Good faith

How BC law treats it

In Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada recognized good faith as an organizing principle and created a duty of honest performance that applies to every contract and cannot be excluded. A party must not lie or knowingly mislead the other about matters directly linked to the contract's performance. In CM Callow Inc v Zollinger, 2020 SCC 45, the Court held that this can include actively creating a false impression through half-truths or misleading conduct, even without an outright lie. Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, a BC case, held that a party exercising a contractual discretion must do so reasonably, in a manner connected to the purposes for which the discretion was granted. Exercising a discretion to one's own advantage is not bad faith on its own; the problem is using it for a purpose unconnected to the bargain. Good faith does not create a duty of loyalty, a duty to disclose, or a duty to give up one's own interests. Canadian law also recognizes no general duty to negotiate in good faith (Martel Building Ltd v Canada, 2000 SCC 60), so parties can usually walk away from negotiations unless they agree otherwise. Specific duties exist in particular settings: employers must act in good faith in the manner of dismissal (Honda Canada Inc v Keays, 2008 SCC 39), directors must act honestly and in good faith under s. 142 of the Business Corporations Act, SBC 2002, c 57 (BCBCA), and franchise agreements carry a duty of fair dealing under the Franchises Act, SBC 2015, c 35.

What it means for your business

Good faith claims now appear in most BC commercial disputes, especially over terminations, renewals and discretionary decisions such as approvals and pricing. A business can protect its own interests, but it cannot mislead a counterparty about performance or use a contractual power for a purpose the contract never intended. Careful drafting of discretion clauses and honest, documented communications around termination reduce exposure. Founders should also know that a letter of intent does not usually create an enforceable duty to keep negotiating. Example: A Burnaby supplier knows it will not renew a distribution agreement but tells the distributor renewal is "looking good" so it keeps investing. Under Bhasin and Callow, that misleading reassurance can breach the duty of honest performance even though the supplier was entitled not to renew.

Risks and common mistakes

Assuming good faith requires a party to disclose information or act in the other party's best interests. Believing a clause can exclude the duty of honest performance altogether. Using a contractual discretion, such as a consent right, for a purpose unrelated to why it was granted. Treating a non-binding letter of intent as creating a duty to negotiate in good faith without an express term. Giving vague or reassuring statements during a planned termination that create a false impression.