Good Faith in Ontario Commercial Contracts: What Businesses Must Know
Introduction
The duty of good faith in Canadian contract law has undergone a fundamental transformation over the past decade. What was once a patchwork of narrow, context-specific doctrines has evolved into a general organizing principle that applies to the performance of all contracts. For Ontario businesses, this development has profound practical implications for how contracts are performed, how discretionary powers are exercised, and how contractual relationships are terminated.
This article traces the evolution of the good faith doctrine through three landmark Supreme Court of Canada decisions—Bhasin v. Hrynew, Callow v. Zollinger, and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District—and explains what these decisions mean for Ontario businesses in practical terms. We also discuss the important limitations of the good faith duty and offer guidance on how to draft contracts that account for these obligations.
Bhasin v. Hrynew: The General Duty of Honest Performance
The Supreme Court of Canada’s 2014 decision in Bhasin v. Hrynew, 2014 SCC 71, was a watershed moment for Canadian contract law. For the first time, the Court recognized that there is a general organizing principle of good faith that underlies many of the existing doctrines and rules governing contractual performance. From this principle, the Court derived a new common law duty: the duty of honest performance.
The duty of honest performance means that parties must not lie to or knowingly mislead each other about matters directly linked to the performance of the contract. In Bhasin, the defendant had actively deceived the plaintiff about whether the parties’ dealership agreement would be renewed, while simultaneously working to capture the plaintiff’s business for a competitor. The Court found that this dishonesty breached the duty of honest performance and awarded damages.
Several aspects of the Bhasin decision are particularly important for Ontario businesses:
• The duty of honest performance is a general doctrine that applies to all contracts, not just specific categories of contracts or relationships.
• The duty is a minimum standard that cannot be contracted out of. Parties cannot include a clause in their contract that authorizes dishonesty in the performance of the contract.
• The duty does not require a party to disclose information or act altruistically. It requires only that parties not actively lie to or mislead each other about matters directly linked to performance.
• The duty operates as a limitation on the exercise of otherwise valid contractual rights. Even if a contract gives you the right to take a certain action (such as non-renewal), you cannot exercise that right through deception.
Callow v. Zollinger: Active and Passive Dishonesty
The Supreme Court returned to the duty of honest performance in Callow v. Zollinger, 2020 SCC 45. This case involved a winter maintenance contract that a condominium corporation terminated pursuant to a termination-for-convenience clause. The contractor alleged that the corporation had induced him not to seek other contracts by creating the false impression that the contract would be renewed, even though the corporation had already decided to terminate the agreement.
The Court held that the duty of honest performance was breached. Importantly, the majority clarified that the duty is not limited to active lies. It extends to conduct that creates a false impression—even through technically true statements, half-truths, or misleading omissions—when the overall effect is to deceive the other party about matters directly linked to performance. The distinction is between silence (which is generally permitted) and active creation of a false impression (which is not).
For Ontario businesses, Callow reinforces several practical points:
• You can exercise a termination-for-convenience right, but you cannot string the other party along with misleading assurances while you prepare to terminate.
• Technical truth is not a defence if your overall conduct creates a false impression about matters linked to performance of the contract.
• The duty applies to conduct that occurs during the performance of the contract, not just at the moment of exercising a specific contractual right.
Wastech Services Ltd. v. Greater Vancouver Sewerage: Good Faith and Discretionary Powers
The most recent major development came in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7. This case addressed a different aspect of good faith: how the duty applies to the exercise of discretionary contractual powers. The contract at issue gave one party (the sewerage district) the discretion to allocate waste disposal volumes between different facilities, directly affecting the compensation of the other party (the waste hauler).
The Supreme Court held that the exercise of contractual discretion is subject to a duty of good faith, which requires that the discretion not be exercised unreasonably—meaning in a manner that would "substantially nullify" the benefit of the contract for the other party or defeat the purposes for which the discretion was granted. However, the Court emphasized that this is not a general duty of reasonableness. The discretion-holder does not need to exercise its discretion in the way most favourable to the other party. It must simply not exercise the discretion in a way that is so unreasonable as to undermine the very purpose of the contractual arrangement.
The practical implications for Ontario businesses are significant:
• If your contract gives you discretion over pricing, volume allocation, performance evaluation, or similar matters, you must exercise that discretion in a manner that does not substantially deprive the other party of the benefit of the contract.
• The duty does not require you to maximize the other party’s benefit. It requires you to exercise discretion within the range of outcomes contemplated by the contract.
• If you hold discretionary powers under a contract, document your decision-making process to demonstrate that you exercised the discretion reasonably and in good faith.
