Good faith (law)#Contemporary usage in Canada

In U.S. law, the legal concept of implied covenant of good faith and fair dealing arose in the mid-19th century because contemporary legal interpretations of “the express contract language, interpreted strictly, appeared to grant unbridled discretion to one of the parties”.{{cite journal |last1=Dubroff |first1=Harold |title=The Implied Covenant of Good Faith in Contract Interpretation and Gap-Filling: Reviling a Revered Relic |journal=St. John's Law Review |date=2006 |volume=80 |issue=2 |pages=559–619 |url=https://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?article=1200&context=lawreview}} In 1933, in the case of Kirke La Shelle Company v. The Paul Armstrong Company et al. 263 N.Y. 79; 188 N.E. 163; 1933 N.Y., the New York Court of Appeals said:

In every contract there is an implied covenant that neither party shall do anything, which will have the effect of destroying or injuring the right of the other party, to receive the fruits of the contract. In other words, every contract has an implied covenant of good faith and fair dealing.

Furthermore, the covenant was discussed in the First Restatement of Contracts by the American Law Institute, but before adoption of the Uniform Commercial Code in the 1950s, the common law of most states did not recognize an implied covenant of good faith and fair dealing in contracts. Certain states, such as Massachusetts, have stricter enforcement than others. For example, the Commonwealth of Massachusetts will assess punitive damages under Chapter 93A which governs unfair and deceptive business practices, and a party found to have violated the covenant of good faith and fair dealing under 93A may be liable for punitive damages, legal fees and treble damages.{{Cite web | url=https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXV/Chapter93A/ | title=Chapter 93A }}

The implied covenant of good faith and fair dealing is especially important in U.S. law. It was incorporated into the Uniform Commercial Code (as part of Section 1–304), and was codified by the American Law Institute as Section 205 of the Restatement (Second) of Contracts.

Most U.S. jurisdictions view the breach of the implied covenant of good faith and fair dealing solely as a variant of breach of contract, in which the implied covenant is merely a "gap-filler" that expresses an unwritten contractual term that the parties would have included in their contract had they thought about it.{{Cite web|title=Dieckman v. Regency GP LP, Regency GP LLC|url=https://law.justia.com/cases/delaware/supreme-court/2017/208-2016.html|access-date=2021-07-02|website=Justia Law|language=en}} As a result, a breach of the implied covenant generally gives rise to ordinary contractual damages. Of course, this is not the most ideal rule for plaintiffs, since consequential damages for breach of contract are subject to certain limitations (see Hadley v. Baxendale).

In certain jurisdictions, breach of the implied covenant can also give rise to a tort action, e.g. A.C. Shaw Construction v. Washoe County, 105 Nevada 913, 915, 784 P.2d 9, 10 (1989).See A.C. Shaw Construction v. Washoe County, 105 Nev. 913, 915, 784 P.2d 9, 10 (1989). This rule is most prevalent in insurance law, when the insurer's breach of the implied covenant may give rise to a tort action known as insurance bad faith. The advantage of tort liability is that it supports broader compensatory damages as well as the possibility of punitive damages.

Some plaintiffs have attempted to persuade courts to extend tort liability for breach of the implied covenant from insurers to other powerful defendants, like employers and banks. However, most U.S. courts{{Citation needed|reason="most U.S. courts" is not cited, and is not part of the subsequent citations|date=July 2019}} have followed the example of certain landmark decisions from California courts, which rejected such tort liability against employers in 1988Foley v. Interactive Data Corp., [http://online.ceb.com/CalCases/C3/47C3d654.htm 47 Cal. 3d 654, 665] (1988).{{Better source needed|reason=Citation is to specific caselaw and not for the proposition that this is controlling precedent in California, that it's followed by other courts, or that it's a "landmark" decision.|date=July 2019}} and against banks in 1989.Price v. Wells Fargo Bank, [http://online.ceb.com/CalCases/CA3/213CA3d465.htm 213 Cal. App. 3d 465] (1989).{{Better source needed|reason=Citation is to specific caselaw and not for the proposition that this is controlling precedent in California, that it's followed by other courts, or that it's a "landmark" decision.|date=July 2019}}

