When negotiating agreements, it’s common for one or more parties to insist on including the term ‘good faith’ in various clauses. This inclusion is based on the assumption that it is required to ensure all parties act honestly in the performance of the agreement.
However, there is actually little to no added protection afforded by merely including the term. That’s because the Supreme Court of Canada (the “SCC”) ruled in Bhasin v. Hrynew that ‘good faith’ is a contractual expectation of all parties in an agreement, at all times. The SCC further ruled that no evidence is required to prove such expectation, nor does the expectation require express language. Simply put, ‘good faith’ does not need to be included in an agreement because all parties are always expected to act in good faith in performance of the agreement.
Prior to this 2014 ruling, the duty of ‘good faith’ had been limited to only particular contracts, such as employment, landlord-tenant, franchise and insurance contracts because, in these cases, power imbalances may exist. Since the ruling, the duty of ‘good faith’ applies to all agreements.
False sense of security
Including the provision requiring parties to agree to perform their obligations under the agreement in good faith not only offers no added legal protection, but may actually lead to a false sense of security. And that’s because according to the SCC, ‘good faith’ performance is merely the obligation not to lie or knowingly mislead the other parties about matters directly linked to the performance or execution of the agreement. There is no obligation beyond that narrow definition.
To gain real added protection, the term ‘good faith’ should be defined in an agreement to go beyond the SCC’s definition. As an example, if a condition in an agreement of purchase and sale requires a re-zoning of the property, simply including an expression of a good faith attempt by the party responsible for obtaining the rezoning is not helpful. The agreement should set out the specific steps and timelines for completion.
If a party considers it necessary for one or more obligations to be undertaken in good faith, then it is also worth negotiating an expansion of good faith beyond the requirement to not lie or knowingly mislead.
Not much is gained by expressing the obligation that parties not lie or knowingly mislead. And in reality, why would anyone want to enter into an agreement with another person from whom such a promise was expressly required