Written by: Irvin Schein

From time to time, a party to a commercial contract will feel that the other party to the contract has treated him improperly or unfairly.  A review of the contract, however, does not reveal any specific provisions that have been breached by the other party’s offending conduct.  In those circumstances, is there any room to argue that the other party had a duty implied in the contract to act in good faith, and breached the contract by failing to do so?

This question has been put before the court on a number of occasions over the last several years.  On each occasion, a Plaintiff has alleged that the Defendant had an implied contractual duty to act honestly and in good faith in the performance of a contract between the parties.  The duty is said to be implied simply because there is no explicit term in the contract that specifies the existence of such a duty. 

A duty of good faith has been implied to make sure that parties do not act in a way that defeats the essential objective of the contract.

In the past, when the court has referred to the existence of a duty of good faith, it is done so in circumstances in which the case was decided on the basis of established legal principles.  As one judge has said, “Canadian courts have not developed a comprehensive and principled approach to the implication of duties of good faith in commercial contracts”. 

This issue was very recently addressed again by the Ontario Superior Court in 1001411 Ontario Limited v. City of Toronto Economic Development Corporation.  This case involved a dispute over a lease agreement that commenced in May, 1994.  The Defendant/Landlord had a right to terminate the agreement on notice, although the contract did not specify any particular timeframe for notice.  Notice was provided by the Defendant, but the Plaintiff/Tenant took the position that the parties had agreed at the outset that the notice period would be 18 months and far less than that was given.  The Plaintiff alleged that the failure to give a full 18 months’ notice constituted a breach by the Defendant of an implied duty of good faith in the implementation of the lease agreement, giving rise to damages. 

Recent cases decided prior to this one had suggested that the doctrine of good faith in the performance of contracts was developing and might have a role to play.  Indeed, a duty of good faith has been implied to make sure that parties do not act in a way that defeats the essential objective of the contract.  However, it will not be used to alter express terms of the contract.  It will not serve to impose new obligations on a contracting party or additional obligations inconsistent with what the contract actually says. 

For that reason alone, the Plaintiff’s claim was dismissed.  The Court felt that reading the contract in such a way as to require 18 months’ notice would impose an additional obligation on the landlord which was not contained in the contract at all.  Doing so would change and add to the contract’s express terms. 

The judgment confirmed, however, that there is an implied duty under a contract to carry it out in a way that does not defeat the very purpose or objective of the contract itself.  In addition, and although these principles did not apply in this case, the Court confirmed that a duty of good faith in a contract may be implied where there is a duty to cooperate or where the contract calls on a party to exercise discretionary powers.  In the latter case, a failure to exercise the discretion fairly will constitute a breach of the contract.