In Canadian contract law, there are two distinct duties requiring parties to act in good faith. The first, pertaining to pre-contractual relations, is a duty to negotiate in good faith, while the second is a duty to act honestly in the performance of contractual obligations. The two duties are equally relevant to both Québec's civil law and the other provinces' and territories' common law approaches to contract law, representing an attempt by the Supreme Court of Canada to extend the duties of good faith embedded in Québecois law to the jurisprudence of the country's common law jurisdictions. Additionally, in the common law provinces and territories, the doctrine of estoppel is another way in which the courts restrict the ability of parties in a contract to act in bad faith.

The duty to negotiate in good faith is enshrined in Québecois contract law by the broader obligation on individual's to exercise their civil rights in good faith and has been recognised in certain circumstances in the common law jurisdictions. In Québec, this right is grounded in section 1375 of the civil code, which provides that parties to a contract must act in good faith not only at the time an obligation is performed but also "at the time the obligation arises". While English common law did not traditionally recognise a duty to negotiate in good faith, Canadian contract law recognises the duty where an imbalance in bargaining power exists between the parties to a contract. Circumstances giving rise to this duty include: negotiations between franchisors and franchisees, insurers and insured parties, contracts pertaining to marriages and separation agreements, invitations to tender, and fiduciary relationships.{{Cite web|url=https://www.westlawcanada.com/academic/ced/contracts/|title=Contracts|publisher=Westlaw Canada|author=Warren H.O. Mueller, B.A., LL.B., LL.M., Q.C. and D. Morgan, B.A., LL.B, LL.M.|access-date=28 May 2022}} Courts may also recognise a duty to negotiate in good faith in situations involving a pre-existing relationship between the parties, particularly where the negotiation pertains to collateral terms in an otherwise complete contract, as well as in situations where parties to an oral contract have agreed to negotiate the terms to be recorded in a written contract. In circumstances where one party has incurred expenses in anticipation of a contract and the other party withdraws, in bad faith, from negotiations; the violation of the duty to negotiate in good faith may entitle the aggrieved party to restitutionary damages.

With regard to invitations to tender, this duty is applied in the form of the Contract A doctrine. A "process contract", referred to as "Contract A",Court of Appeal for British Columbia, [https://www.bccourts.ca/jdb-txt/ca/07/05/2007bcca0592.htm#_ftn1 Tercon Contractors Ltd. v. British Columbia (Transportation and Highways)], 2007 BCCA 592, footnote 1, published 3 December 2007, accessed 29 July 2021 is formed between the owner (person, company or organisation tendering the project) and each bidder when a "request for proposal" is responded to in the form of a compliant bid, sometimes also known as submission of price. The owner must deal fairly and equally with all bidders, and must not show any favouritism or prejudice towards any bidder(s). In essence, this concept boils down to the right of an individual to have equal opportunity to be successful with their bid for work. A breach of Contract A may occur if the owner (or an owner's officer or representative, see vicarious liability), provides information, changes specification during the tendering process to unfairly benefit a particular bidder, enters into closed negotiations with an individual bidder in an effort to obtain more desirable contract conditions, etc. The most common situation in which an owner is accused of having breached Contract A occurs when a bidder is selected who is not the lowest bidder. This contravenes established custom and practice, which would normally dictate that the lowest bid be awarded the subsequent contract to perform the work, Contract B, but is not normally a source of a breach if handled properly. Successful suits for breach typically occur where the lowest bidder is excluded based on a clause or stipulation that is either not clearly outlined in the tender documents (such as preference for local bidders) or is deemed by the courts to be too broadly worded to have any meaning.

