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The Principle of Good Faith in Contractual Performance: A Scottish-Canadian Comparison

Document Cited in Related
Vincent
Pages301-331
Published date01 September 2019
Author
DOI10.3366/elr.2019.0571
Date01 September 2019
INTRODUCTION

Unlike Continental European legal systems, English common law traditionally does not recognise good faith as a general principle informing contracts. Instead, the preferred approach is to develop “piecemeal solutions in response to demonstrated problems of unfairness”.1 Courts and academics alike have identified numerous objections to the good faith principle, including its encroachment on freedom of contract2 and disregard of the law's “strong ethos” of individualism.3 It is said to produce commercial uncertainty;4 undermine existing contractual terms;5 and promote “judicial moralism or palm tree justice”.6 In a common law system, it amounts to a contagion from civil law jurisdictions.7 In short, the good faith principle is “unworkable”.8 In modern times Scots contract law has generally followed English law in denying the concept of good faith any particular significance outside certain particular forms of contract such as insurance, partnership, and agency.

Since 2013, however, the English judge Sir George Leggatt (to become a Justice of the UK Supreme Court in April 2020) has developed both judicially and extra-judicially an argument that English law can and does recognise an obligation of good faith performance by way of terms implied into contracts, either in the facts and circumstances of the particular case or in general in types of contracts.9 In this argument he has especially highlighted long-term or “relational” contracts (including employment contracts) in which the parties have a relationship

requiring extensive cooperation between the parties continuing over many years. In such a case the parties may need to show flexibility and a willingness to adapt their behaviour if their joint venture is to succeed. … [The relationship] involves expectations of cooperation and loyalty which are not (and perhaps cannot be) completely expressed in a formal document.10

But the obligation does not govern the negotiation and formation of contracts, since it arises only where there is a contract. Nor does it require a party to set another's interests above its own, and it is not capable of over-riding express contract terms. The concept can regulate the exercise of contractually conferred discretionary powers, however, with Sir George arguing that there is now an implication of law that such discretions will be exercised honestly and in good faith, not arbitrarily, capriciously or unreasonably.11

These arguments are of course controversial, and have not yet received the seal of approval from appellate courts.12 The academic response in the UK has also been variable, not least with regard to the use of the idea of relational contracts. While Hugh Collins has identified distinguishing features by which a relational contract might be given specific legal definition and effects (not necessarily including a good faith performance rule), others have tended to agree with the US scholar Melvin Eisenberg that “the general principles of contract law can and should be formulated to be responsive to relational as well as discrete contracts”.13 But there has been significant movement in other jurisdictions which had hitherto generally followed the traditional English approach.14 In particular, the Supreme Court of Canada (SCC) in Bhasin v Hrynew in 2014 broke with the past and formally acknowledged good faith as a general organising principle of contractual performance at common law. After a multi-jurisdictional survey, the court rejected English recalcitrance and, instead, concluded that recognising a good faith principle makes “the common law less unsettled and piecemeal, more coherent and just”.15 Bhasin's other remarkable contribution is to recognise, for the first time, a general duty of honesty in contractual performance which is derived from the good faith principle. This duty means, as the SCC explains, “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”.16

The purpose of this article is to assess what Scots law can learn from Canadian law on good faith. Section B begins with Canadian law, providing an overview of Bhasin and briefly describing the new principle of good faith. Several post-Bhasin cases concerning implied terms and contractual discretion (areas in which the good faith principle has considerable presence) are analysed and the new duty of honesty explored. Section C considers the failure of the Scottish courts to develop “the broad principle in the field of contract law of fair dealing in good faith” identified by the House of Lords in 1997,17 while also noting the incoherent use of “equitable” controls (which may be seen as good faith in disguise) available in remedies for breach of contract. Section D assesses the difference between the current Canadian and the Scottish positions, appraising the extent to which recognition of a general good faith principle can make the law more coherent and responsive to real problems while also requiring appropriate safeguards against excessive judicial empowerment to be put in place. Bhasin may provide inspiration here, although change in the Scottish courts’ approach seems unlikely unless and until the English courts do so too.

 CANADIAN LAW Overview: <italic>Bhasin v Hrynew</italic>

The plaintiff, Mr Bhasin, and the defendant, Canadian American Financial Corp (Can-Am) were parties to a commercial dealership agreement whereby Bhasin's agency sold Can-Am's education savings plans to investors. The non-renewal clause provided that either party could terminate their contract on six months’ notice upon expiry of the first three-year period. When a Bhasin competitor, Mr Hrynew, joined Can-Am, he pressured Can-Am to force a merger with Bhasin. Can-Am complied, triggering its non-renewal clause by giving Bhasin proper notice of termination and then merging Bhasin's agency with Hrynew's. Bhasin sued, inter alia, for breach of contract.18 Notwithstanding an entire agreement clause which would generally operate to prevent the court from implying terms in this case,19 the trial judge implied a term that Can-Am could only trigger the non-renewal clause for good faith reasons.20 Though recognising that implying such a term was contrary to the entire agreement clause at bar, the court ruled that the clause was of no effect since Can-Am had exercised its non-renewal power “unfairly or abusively”,21 Bhasin was not sophisticated,22 and it would be unjust or inequitable to allow Can-Am to rely on the non-renewal clause as written.23 The trial judge also went on to find that Can-Am had breached an implied term of good faith on various occasions, including when it acted dishonestly in not advising Bhasin that a merger decision had been taken24 and “equivocated” in response to Bhasin's question as to whether a merger of the agencies would take place.25 She awarded over $380,000 in damages for, inter alia, loss of income and business.26

On appeal, the trial decision was reversed in its entirety. The court concluded that a good faith term could not be implied because it would conflict with an express term; violate the parol evidence rule;27 and be contrary to the entire agreement clause.28 On a related front, the lower court's determination that the contract could only be terminated for good faith reasons “flatly” contradicted the words of the non-renewal clause.29

On further appeal, the SCC found for Bhasin but on entirely new grounds. It identified, for the first time, the good faith principle informing contractual performance and explained how Can-Am was in breach of the new duty of honesty that underlies all contracts. These matters are discussed in more detail below.

 <italic>Bhasin</italic>'s Good Faith Principle: Reasonableness and Honesty

According to the SCC, Canada's good faith principle states that parties must generally perform their contracts “honestly and reasonably and not capriciously or arbitrarily”.30 It noted that the principle reflects “the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner”.31 This, in turn, “merely requires that a party not seek to undermine those interests in bad faith”.32 Beyond this, “appropriate regard” is cast as a variable whose meaning is contextual and tied to the relationship or situation at bar.33 Having referred amongst many other sources to Sir George Leggatt's views on good faith in English law, the SCC remarked:

Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. For example, the general organising principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange …34

The good faith principle does not, on its own, operate as a contractual term, implied or otherwise, or found any cause of action.35 Rather, the principle is a standard, underpinning, uniting, and organising those aspects of contract law which, as described by the SCC, require “honest, candid, forthright or reasonable contractual performance”.36 For example, the good faith principle is the source of the long-standing doctrine of unconscionability because it expressly considers “the fairness of contractual bargains”.37 As another example, the good faith principle can be a basis for implying contractual terms that regulate the defendant's freedom of action.38

The good faith principle has a twofold purpose. First, it is the source of and justification for certain existing contract rules or elements.39 Second, it is the foundation for the judicial promulgation of new contract rules or elements, albeit on a cautious, restrained, incremental...

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