Toward a Framework to Define the Outer Boundaries of Good Faith in Contractual Performance

Abstract

Since Bhasin v. Hyrnew, approaches to good faith in Canadian law can be grouped into two broad categories: restrained and expansionist. Restrained approaches attempt to read and contain Bhasin within the narrow scope traditionally attributed to good faith in the Anglo-Canadian common law tradition; expansionist strategies embrace the idea of good faith as a general principle of the common law of contract. What is often missing in both approaches is a unified and comprehensive explanation of how the general principle of good faith is organized in different transactional contexts. Both approaches overlook the fact that Bhasin conceptualizes good faith as a variable whose meaning is contextual and tied to the relationship or situation within which it is to be applied. In this paper, I develop a framework that can serve as a basis for a systematic understanding of how the good faith principle operates in varying transactional settings. I conceptualize the operation of the good faith principle as a function of the interaction between institutional and transactional variables. Institutional variables encompass the legal reasoning employed by judges in applying the notion of good faith. Transactional variables are the contractual settings within which good faith is applied. I do not claim the proposed framework captures all the relevant variables affecting the scope and functioning of the good faith principle, nor that it explains all instances in which such duties arise. The ultimate goal is to improve the transparency of judicial decision-making and the judicial use of good faith by rendering explicit the factors that most affect the incidence of good faith duties. Two cases that were recently decided by the Supreme Court of Canada demonstrate that by explicitly adhering to the proposed framework, judges can be more transparent about how and why they employ good faith in differing contexts.

Keywords: good faith, duty of honesty, contractual discretion, contractual interpretation, contractual performance

JEL Classification: K12