{{main|Duty of honest contractual performance}}

The duty of honest contractual performance (referred to in Québec as the doctrine of abuse of rights) is a contractual duty and implied term of a contract. In Québec, it is rooted in sections 6 and 7 of the civil code which provide that "every person is bound to exercise his civil rights in accordance with the requirements of good faith"[https://www.legisquebec.gouv.qc.ca/en/document/cs/CCQ-1991 Book One] of the Civil Code of Quebec – Section 6 and that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith".[https://www.legisquebec.gouv.qc.ca/en/document/cs/CCQ-1991 Book One] of the Civil Code of Quebec – Section 7 It was extended to Canada's common law provinces and territories as a result of the decision of the Supreme Court of Canada in the case of Bhasin v. Hrynew. In essence, this duty requires parties to a contract to act in good faith and with honesty in exercising their rights under a contract and in delivering their obligations under a contract. This duty prohibits parties to a contract from "[lying] or otherwise knowingly mislead[ing] each other about matters directly linked to the performance of the contract”.[https://www.canlii.org/en/ca/scc/doc/2020/2020scc45/2020scc45.html C.M. Callow Inc. v. Zollinger, 2020 SCC 45] paragraph 3 While it is also currently an integral part of the jurisprudence of Canada's common law provinces and territories, the duty of honest contractual performance is rooted in the civil law doctrine of abuse of rights and the Supreme Court of Canada has established that precedent from Québecois contract law is applicable to interpreting this duty in cases arising in the country's common law jurisdictions and vice versa.[https://www.canlii.org/en/ca/scc/doc/2020/2020scc45/2020scc45.html C.M. Callow Inc. v. Zollinger, 2020 SCC 45] paragraphs 62-63 Consequently, in all Canadian jurisdictions, this duty is rooted in articles 6, 7, and 1375 of the Civil Code of Québec; with article 7 in particular providing that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner".[https://www.canlii.org/en/ca/scc/doc/2020/2020scc45/2020scc45.html C.M. Callow Inc. v. Zollinger, 2020 SCC 45] paragraph 67 While this duty does not serve to extinguish or negate a party's rights under a contract, it serves to limit the manner in which parties to a contract may exercise their rights[https://www.canlii.org/en/ca/scc/doc/2020/2020scc45/2020scc45.html C.M. Callow Inc. v. Zollinger, 2020 SCC 45] paragraph 68 by mandating that parties must act in "good faith both at the time the obligation arises and at the time it is performed or extinguished".[https://www.legisquebec.gouv.qc.ca/en/document/cs/CCQ-1991?langCont=en#ga:l_five-gb:l_one-h1 Book Five, Title One] of the Civil Code of Quebec – Section 1375

Estoppel is an equitable remedy whereby a contracting party may not rely on the terms of a contract if, "by its words or conduct", it led the other party to believe that certain terms in the contract will be ignored, interpreted in a particular way, or given a less strict construction.{{Cite web|url=https://www.airdberlis.com/insights/blogs/energyinsider/post/ei-item/estoppel-by-convention-the-ontario-court-of-appeal-s-latest-take-on-a-relatively-rare-form-of-estoppel-and-the-implications-for-contracting-parties#:~:text=Generally%20speaking%2C%20estoppel%20is%20an,party%20to%20believe%20that%20certain|website=Energy Insider|title=Estoppel by Convention: The Ontario Court of Appeal's Latest Take on a Relatively Rare Form of Estoppel and the Implications for Contracting Parties|author=Simon Dugas and Mark van Zandvoort|date=31 August 2020|access-date=1 June 2022}} One type of estoppel recognised in Canada's common law jurisdictions is estoppel by convention, which operates where three criteria are satisfied: 1) a "manifest representation" of a "shared assumption of fact or law" pertaining to the application or construction of a contractual term, 2) one party acts in reliance of the "shared assumption" in a manner that alters its legal position, 3) the party that acted in reliance shows that it did so reasonably and would be significantly harmed if the term is strictly enforced.[https://www.canlii.org/en/on/onca/doc/2020/2020onca499/2020onca499.html Grasshopper Solar Corporation v. Independent Electricity System Operator, 2020 ONCA 499][https://www.canlii.org/en/ca/scc/doc/2005/2005scc38/2005scc38.html Ryan v. Moore, 2005 SCC 38 (CanLII), 2005 2 SCR 53] The Ontario Court of Appeal has held that the "shared assumption" required to invoke estoppel by convention does not need to arise as a representation by the party seeking enforcement of the contractual term.[https://www.canlii.org/en/on/onca/doc/2021/2021onca201/2021onca201.html Fram Elgin Mills 90 Inc. v. Romandale Farms Limited, 2021 ONCA 201 (CanLII)] Two distinct but related types of estoppel recognised in Canada are promissory estoppel or estoppel by representation, which enables courts to enforce a promise or representation by one party to a contract stating that it will not invoke a particular term of a contract or rely upon a particular provision of law if the other party has acted to its own detriment in reliance on such a promise or representation.[https://www.canlii.org/en/ca/scc/doc/1991/1991canlii58/1991canlii58.html Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), 1991 2 SCR 50] In Canada's common law provinces and territories, these categories of estoppel serve to require parties to a contract to act in good faith in invoking contractual terms.

