ABUSE OF DISCRETION, FAILURE TO
COOPERATE AND EVASION OF DUTY:
UNPACKING THE COMMON LAW DUTY OF
GOOD FAITH CONTRACTUAL PERFORMANCE
John D. MeCamus*
1, Introduction
‘The Roman origins of the civilian doctrine requiring contracting
parties to perform their contractual obligations with good faith were
revealed to an English audience by Raphael Powell in 1956 in his
inaugural lecture as Professor of Roman law in the University of
London. Professor Powell was an enthnsinst of the civilian doctrine
he appeared particularly attracted to the contemporary German version —
‘and he evidently preferred it to the common law approach. In the English
Jaw of contract, he suggested, rather than adopting a general rule of good
faith, “there are a number of individual cases in which the law contains
an element of objective or subjective good faith”? The common law was
the poorer, he intimated, for not having adopted the civilian rule.
‘More than 30 years later, in 1989, Bingham L.J. offered a similar
comparison between the two systems in the following terms:?
In many civil law systems, and perhaps in most legal systems outside the
common law world, the law of obligations recognises and enforces an
overriding principle that in making and carrying out contracts parties
should act in good faith... English law has, characteristically, committed
itself to no such overriding principle but has developed piecemeal
solutions in response to demonstrated problems of unfainmess.
Although it appears that English interest in the civilian doctrine of
‘g00d faith performance has been rekindled by the increasing influence
Professor of Law, Osgoode Hall Law School, York University. Tis isa revised
and updated version ofan unpublished paper fst presented, under the tte “The
Duty of Good Faith Performance at Common Law’, at the Civil Law Seminar of
the National Judicial Institue held in Montreal, on May 17th, 2000,
R. Powell, “Good Faith in Contracts” (1956), 9 Cur. Legal Probs. 16.
Ibid, at p23.
Interfote Picture Library Ltd. ¥, Stleto Visual Programmes Lid, (1989] 1 QB.
433 at p. 439 (CA).
72
2004] Good Faith Contractual Performance 73
of European law on the English law of contracts. itis probably fair to
say that as we entered the 2ist century, the role of good faith in the
common law of English contract law was not significantly changed
from that described by Professor Powell in 1956.
‘A very different story unfolded in the United States. The recognition
of a general duty of good faith performance was given a substantial
impetus in American law and, indeed, a statutory base, when such a
duty was explicitly provided for in the Uniform Commercial Code, a
‘model law, in the 1950s. The Code, in turn, was enacted as state law
across the country. There are several references to good faith in the
Code. Article 1-208, for example, provides as follows: “Every contract
or duty within this Act imposes an obligation of good faith in its
performance or enforcement.” Interestingly, the principal architect of
the Uniform Commercial Code, Professor Karl Llewellyn, was familiar
with and apparently an admirer of the German Civil Code’s provision
‘on good faith.’ In due course, the influence of the American Code and
the vast body of case law on good faith which surrounded and, to some
extent, preceded it led to the inclusion of an article on good faith in the
Restatement of the Law of Contracts, 2d, published in 1981. Section 205
Of the Kestatement provides as follows: "Every contract imposes upon
each party a duty of good faith and fair dealing in its performance and
its enforcement.” Alone among the common law jurisdictions, then,
the United States appears to have adopted a generalized duty of good
faith performance of contracts.
‘The interest of Canadian common lawyers in the generalized good
faith duty appears to have been stimulated, in part at least, by the work
of the Ontario Law Reform Commission (OLRC) on sale of goods law
and contract law in the 1970s and 1980s. In its 1979 Report on Sale of
Goods! and its 1987 Report on Amendment of the Law of Contract,’ the
OLRC recommended that legislation be enacted giving recognition to
the doctrine of good faith. In the latter report, the OLRC reasoned that
“statutory recognition of the doctrine of good faith would serve to
synthesize the various strands of good faith analysis in the case law.
4. See, generally, G. Teubner, “Legal Iritants: Good Faith in British Law or How
Unifying Law Ends Up in New Divergences” (1998), 61 Mod. L. Rev. 11; R.
Brownsword, “Good Faith in Contracts’ Revisited” (1996), 49 Curr. Legal
robs. 112.
5. EA. Famsworth, “Good Faith in Contract Performance” in J, Beatson and D.
Friedmana, eds., Good Faith and Fault in Contract Law (Onford: Clarendon
Press, 1995), p. 153 at p. 15S.
6. Toronto: Ministry of the Attomey Ger
7. CToronto: Ministry of the Attomey Gener
1979),
1989),74 The Advocates’ Quarterly [Vol. 29
Moreover, the literature reveals that a generalized doctrine of good
faith would conform to commercial realities.
