message. Conversely, be cautious with clauses that attempt to waive duties. If you include something like “no duty of good faith or fair dealing shall be implied,” know that a court will likely ignore that if it conflicts with the law’s minimum standard of honesty.
A more effective approach is to acknowledge the duty and frame how the parties will interpret it. This way you work with the legal doctrine, not against it.
- Entire Agreement & Reliance: Maintain these clauses to prevent claims of verbal side promises. However, don’t expect an entire agreement clause to shield you from liability if you actively mislead during performance. Its main role is to prevent someone from saying “you promised me X before signing” when X isn’t in the contract.
- Dispute Resolution and Remedies: Consider adding that in the event of a dispute, the parties may attempt resolution in good faith (e.g., a negotiation or mediation clause). This keeps communication open and might resolve issues before they escalate to allegations of bad faith in court.
3. Foster Honest Performance Day-to-Day
Once the deal is running, make good faith part of your contract management. Ensure your team knows the contract terms (many good faith problems arise simply because someone on the ground is unaware of what was agreed and makes a misleading statement).
Set up internal checks for major decisions:
- If you’re about to exercise a contract option that will surprise the other party, ask internally: “Did we signal this possibility? Were any contrary assurances given?” If there’s any doubt, it might be wise to give the other party a heads-up or an explanation (to show appropriate regard for their interests).
- Keep communications professional and truthful. It’s fine to be optimistic or encouraging, but don’t overpromise. For example, don’t repeatedly praise a vendor’s work as “excellent” if you know you’re building a case to terminate for poor performance – that contrast can and will appear dishonest later. Instead, address issues frankly so they’re not blindsided.
- Document performance issues and share concerns promptly. Surprise and ambush are enemies of good faith. If the other party is falling short, a notice to cure or warning not only helps remedy the issue, it also protects you; you later have a clear record that you didn’t silently tolerate problems only to spring a termination on them.
4. Watch for Red Flags of Bad Faith
Be mindful of scenarios that commonly lead to litigation:
- Stringing along: e.g., hinting at renewing a contract or awarding more work and then abruptly cutting ties. If circumstances force a change of plan, update the other party as soon as reasonably possible – don’t let them continue under false pretenses.
- Bait-and-switch: using a contract term in an unexpected way that the other side never would have agreed to if disclosed. For instance, invoking a “force majeure” or “termination for convenience” right immediately after signing a contract, just to renegotiate price – that could be seen as bad faith use of a clause.
- Pretextual excuses: firing an employee “for performance” when the real reason is to avoid paying a bonus, or terminating a franchise “for breach of standards” when the real plan is to take over the location. If the stated reason is a fig leaf, courts will likely see through it, especially if internal documents or timelines suggest an ulterior motive.
5. Include Good Faith in Compliance Programs
Larger organizations should incorporate the contract duty of good faith into their compliance and training. Just like employees are trained on ethics and anti-corruption, train the relevant teams (sales, account managers, legal liaisons) on the do’s and don’ts of contract communications.
Simple awareness can prevent that casual email—”Don’t worry, we’ll renew you for sure”—that later becomes plaintiff’s Exhibit A in court. Develop a protocol for management review of any tricky situations (e.g., terminating long-term partners, major contract changes) to ensure decisions are defensible and communicated properly.
6. Stay Informed on Evolving Trends
Keep an eye on case law updates. Courts continue to refine what good faith means in novel contexts, like employment, franchise relations, or even tendering and procurement (an area with its own good faith nuances).
Ontario courts have noted that Bhasin‘s principle has “taken root” in many areas and any party to any contract “should think carefully before relying on a contractual power to carry out a dishonest act”.
Trends to watch include how far the duty might extend to contract renewals or renegotiations (areas not fully settled) and how damages are approached when a breach is proven (as seen in the Cresco Labs case, proving loss is crucial).
Some experts wonder if a duty to negotiate in good faith (pre-contract) will eventually be recognized in common law – so far, courts have been reluctant unless an agreement expressly requires it. Another area is the concept of “relational contracts” (long-term, trust-based contracts); judges may be more inclined to find broad good faith obligations there due to the nature of the relationship.
Businesses engaged in long-term joint ventures or partnerships should be especially conscientious of good faith – the longer and more entrenched a relationship, the greater the expectation of fair play.
Conclusion: The New Normal of Honest Contracting
The evolving duty of good faith in Ontario contract law represents a fundamental shift towards honesty and fairness in commerce. From Bhasin‘s watershed recognition of an honesty obligation, through Callow‘s expansion to cover misleading silence, to Wastech‘s message that even contractual discretion isn’t beyond scrutiny, the direction is clear: courts expect parties to keep their business deals honorable.
This doesn’t mean every contract dispute is now a moral trial – but egregious conduct will be called out and remedied. Ontario businesses should view this not as a burden, but as guidance for sustainable dealings.
By negotiating clearly, drafting carefully, and performing conscientiously, companies can largely avoid breaching the duty of good faith and the costly lawsuits that follow. In an era where reputations are key and relationships matter, aligning your practices with the legal duty of good faith isn’t just about avoiding liability – it’s about building trust.
And as the courts have effectively said, trustworthiness is enforceable. The prudent business will take that to heart and ensure that good faith and honest performance are cornerstones of every contract they enter, from the handshake to the final deliverable.
If you require legal advice, representation, mediation services, or have questions about real estate law, business law, civil litigation, or dispute resolution, contact us at Sukh Law.
Sukh Law publishes articles for information purposes only and is not intended to constitute legal advice.
