ABUSE OF DISCRETION, FAILURE TO COOPERATE AND EVASION OF DUTY: UNPACKING THE COMMON LAW DUTY OF GOOD FAITH CONTRACTUAL PERFORMANCE John D. MeCamus* 1, Introduction ‘The Roman origins of the civilian doctrine requiring contracting parties to perform their contractual obligations with good faith were revealed to an English audience by Raphael Powell in 1956 in his inaugural lecture as Professor of Roman law in the University of London. Professor Powell was an enthnsinst of the civilian doctrine he appeared particularly attracted to the contemporary German version — ‘and he evidently preferred it to the common law approach. In the English Jaw of contract, he suggested, rather than adopting a general rule of good faith, “there are a number of individual cases in which the law contains an element of objective or subjective good faith”? The common law was the poorer, he intimated, for not having adopted the civilian rule. ‘More than 30 years later, in 1989, Bingham L.J. offered a similar comparison between the two systems in the following terms:? In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith... English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfainmess. Although it appears that English interest in the civilian doctrine of ‘g00d faith performance has been rekindled by the increasing influence Professor of Law, Osgoode Hall Law School, York University. Tis isa revised and updated version ofan unpublished paper fst presented, under the tte “The Duty of Good Faith Performance at Common Law’, at the Civil Law Seminar of the National Judicial Institue held in Montreal, on May 17th, 2000, R. Powell, “Good Faith in Contracts” (1956), 9 Cur. Legal Probs. 16. Ibid, at p23. Interfote Picture Library Ltd. ¥, Stleto Visual Programmes Lid, (1989] 1 QB. 433 at p. 439 (CA). 72 2004] Good Faith Contractual Performance 73 of European law on the English law of contracts. itis probably fair to say that as we entered the 2ist century, the role of good faith in the common law of English contract law was not significantly changed from that described by Professor Powell in 1956. ‘A very different story unfolded in the United States. The recognition of a general duty of good faith performance was given a substantial impetus in American law and, indeed, a statutory base, when such a duty was explicitly provided for in the Uniform Commercial Code, a ‘model law, in the 1950s. The Code, in turn, was enacted as state law across the country. There are several references to good faith in the Code. Article 1-208, for example, provides as follows: “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.” Interestingly, the principal architect of the Uniform Commercial Code, Professor Karl Llewellyn, was familiar with and apparently an admirer of the German Civil Code’s provision ‘on good faith.’ In due course, the influence of the American Code and the vast body of case law on good faith which surrounded and, to some extent, preceded it led to the inclusion of an article on good faith in the Restatement of the Law of Contracts, 2d, published in 1981. Section 205 Of the Kestatement provides as follows: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Alone among the common law jurisdictions, then, the United States appears to have adopted a generalized duty of good faith performance of contracts. ‘The interest of Canadian common lawyers in the generalized good faith duty appears to have been stimulated, in part at least, by the work of the Ontario Law Reform Commission (OLRC) on sale of goods law and contract law in the 1970s and 1980s. In its 1979 Report on Sale of Goods! and its 1987 Report on Amendment of the Law of Contract,’ the OLRC recommended that legislation be enacted giving recognition to the doctrine of good faith. In the latter report, the OLRC reasoned that “statutory recognition of the doctrine of good faith would serve to synthesize the various strands of good faith analysis in the case law. 4. See, generally, G. Teubner, “Legal Iritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergences” (1998), 61 Mod. L. Rev. 11; R. Brownsword, “Good Faith in Contracts’ Revisited” (1996), 49 Curr. Legal robs. 112. 5. EA. Famsworth, “Good Faith in Contract Performance” in J, Beatson and D. Friedmana, eds., Good Faith and Fault in Contract Law (Onford: Clarendon Press, 1995), p. 153 at p. 15S. 6. Toronto: Ministry of the Attomey Ger 7. CToronto: Ministry of the Attomey Gener 1979), 1989),74 The Advocates’ Quarterly [Vol. 29 Moreover, the literature reveals that a generalized doctrine of good faith would conform to commercial realities. In a published lecture delivered by then Professor E.P. Belobaba, based on his research for the OLRC, Belobaba argued persuasively for the recognition of a generalized duty of good faith.” References to this lecture are commonly found in later Canadian judicial discussions con- sidering the desirability of recognizing the existence of the duty. As we shall see, there are also a number of commentators who have weighed in against recognition of the doctrine. In recent years, this academic debate concerning the desirability of recognizing the generalized duty has migrated into the Canadian