Supreme Court rules on duty of good faith in contract dispute

Ruling described as a historic development in Canadian contract law

The Supreme Court of Canada recently issued a major ruling concerning commercial contract law. The ruling settles a longstanding issue before both courts and businesses about the extent to which parties to a contract are expected to act honestly and in good faith – even when the contract itself does not stipulate a duty of good faith. While a duty of good faith has already been recognized in specific areas of commercial law, the recent ruling now requires a general duty of good faith in all commercial contracts.

Company acted dishonestly

The case, which originated in Alberta, involved a man who had a business that sold RESP products for the defendant company. The contract between the two parties included a termination clause and did not stipulate a duty of good faith or require either party to give reasons for ending the contract.

In this case, however, the defendant company terminated its contract with the man after it had dealt dishonestly with one of the man’s competitors. After the contract ended, the competitor hired away the man’s sales team, thus driving him out business. The man sued the company and a trial judge initially ruled in his favour, awarding him $87,000 plus interest and legal fees. However, an appeals court overturned the lower court’s ruling on the basis that the contract between the parties did not require a duty of good faith.

Supreme Court case

The case eventually made its way to the Supreme Court of Canada, which recently reversed the appeals court ruling and upheld the man’s original $87,000 award. The court ruled that parties to a contract should be expected to perform honestly, regardless of whether the contract spells out a duty of good faith. The court noted that the expectation of a duty of good faith would provide greater predictability for businesses and greater clarity for contract law. The ruling also brings Canadian commercial law more in line with the laws in Quebec and the United States, where a general duty of good faith is already the norm.

The ruling is, however, a turn away from previous decisions. While the court has ruled that a duty of good faith is required in specific areas of contract law – such as in employment and insurance law – it has, until now, tried not to enforce a broad expectation of good faith in commercial law out of fear of imposing too many constraints on businesses. As such, the recent ruling has been described as one of the most important contract law cases in recent decades.

Commercial legal representation

While its full implications remain to be seen, the above case has the potential to seriously impact many businesses in British Columbia and throughout Canada. Regardless of what form a contract dispute takes, businesses should always reach out to a commercial law firm that has the experience and expertise to help mitigate the potential damage a contract or other commercial law dispute can cause.

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