Practical Implications for Ontario Businesses
The trilogy of Bhasin, Callow, and Wastech has created a robust framework of good faith obligations that apply to virtually every commercial contract in Ontario. The following practical implications emerge from these decisions.
Termination and Non-Renewal
You may terminate or decline to renew a contract in accordance with its terms, but you must do so honestly. Do not create false expectations about renewal or continued performance while simultaneously planning to terminate. If you have decided to terminate, communicate your decision clearly and in a timely manner. Document your reasons and ensure that your communications are consistent.
Discretionary Clauses
Contracts that grant discretionary powers—such as the power to set prices, allocate work, evaluate performance, approve requests, or withhold consent—must be exercised within the bounds of good faith. Exercise discretion based on the purposes for which the power was granted, not to punish the other party or to extract an advantage unrelated to the contract. Maintain records of the factors you considered in exercising the discretion.
Communications During Performance
Be careful about the impressions created by your communications during the life of the contract. Avoid making assurances you do not intend to honour. If circumstances change and a previously communicated expectation is no longer valid, correct the record promptly. Train your team to understand that misleading communications—even informal ones—can give rise to a breach of the duty of honest performance.
Limitations of the Good Faith Duty
It is equally important to understand what the duty of good faith does not require. The Supreme Court has been careful to define the boundaries of the doctrine:
• The duty does not require disclosure of information. You are not obligated to share your negotiating strategy, your business plans, or confidential information with your contractual counterparty.
• The duty does not require altruism. You are entitled to act in your own commercial self-interest, provided you do so honestly.
• The duty does not override the express terms of the contract. If the contract gives you the right to terminate on 30 days’ notice, you can exercise that right—you just cannot do so through deception.
• The duty is not a free-standing cause of action. It operates within the framework of the contract and does not create obligations that go beyond the contractual relationship.
• The duty does not require good faith in negotiation. The duty of honest performance applies to the performance of the contract, not to pre-contractual negotiations (though other doctrines, such as misrepresentation, may apply during negotiations).
Drafting Considerations
While the duty of honest performance cannot be contracted out of, there are steps you can take in drafting your contracts to manage good faith obligations:
• Define discretionary powers with specificity. Where possible, specify the criteria or factors the discretion-holder must consider, which reduces the scope for disputes about whether the discretion was exercised in good faith.
• Include clear termination mechanisms with specific notice periods, which reduces the likelihood of disputes about whether termination was dishonest.
• Document the parties’ expectations. Detailed recitals and purpose clauses can help establish the context in which good faith obligations will be assessed.
• Include entire agreement clauses to limit the extent to which pre-contractual representations can be relied upon, though note that entire agreement clauses do not prevent claims for fraudulent misrepresentation.
• Train your team on the duty of honest performance. Ensure that employees who manage commercial relationships understand that misleading conduct during performance can expose the business to liability.
Frequently Asked Questions
Q: Can I contract out of the duty of good faith?
A: No. The Supreme Court of Canada in Bhasin v. Hrynew held that the duty of honest performance is a minimum standard that cannot be excluded by contract. However, you can structure your contract to reduce the scope for good faith disputes—for example, by defining discretionary powers with specificity and including clear termination mechanisms.
Q: Does the duty of good faith require me to disclose confidential information to my counterparty?
A: No. The duty of honest performance does not require disclosure. It prohibits active dishonesty—lying to or knowingly misleading the other party about matters directly linked to performance of the contract. You are not required to volunteer information, share your business plans, or act contrary to your own commercial interests.
Q: If I have a termination-for-convenience clause, can I terminate at any time?
A: Yes, you can exercise a termination-for-convenience right, provided you do so honestly. You cannot, however, create a false impression that the contract will continue while simultaneously preparing to terminate. Callow v. Zollinger makes clear that stringing a counterparty along with misleading assurances breaches the duty of honest performance.
Q: Does the duty of good faith apply to pre-contractual negotiations?
A: The duty of honest performance as articulated in Bhasin applies to the performance of contracts, not to negotiations. However, dishonesty during negotiations may give rise to other claims, such as negligent or fraudulent misrepresentation. The Supreme Court has not yet recognized a general duty of good faith in negotiations.
Contact Booni Law
The evolving duty of good faith has significant implications for how Ontario businesses perform their contracts, exercise discretionary powers, and manage commercial relationships. Booni Law provides practical, up-to-date advice to help you navigate these obligations with confidence.
Booni Law serves clients across Ontario, including the Greater Toronto Area, Southwestern Ontario, and communities throughout the province. Email us at admin@boonilaw.com or call +1 (226) 271-1751 to get started.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship between you and Booni Law. The information in this article may not reflect the most current legal developments and should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you require legal advice, please contact Booni Law.