English private law has traditionally been averse to general clauses and has repeatedly rejected the adoption of good faith as a core concept of private law.{{Cite book|url={{GBurl|B4AvUL3Xq7EC}}|title=Good Faith in European Contract Law|last1=Zimmermann|first1=Reinhard|last2=Whittaker|first2=Simon|date=2000-06-08|publisher=Cambridge University Press|isbn=9780521771900|language=en}} Over the past thirty years, EU law has injected the notion of "good faith" into confined areas of English private law.{{Cite book|url={{GBurl|1n46AQAAIAAJ}}|title=Good Faith in Contract: Concept and Context|last1=Brownsword|first1=Roger|last2=Hird|first2=Norma J.|last3=Howells|first3=Geraint G.|date=1999|publisher=Ashgate/Dartmouth|isbn=9781855219250|language=en}} The majority of these EU interventions have concerned the protection of consumers in their interactions with businesses.{{cite book |last1=Weatherill |first1=Stephen |title=EU consumer law and policy |date=2013 |publisher=Edward Elgar |location=Cheltenham, UK |isbn=9781782548317 |edition=Second}} Only Directive 86/653/EEC on the co-ordination of the laws of the member states relating to self-employed commercial agents has brought "good faith" to English commercial law.{{Cite journal|last=Tosato|first=Andrea|date=2016-09-01|title=Commercial Agency and the Duty to Act in Good Faith|journal=Oxford Journal of Legal Studies|language=en|volume=36|issue=3|pages=661–695|doi=10.1093/ojls/gqv040|issn=0143-6503|url=http://eprints.nottingham.ac.uk/34741/1/%5BUoN%5DCommercial%20Agency%20and%20the%20duty%20to%20act%20in%20good%20faith.pdf|access-date=2019-07-24|archive-date=2018-07-19|archive-url=https://web.archive.org/web/20180719134844/http://eprints.nottingham.ac.uk/34741/1/%5BUoN%5DCommercial%20Agency%20and%20the%20duty%20to%20act%20in%20good%20faith.pdf|url-status=dead}}

On the European continent, good faith often is strongly rooted in the legal framework. In the German-speaking area, {{lang|de|Treu und Glauben}} has a firm legal value{{mdash}}for instance in Switzerland, where Article 5(3) of the constitution{{cite web|url=https://www.admin.ch/opc/de/classified-compilation/19995395/index.html#a5|title=Schweizerische Bundesverfassung vom 18. April 1999, Art. 5|access-date=31 March 2019|language=de|archive-date=25 September 2016|archive-url=https://web.archive.org/web/20160925210152/https://www.admin.ch/opc/de/classified-compilation/19995395/index.html#a5|url-status=dead}} states that the state and private actors must act in good faith. This leads to the assumption, for example in contracts, that all parties have signed in good faith, so that any missing or unclear aspect of a contract is to be interpreted based on an assumption of the good faith of all parties. In the Netherlands, {{langx|nl|redelijkheid en billijkheid}} (art. 6:248 BW) has significant legal value