case law." ‘The first object of this article is to attempt to discern the current sta- tus of the doctrine in common law Canada by examining the leading cases in which recognition of the doctrine is either assumed or advo- cated, More than this, however, the article will attempt to identify recurring themes in the factual patterns of these cases, with a view to demystifying the doctrine and giving the doctrine more concrete content. In tur, this exercise may provide a working definition of the concept of good faith. Bringing the abstract notion of good faith a little closer to earth may render it more “reckonable” and may offer some comfort to those critics of the doctrine who consider it to be unhelpful, if not dangerous, because of its vagueness and uncertain ambit. Before turning to examine the case law, however, I will begin by describing the Canadian debate conceming recognition of the duty and identifying the principal arguments advanced by the doctrine’s advocates and its detractors. In the third section of the article, I will ‘examine what appear to be the leading cases making reference to the concept of a duty of good faith. In the fourth section, an account will be offered of the treatment accorded good faith by the Supreme Court of Canada in the context of wrongful dismissal in Wallace v. United Grain Growers Ltd." In the fifth, on the assumption that recognition of the doctrine is, if not yet achieved, something that may occur, I attempt to identify a number of issues concerning the good faith duty that may 8 Bid, at p. 174 9. jood Faith in Canadian Contract Law” in Law Society of Upper Canada, Special Lectures 1985, Commercial Law: Recent Developments and Emerging Trends (Toronto: R. De Boo, 1985), at. 73 10. See, generally, S.K. O'Byrne, “Good Faith in Contracrual Performance: Recent (1995), 74 Can. Bar Rev. 70; D. Stack, “The Two Standards of Good Faith in Canadian Contract Law" (1998), 62 Sask. L. Rev. 201. For a dis- cussion that includes recent developments in Australia and New Zealand, see (former Chief Justice) AT. Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000), 116 LOR. 66. 11, (1997), 152 D.LR, (th) 1, [1997] 3 S.CR. 701, [1999] 4 WWR. 86, 2004} Good Faith Contractual Performance 75 need to be resolved if a generalized good faith performance duty is to be recognized. 2. The Debate over Recognition of the Duty There are two principal arguments made by advocates of recogni- tion of a generalized duty of good faith performance, both of which appear to have had some influence of the thinking of the OLRC. The first argument minimizes the extent of the change involved in recog- nizing the doctrine and suggests that the common law has already, in effect, recognized such a doctrine, though not by name. Thus, for example, Belobaba referred to good faith as “de facto” doctrine. Belobaba stated what is perhaps an extreme version of this thesis when he made the following claim: [T]he explicit adoption of a good faith doctrine today would not impose ‘any new contractual obligations or responsibilities. It would simply consolidate existing doctrinal approaches and. provide @ more precise remedial vocabulary. Fifteen years on, one might enter into a modest quibble about the use of the adjective “precise” in this statement, especially as Belobaba himself wrote, a page later, that “good faith cannot be defined with any ‘meaningful precision”."* We will return to the question of definition. Nonetheless, there is considerable force to the argument that a variety of existing common law doctrines — some of which we will examine in the next section of this article — appear to manifest a policy of encouraging good faith or punishing bad faith. The second argument in support of recognition is that explicit adoption of a good faith duty will bring the law more into accord with the expectations of contracting parties. Commercial actors, and others, expect that the people with whom they enter into transactions will act in good faith. By explicitly recognizing the existence of such a duty, the common law of contract will simply give effect to those reasonable expectations. This thesis, it may be noted, is not necessarily entirely consistent with the first argument. That is to say, this appears to be an argument for reforming the law in order to bring it into closer alignment with the reasonable expectations of contracting parties. We are left to assume that the current law does not fully achieve this laudable objec- tive and can be improved by adopting a generalized duty of good faith Again, however, there is some force in the argument. The change to the law will, arguably, be less dramatic than critics envisage and, moreover, it will be consistent with the expectations of contracting parties. 