In a published lecture delivered by then Professor E.P. Belobaba,
based on his research for the OLRC, Belobaba argued persuasively for
the recognition of a generalized duty of good faith.” References to this
lecture are commonly found in later Canadian judicial discussions con-
sidering the desirability of recognizing the existence of the duty. As we
shall see, there are also a number of commentators who have weighed
in against recognition of the doctrine. In recent years, this academic
debate concerning the desirability of recognizing the generalized duty
has migrated into the Canadian case law."
‘The first object of this article is to attempt to discern the current sta-
tus of the doctrine in common law Canada by examining the leading
cases in which recognition of the doctrine is either assumed or advo-
cated, More than this, however, the article will attempt to identify
recurring themes in the factual patterns of these cases, with a view to
demystifying the doctrine and giving the doctrine more concrete
content. In tur, this exercise may provide a working definition of the
concept of good faith. Bringing the abstract notion of good faith a
little closer to earth may render it more “reckonable” and may offer
some comfort to those critics of the doctrine who consider it to be
unhelpful, if not dangerous, because of its vagueness and uncertain
ambit. Before turning to examine the case law, however, I will begin
by describing the Canadian debate conceming recognition of the duty
and identifying the principal arguments advanced by the doctrine’s
advocates and its detractors. In the third section of the article, I will
‘examine what appear to be the leading cases making reference to the
concept of a duty of good faith. In the fourth section, an account will
be offered of the treatment accorded good faith by the Supreme Court
of Canada in the context of wrongful dismissal in Wallace v. United
Grain Growers Ltd." In the fifth, on the assumption that recognition of
the doctrine is, if not yet achieved, something that may occur, I attempt
to identify a number of issues concerning the good faith duty that may
8 Bid, at p. 174
9.
jood Faith in Canadian Contract Law” in Law Society of Upper
Canada, Special Lectures 1985, Commercial Law: Recent Developments and
Emerging Trends (Toronto: R. De Boo, 1985), at. 73
10. See, generally, S.K. O'Byrne, “Good Faith in Contracrual Performance: Recent
(1995), 74 Can. Bar Rev. 70; D. Stack, “The Two Standards of
Good Faith in Canadian Contract Law" (1998), 62 Sask. L. Rev. 201. For a dis-
cussion that includes recent developments in Australia and New Zealand, see
(former Chief Justice) AT. Mason, “Contract, Good Faith and Equitable
Standards in Fair Dealing” (2000), 116 LOR. 66.
11, (1997), 152 D.LR, (th) 1, [1997] 3 S.CR. 701, [1999] 4 WWR. 86,
2004} Good Faith Contractual Performance 75
need to be resolved if a generalized good faith performance duty is to
be recognized.
2. The Debate over Recognition of the Duty
There are two principal arguments made by advocates of recogni-
tion of a generalized duty of good faith performance, both of which
appear to have had some influence of the thinking of the OLRC. The
first argument minimizes the extent of the change involved in recog-
nizing the doctrine and suggests that the common law has already, in
effect, recognized such a doctrine, though not by name. Thus, for
example, Belobaba referred to good faith as “de facto” doctrine.
Belobaba stated what is perhaps an extreme version of this thesis when
he made the following claim:
[T]he explicit adoption of a good faith doctrine today would not impose
‘any new contractual obligations or responsibilities. It would simply
consolidate existing doctrinal approaches and. provide @ more precise
remedial vocabulary.
Fifteen years on, one might enter into a modest quibble about the use
of the adjective “precise” in this statement, especially as Belobaba
himself wrote, a page later, that “good faith cannot be defined with any
‘meaningful precision”."* We will return to the question of definition.
Nonetheless, there is considerable force to the argument that a variety
of existing common law doctrines — some of which we will examine
in the next section of this article — appear to manifest a policy of
encouraging good faith or punishing bad faith.
The second argument in support of recognition is that explicit
adoption of a good faith duty will bring the law more into accord with
the expectations of contracting parties. Commercial actors, and others,
expect that the people with whom they enter into transactions will act
in good faith. By explicitly recognizing the existence of such a duty, the
common law of contract will simply give effect to those reasonable
expectations. This thesis, it may be noted, is not necessarily entirely
consistent with the first argument. That is to say, this appears to be an
argument for reforming the law in order to bring it into closer alignment
with the reasonable expectations of contracting parties. We are left to
assume that the current law does not fully achieve this laudable objec-
tive and can be improved by adopting a generalized duty of good faith
Again, however, there is some force in the argument. The change to the
law will, arguably, be less dramatic than critics envisage and, moreover,
it will be consistent with the expectations of contracting parties.