The concept of good faith was established in the insurance industry following the events of Carter v Boehm (1766), and is enshrined in the Insurance Contracts Act 1984 (ICA).{{Cite web|url=http://www.legislation.gov.au/Details/C2019C00115/Html/Text|title=Insurance Contracts Act 1984|publisher=Australian Treasury|website=www.legislation.gov.au|language=en|access-date=2019-08-07}} The act stipulates, in Section 13, obligations of all parties within a contract to act with utmost good faith. The New South Wales Court of Appeal case Burger King Corporation v Hungry Jack's Pty Ltd (2001)69 NSWLR 558 was also concerned with good faith and referred to an earlier case, Renard Constructions v Minister for Public Works (1992).26 NSWLR 234

In the Indian Penal Code, "good faith" is defined under section 52 as "Nothing is said to be done or believed in 'good faith' which is done or believed without due care and attention."{{citation |mode=cs1 |section-url=https://indiankanoon.org/doc/1180351/ |title=Central Government Act |section=Section 52 of the Indian Penal Code |via= Indian Kanoon |access-date=8 March 2018}} The privy council expanded on this meaning in the case of Muhammad Ishaq v The Emperor (1914), in which it held that an action taken by the defendant based on a belief of having a decree passed in his favor was illegal, since he could have found out that he did not enjoy any such favorable decree if he had inquired with a little more care and attention.{{cite web|url=https://indiankanoon.org/doc/911823/|last=Piggott|website=indiankanoon.org|title=Muhammad Ishaq vs Emperor|date=2 April 1914|place=Allahabad High Court|access-date=8 March 2018}}

In Walford v Miles (1992), the House of Lords ruled that an agreement to negotiate in good faith for an unspecified period is not enforceable, and a term to that effect cannot be implied into a lock-out agreement (an agreement not to negotiate with anyone except the opposite party) for an unspecified period, since the lock-out agreement did not oblige the vendor to conclude a contract with the intended purchaser.House of Lords, [https://www.ius.uzh.ch/dam/jcr:0ad63435-bcb7-490f-ab7b-154d9acc497f/Walford%20v.%20Miles.pdf Walford v Miles], [1992] 2 AC 128, accessed 25 May 2021

The court in Gold Group Properties v BDW Trading Ltd. in 2010 considered the nature and extent of an obligation "to act at all times in good faith", finding that this obligation does not impose a fiduciary duty whereby the party concerned would be required to abandon the pursuit of its own self-interest. A contractual commitment to act in good faith serves "to qualify self-interest, requiring that both parties act so as to allow both to enjoy the anticipated benefits of the contract".Keating Chambers, [https://www.keatingchambers.com/case-report/gold-group-properties-ltd-v-bdw-trading-ltd/ Gold Group Properties v BDW Trading Ltd.], BLM Vol. 27 No. 7 TCC, EWHC 1632 (TCC), accessed on 2 September 2024

• Good-faith exception
• {{cite BAILII |litigants=Yam Seng PTE Ltd v International Trade Corporation Ltd |link=Yam Seng Pte Ltd v International Trade Corp Ltd |court=EWHC |division=QB |year=2013 |num=111}}

{{Reflist}}

• {{cite journal |last1=Kowalczyk |first1=Ronald B. |last2=Piwowar |first2=Melissa |title=The Application of the Implied Covenant of Good Faith and Fair Dealing in Contract Cases |journal=Journal of the DuPage County Bar Association |date=December 2003 |volume=16}}

{{English contract law}}

{{Authority control}}

Category:Contract law