12. Supra, footnote 9, at p. 78 13, Ibid, atp. 79. Belobabais ofthe view thatthe definition of good faith ean be ren ered more precise by focusing on bad faith, See further, post, Section 5.76 The Advocates’ Quarterly [Vol. 29 A third argument sometimes made in favour of recognition draws on comparative material. The duty of good faith contractual performance is recognized in civilian legal systems, in the United States and, in somewhat watered-down fashion, in the Convention on Contracts for the International Sale of Goods. Recognition of the doctrine in Canadian common law would simply bring our legal system into line with other jurisdictions. The principal argument against recognition, of course, is the fear that recognition of the good faith duty will bring an unattractive degree of uncertainty to the law. With increased uncertainty comes increased difficulty in giving advice and the prospect of more protracted litiga- tion, Professor Bridge advances this thesis colourfully in the following, passage:"* Good faith and fair dealing, it is submitted, is an imperfect translation of an ethical standard into legal ideology and legal rules. However much it ‘might stimulate research or encourage inquiry into theories underlying contract law, its appropriate home is the university where it ean perform its functions without wreaking practical mischief. In the form in which it is cast in s. 205 of the Restatement Second, good faith isan invitation to judges to abandon the duty of legally reasoned decisions and to produce ‘an unanalytical incantation of personal values. Far trom involving the community ethic in the day-to-day task of law-making and decision making, with the atendant fruits of such a democratization, good faith is more likely to produce idiosyncratic judgments For critics like Bridge, the existing common law approach in which discrete rules have developed to deal with particular instances of bad faith is not only satisfactory, itis preferable to the adoption of a vague general standard Some detractors of good faith have examined the comparative expetience and find it either wanting or not easily transportable into the common law context. Thus Professor Girard," for example, offered a comparative account of good faith doctrine in the United States and in civilian law and argued that the doctrine should not be simply trans- ported into Canadian common law without 2 wholesale rethinking of the nature of contractual obligation, something that should be under- taken, in his view, only by the legislature. Whether it is realistic to think that Canadian provincial legislatures will take an interest in such isoues is, of course, another matter 14, Aniele 10), IS. M. Bridge, ‘Does Anglo-Canadian Contract Law Need & Doctrine of Good Faith?” (1984), 9 C.B.LJ. 385 at pp. 412-13, 16, P.Giraed, * ‘Good Faith’ in Contract Performance: Principe or Placebo” (1983), 5 Sup. Ct. L. Rev, 309. See also R. Hasson, “Good Faith in Contract Law — Some Lessons from Insurance Law” (1987), 13 C-B.LJ. 93 (suggesting that 2004) Good Faith Contractual Performance 77 In short, a spirited debate with respect to the question of recognition has developed in Canada. Its not entirely clear that a knock-out punch has been delivered by either the proponents of good faith or the detrac- tors. It is, however, a striking fact that the doctrine of good faith seems to have taken root successfully in American contract law which, despite various differences in detail, is fundamentally very similar to Canadian contract law. Professor Famsworth, perhaps the leading contemporary American contracts scholar, responded to Professor Bridge’s attack in the following terms:" [see litte basis for Professor Bridge's fears of abuse of the doctrine. And While the requirement of good faith has not wrought any fundamental cchange in the law of the United States or in the thinking ofits lawyers, it has, I believe, provided a useful basis for generalizing from particular ceases... and for analyzing their similarities and differences, 3. Analysis of the Leading Cases The debate concerning the desirability of recognizing an explicit duty of good faith performance has attracted increasing judicial attention in recent years. Accordingly, it may be asked whether Canadian com- mon law now recognizes the existence of such a duty. The answer to this question lies, I suggest, in a careful examination of what appear to be the leading decisions making reference to good faith. An examina- tion of these cases will also provide some insight into the extent to which the common law already addresses, through more traditional ‘means, problems that might be addressed by the concept of a duty of good faith performance. (1) Good Faith, Best Efforts and the Duty to Cooperate Advocates of recognition of the good faith duty place considerable importance on the decision at trial in Gateway Realty Ltd. v. Arton Holdings Lid," a decision upheld, in the result, by the Nova Scotia Court of Appeal.” This case involved a dispute between owners of neighbouring mall properties. Zellers was initially the anchor tenant in the mall owned by Gateway. Hotly pursued by Arton, Zellers even- tually moved its business to the Arton mall and Arton took an assign- ment of the remaining 17 years of Zellers’ lease with Gateway. That “goed i ns produced “bizare” ress in insane wand questioning the wisdom of extending the doctrine thoghott onc I) 17, Ea Tamssorh “Comment on Michel Badges Pape (198), 9 CBLLS. 426 mp 18, (1991) 106NS.R. 24) 180 sub nom, Gateway Realty Li. Art Holdings Lad (W033 SC) 19, (1953) INSR. QW) 180(CA.