12. Supra, footnote 9, at p. 78
13, Ibid, atp. 79. Belobabais ofthe view thatthe definition of good faith ean be ren
ered more precise by focusing on bad faith, See further, post, Section 5.76 The Advocates’ Quarterly [Vol. 29
A third argument sometimes made in favour of recognition draws on
comparative material. The duty of good faith contractual performance
is recognized in civilian legal systems, in the United States and, in
somewhat watered-down fashion, in the Convention on Contracts for
the International Sale of Goods. Recognition of the doctrine in
Canadian common law would simply bring our legal system into line
with other jurisdictions.
The principal argument against recognition, of course, is the fear
that recognition of the good faith duty will bring an unattractive degree
of uncertainty to the law. With increased uncertainty comes increased
difficulty in giving advice and the prospect of more protracted litiga-
tion, Professor Bridge advances this thesis colourfully in the following,
passage:"*
Good faith and fair dealing, it is submitted, is an imperfect translation of
an ethical standard into legal ideology and legal rules. However much it
‘might stimulate research or encourage inquiry into theories underlying
contract law, its appropriate home is the university where it ean perform
its functions without wreaking practical mischief. In the form in which it
is cast in s. 205 of the Restatement Second, good faith isan invitation to
judges to abandon the duty of legally reasoned decisions and to produce
‘an unanalytical incantation of personal values. Far trom involving the
community ethic in the day-to-day task of law-making and decision
making, with the atendant fruits of such a democratization, good faith is
more likely to produce idiosyncratic judgments
For critics like Bridge, the existing common law approach in which
discrete rules have developed to deal with particular instances of bad
faith is not only satisfactory, itis preferable to the adoption of a vague
general standard
Some detractors of good faith have examined the comparative
expetience and find it either wanting or not easily transportable into
the common law context. Thus Professor Girard," for example, offered
a comparative account of good faith doctrine in the United States and
in civilian law and argued that the doctrine should not be simply trans-
ported into Canadian common law without 2 wholesale rethinking of
the nature of contractual obligation, something that should be under-
taken, in his view, only by the legislature. Whether it is realistic to
think that Canadian provincial legislatures will take an interest in such
isoues is, of course, another matter
14, Aniele 10),
IS. M. Bridge,
‘Does Anglo-Canadian Contract Law Need & Doctrine of Good
Faith?” (1984), 9 C.B.LJ. 385 at pp. 412-13,
16, P.Giraed, * ‘Good Faith’ in Contract Performance: Principe or Placebo” (1983),
5 Sup. Ct. L. Rev, 309. See also R. Hasson, “Good Faith in Contract Law —
Some Lessons from Insurance Law” (1987), 13 C-B.LJ. 93 (suggesting that
2004) Good Faith Contractual Performance 77
In short, a spirited debate with respect to the question of recognition
has developed in Canada. Its not entirely clear that a knock-out punch
has been delivered by either the proponents of good faith or the detrac-
tors. It is, however, a striking fact that the doctrine of good faith seems
to have taken root successfully in American contract law which,
despite various differences in detail, is fundamentally very similar to
Canadian contract law. Professor Famsworth, perhaps the leading
contemporary American contracts scholar, responded to Professor
Bridge’s attack in the following terms:"
[see litte basis for Professor Bridge's fears of abuse of the doctrine. And
While the requirement of good faith has not wrought any fundamental
cchange in the law of the United States or in the thinking ofits lawyers, it
has, I believe, provided a useful basis for generalizing from particular
ceases... and for analyzing their similarities and differences,
3. Analysis of the Leading Cases
The debate concerning the desirability of recognizing an explicit
duty of good faith performance has attracted increasing judicial attention
in recent years. Accordingly, it may be asked whether Canadian com-
mon law now recognizes the existence of such a duty. The answer to
this question lies, I suggest, in a careful examination of what appear to
be the leading decisions making reference to good faith. An examina-
tion of these cases will also provide some insight into the extent to
which the common law already addresses, through more traditional
‘means, problems that might be addressed by the concept of a duty of
good faith performance.
(1) Good Faith, Best Efforts and the Duty to Cooperate
Advocates of recognition of the good faith duty place considerable
importance on the decision at trial in Gateway Realty Ltd. v. Arton
Holdings Lid," a decision upheld, in the result, by the Nova Scotia
Court of Appeal.” This case involved a dispute between owners of
neighbouring mall properties. Zellers was initially the anchor tenant in
the mall owned by Gateway. Hotly pursued by Arton, Zellers even-
tually moved its business to the Arton mall and Arton took an assign-
ment of the remaining 17 years of Zellers’ lease with Gateway. That
“goed i ns produced “bizare” ress in insane wand questioning the
wisdom of extending the doctrine thoghott onc I)
17, Ea Tamssorh “Comment on Michel Badges Pape (198), 9 CBLLS. 426
mp
18, (1991) 106NS.R. 24) 180 sub nom, Gateway Realty Li. Art Holdings Lad
(W033 SC)
19, (1953) INSR. QW) 180(CA.