The Duty of Good Faith
Gagandeep Singh
by Gagandeep Singh
Gagandeep Singh is articling student with Pallett Valo. Contact Gagandeep.
The duty of good faith has been an established principle of contractual law in Canada since the Supreme Court of Canada’s decision in Bhasin v Hrynew. In essence, the duty requires parties to a contract to act in good faith and with honesty in exercising their rights and in delivering their obligations under a contract. However, the concept of good faith has been difficult to define. It has no statutory or technical meaning but usually includes the requirement that parties act honestly without malice or fraud. A recent Court of Appeal decision has expanded the duty of good faith that parties owe to each other and provided the lower courts with guidance on what can constitute a breach of the duty of good faith.
In 2505243 Ontario Limited o/a ByPeterandPaul.com Princes Gate GP Inc. et al. ONCA 859 (“2505243 Ontario Limited”), on appeal from the Ontario Superior Court of Justice, the Court of Appeal agreed with the trial judge’s decision that if a party misleads the other party by inaction this will constitute a breach of the duty of good faith. Moreover, if a party is complicit in contributing to the other party’s inability to abide by the terms of a contract, this may be grounds for the Court to make a finding of bad faith.
In this case, the plaintiff (“250”) entered into a contract (the “Agreement”) with the defendant, Prince Gates GP Inc. (“PG”) to lease a space in a hotel to operate its two restaurants.[1] In March 2020, the hotel was forced to shut down due to the COVID-19 pandemic. However, PG insisted that the Agreement required that 250 continue to pay rent even though its restaurants were forced to close as well.
In May 2020, PG commenced discussions with a new food and beverage provider, Harlo Entertainment Inc. (“Harlo”) and failed to inform 250 that it was actively looking to replace 250.
When 250 was informed by PG that the Agreement was being terminated, 250 sued PG for breach of contract, alleging that PG acted in bad faith by insisting that 250 pay rent while the restaurants were shut down, failing to assist it with applications for government rental assistance, and failing to inform 250 that it was in negotiations with Harlo to replace it.[2]
At trial, the judge considered the duty of good faith owed by PG and maintained that misleading a party by inaction may constitute a breach of the duty of good faith.[3] Examining the evidence, the trial judge determined that PG was aware that 250 had retained staff who were actively preparing for a reopening of the restaurants and still failed to inform 250 of the discussions it was having with Harlo. The trial judge concluded that the inaction of PG to inform 250 of the negotiations it was having with Harlo constituted a breach of the duty of good faith.[4]
The trial judge also stated that it was unreasonable for PG to refuse to assist 250 with a potential application for relief under the Canada Emergency Commercial Rent Assistance Program (the “CECRA Program”) because PG’s failure to assist 250 with this application contributed to 250’s inability to pay rent.[5]
The Court of Appeal agreed with the trial judge’s findings. The Court of Appeal found the fact that PG had undertaken negotiations with Harlo without informing 250 while being aware that 250 was actively getting ready to reopen the restaurants constituted a breach of the duty of good faith, Moreover, the Court held that it was unreasonable for PG to refuse to assist 250 with an application for relief under the CECRA Program because it provided a golden opportunity for substantial economic relief for both entities.[6] However, part of the reason why PG failed to assist 250 in getting relief under the CECRA Program was because it had already decided that it wanted to dissolve the Agreement.[7]
One interesting fact from this decision is that PG was under no obligation to participate in the CECRA Program, yet the Court does not mention this. Instead, the Court determined that PG’s failure to assist 250 in filling out the applications for governmental rental assistance was evidence of bad faith.
As this area of the law develops it will be interesting to see whether the Courts will continue to make a finding of bad faith against a party even though they have no obligation under a contract to assist the other party.
2505243 Ontario Limited marks an important expansion of the duty of good faith in contract law. Namely, it is now clear that inaction on the part of one party can constitute a breach of the duty of good faith and a party must not contribute to the other party’s inability to abide by the terms of a contract.
[1] 2505243 Ontario Limited o/a ByPeterandPaul.com v. Princes Gate GP Inc. et al. 2021 ONSC 4649, 2021 CarswellOnt 9722 at para 8. [2] Ibid at para 9.[3] Ibid at para 368. [4] Ibid at para 369. [5] Ibid at para 361.[6] 2505243 Ontario Limited (ByPeterandPaulcom) v Princes Gates Hotel Limited Partnership, 2022 ONCA 859 at para 22. [7] Ibid at para 23.
GGI member firmPallett Valo LLPMississauga (ON), CanadaT: +1 905 273 3022
Law Firm Services
Pallett Valo LLP is one of Ontario’s Top 10 Regional Law Firms. The firm practices in the areas of business law, commercial litigation, commercial real estate, construction, employment and labour, insurance defence and wills, estates, and trusts.
