Lexpert US Guides

14 | LEXPERT • December 2015 | www.lexpert.ca GOOD FAITH contracts, it did open the door to new arguments. Some observers go so far as to say that the decision allows courts to become the moral conscience of transactions, opening broader avenues to fill any vacuum that judges perceive in the law. at appears to be what has happened in California, where the duty of good faith has been ensconced since at least the 1980s. Still, it doesn't appear to have created undue commercial uncer- tainty, largely because in general terms, courts adhere to the terms of contract as they are written. For the most part, the duty has been applied as a remedial gap-filler in situations involving egregious conduct that is inherently unfair. BE THAT AS IT MAY, an increase in litigation is perhaps inevi- table when a newly stated principle invites reference to hindsight. "I believe that parties to litigation will look at the entire history of the contractual relationship with a view to finding a perceived dishonest act in the contract's performance that will become the subject of a pleading invoking a breach of the duty of honest performance," Lederman says. Many lawyers believe, however, that Canadian courts will apply Bhasin only in exceptional circumstances in which there are extreme departures from parties' reasonable expectations. Others have suggested that Canadian courts will apply the duty only when the dishonest conduct in question amounts to a "material element," a limitation that could significantly reduce the volume of arguments about the scope of the duty of good faith. So it may not be too long a time before things start to sort themselves out. "I've already pleaded the decision in four different cases," says Edward Babin of Babin Bessner Spry LLP in Toronto. "I'm also advising clients that it does present a potential argument that has some hope of success in a situation where I wouldn't have given that advice before Bhasin came along." In other words, the duty of good faith suddenly has a general legitimacy in Canada that it lacked previously. "e courts still have to shape the duty," Babin says. "But there's no doubt that Bhasin has already effected a change in litigators' outlook." required parties to carry out the contract to the letter of the law as objectively construed, and then confirmed that parties could not depart from that by refusing to act honestly and in good faith. "Let's say I agree to buy a house subject to financing, but I never make a real effort to come up with the money," he says. "It's bedrock law that I can't do that." e court's mistake, the lawyer adds, was to sever the concept of honesty from the concept of good faith. "at creates enormous terminological difficulties because good faith is normally defined in terms of the two key concepts of honesty and sincerity," he says. "So decoupling the principle of honesty from the duty of good faith is a poor choice going forward." It's hard to refute Lowenstein's logic, given that generally speaking bad faith has not been a pervasive issue in contract litigation to date — certainly the common-law courts in Canada have not been swamped by such allegations. While the SCC was at pains to point out that the sky had decid- edly not fallen in jurisdictions where good faith was entrenched, good faith does seem to be a continuing staple of US litigation. In Québec, the new Civil Code of Québec, which came into force in 1994, essentially codified the jurisprudence that had interpreted Article 1024 of the predecessor legislation, the Civil Code of Lower Canada, which did not explicitly refer to the duty of good faith. But as far back as 1962, the SCC's decision in Cosmo Underwear Company Ltd. v. Valleyfield Silk Mills Ltd. confirmed that good faith was the essence of agree- ments in the civil law, governing not only their formation but also their performance. e duty in Québec, however, is much broader than the one articulated in Bhasin: it goes beyond performance of the contract to its formation and throughout its term, and the standard for good faith is an objective one that goes beyond honesty to what a reasonable person would do. at may explain why an automated search reveals that the three provisions in the current Civil Code of Québec have engaged more than 5,100 cases in 20 years, amounting to approximately 250 annually. So while Bhasin did not, for example, purport to change the pre-existing law of good faith as it applies to employment Eli Lederman Lenczner Slaght Royce Smith Griffin LLP "ALTHOUGH the decision doesn't give any specifics about when the parties can try to limit the need to communicate honestly, I do think it will change the way contracts are drafted. For example, lawyers might expand on absolute discretion by expressly stating that a right can be exercised for any reason at all or that no reason need be given for the exercise of a right." Julius Melnitzer is a freelance legal-affairs writer in Toronto.

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