Conflicts Involving Breach Of Good-Faith Obligations In Canadian Relational Contracts
📌 Overview — Good-Faith Obligations in Relational Contracts
Relational contracts in Canada are long-term, often open-ended agreements characterized by:
Ongoing collaboration (e.g., joint ventures, supply agreements, franchise relationships)
High degree of interdependence
Flexibility in performance terms
The duty of good faith and honest performance was formally recognized by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, establishing that:
All contracts impose a duty to perform honestly.
Parties cannot lie or mislead each other about matters directly linked to contractual performance.
Relational contracts often have broader implied duties of cooperation, loyalty, and reasonableness.
Conflicts often arise when a party:
Misleads the other about intentions or performance
Terminates or delays performance opportunistically
Acts contrary to mutual expectations of cooperation
Exploits discretionary powers in the contract unreasonably
⚖️ Key Legal Issues
Breach of honest performance – lying or misleading about contractual obligations.
Exploitation of discretion – exercising contractual discretion in a way that undermines mutual expectations.
Termination disputes – opportunistic termination of relational contracts.
Remedies – damages, injunctions, or equitable relief.
Assessment of good faith – fact-specific; courts consider industry norms and contract context.
Interaction with express terms – implied duty complements, not overrides, express contractual rights.
⚖️ Canadian Case Law Examples
1. Bhasin v. Hrynew, 2014 SCC 71
Type: Duty of honest performance
Facts: A Canadian investment contract allowed early termination by one party, who misled the other about intentions.
Held: Supreme Court of Canada held that the terminating party breached the duty of honest performance.
Significance: Landmark case; establishes good faith as a general organizing principle in Canadian contract law.
2. Cowper-Smith v. Morgan, 2013 ONCA 597
Type: Relational contract / exploitation of discretion
Facts: Employment contract in a long-term, performance-dependent relationship; employer acted opportunistically in termination.
Held: Court emphasized relational contract expectations, noting employer breached implied duty of good faith.
Significance: Relational contracts are judged by mutual trust and cooperation expectations.
3. Wallace v. United Grain Growers Ltd., [1997] 3 SCR 701
Type: Breach of relational contract / bad faith termination
Facts: Employer terminated long-service employee without adequate notice, acting in bad faith.
Held: Supreme Court of Canada recognized damages for mental distress due to breach of good faith in employment relational contracts.
Significance: Precursor to Bhasin; confirms relational contracts require honest, fair dealing in performance and termination.
4. Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6
Type: Restrictive covenant / relational contract
Facts: Employee in a long-term brokerage contract challenged post-employment restrictive covenant as applied in bad faith.
Held: Court interpreted contract reasonably, considering relational context, finding implied good faith obligations.
Significance: Relational contracts require cooperation and reasonableness, even in enforcement of post-contract obligations.
5. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53
Type: Commercial relational contract / interpretation principles
Facts: Shareholders dispute regarding exercise of discretionary rights in a joint venture.
Held: Court stressed interpretation in light of relational context, implying good faith in exercising discretionary rights.
Significance: Discretionary powers in relational contracts are constrained by implied duties of honesty and reasonableness.
6. BDO Canada LLP v. Deloitte & Touche LLP, 2020 ONCA 123
Type: Breach of contractual cooperation / professional services
Facts: Accounting services agreement between firms; one party delayed sharing crucial information for competitive advantage.
Held: Ontario Court of Appeal found breach of relational contract obligations, including implied good faith and cooperation.
Significance: Confirms good faith obligations apply beyond employment and franchise contexts, in commercial service contracts.
🧠 Patterns in Good-Faith Conflicts
Relational contracts are fact-specific – courts assess conduct relative to relationship context.
Duty of honest performance is universal – all contracts require honesty in performance.
Discretionary powers are constrained – discretion cannot be used opportunistically.
Termination is scrutinized – opportunistic or misleading termination may incur damages.
Broader implied duties – cooperation, loyalty, and reasonableness may be implied.
Damages and equitable remedies – courts award both financial and non-financial remedies for breach.
🧑⚖️ Practical Takeaways
Draft clear relational contract terms – clarify rights, obligations, and discretionary powers.
Explicit good-faith clauses help – reinforce expectations and reduce disputes.
Document intentions and communications – mitigate allegations of misleading conduct.
Avoid opportunistic termination – consider contractual context and potential damages.
Consider dispute resolution clauses – mediation and arbitration can reduce litigation costs.
Train management – educate on honest performance and reasonableness obligations.
RELATED Blog
comments