Various courts have struggled with the concept of "good
faith" between two contracting parties. The struggle arises
from the competing principles of the individualistic and
adversarial nature of contracting versus the natural inclination to
punish people for taking undue advantage of another person. As
indicated in a recent decision of the Ontario Court of Appeal in
Oz Optics Limited v Timbercon, Inc,1 this
struggle continues to challenge many courts. While this case does
not resolve the issue, it appears to invite future courts to
consider expanding the scope of contractual duties of good
The underlying dispute in this case relates to
"attenuators", which are a fiber-optic component used in
jet fighter planes. Oz Optics Limited ("Oz"), a
manufacturer of attenuators, entered into discussions with
Timbercon, Inc. ("Timbercon") to have the attenuators
incorporated into a product to be sold to Lockheed Martin. Although
Timbercon told Oz that Oz was the sole bidder to supply the
attenuators, Timbercon was also in discussions with another
attenuator manufacturer. Ultimately, Timbercon presented both
attenuator options to Lockheed Martin, but due in part to a
substantial markup on the Oz product, Lockheed selected Oz's
competitor for the project.
Oz then claimed against Timbercon, alleging that Timbercon had
misrepresented the lack of other bidders, and had breached a duty
of good faith towards Oz. The trial judge found in favour of
Timbercon. The matter was appealed, and the Court of Appeal
reversed the trial judge's decision on the misrepresentation,
holding that Timbercon was liable to Oz for misleading it as to
whether there was any competing bidder. In addition, Justice
Armstrong of the Court of Appeal went on to discuss the concept of
the duty of good faith in contractual dealings.
After noting that it "is difficult to ascertain in what
circumstances [a duty of good faith] will be applied," Justice
Armstrong made an attempt to identify where the law stands on the
duty of good faith. In essence, the state of the law was described
There is currently no recognized "free standing duty of
good faith based in tort." The duty of good faith arises only
The law has not recognized "a general duty to bargain in
good faith," although the Court of Appeal has previously left
open the possibility that such a duty exists in "special
circumstances."2 Those "special
circumstances" which could give rise to pre-contractual
bargaining obligations, however, require that the parties
ultimately enter into a contract.
In certain circumstances, a "duty to enforce or perform a
contract in good faith has been recognized" (although it has
also been criticized by some courts).
A specific duty of good faith has been recognized in the
termination of employment contracts, as between a franchisor and
franchisee, and between a condominium developer and a condominium
A duty of good faith has been recognized in the commercial
tendering context, under the Contract A/Contract B framework
originally recognized by the Supreme Court of Canada in Ontario
v Ron Engineering.3
The present case caused some concern for Justice Armstrong.
Justice Armstrong clearly viewed Oz as having been wronged by
Timberline. Yet, on one hand, there was no actual contract on which
to base a contractual duty of good faith. And on the other hand,
the court was bound by prior authority that there is no
freestanding duty of good faith in tort. As a result, after
considering whether the case could be shoehorned into the Contract
A/Contract B tendering paradigm, Justice Armstrong ultimately left
the issue unresolved, stating:
However, in light of the reluctance of the courts, in particular
the Supreme Court of Canada, to extend the doctrine of good faith
beyond the context of a contractual relationship (whether formal or
implied) I would be hesitant to invoke the doctrine here given that
recovery can be grounded in negligent misrepresentation. This
approach is suggested by the Supreme Court in Martel.
Therefore, I do not find it necessary to consider this issue
Given that it was not necessary to enter into this discussion to
decide the case, it is noteworthy that the court even ventured into
this area. Was it intended to simply clarify the state of the law
on contractual duties of good faith? Or was it perhaps intended to
signal, to judges and the bar, the court's interest in finding
a future case to finally resolve this longstanding legal question?
In either case, Justice Armstrong has perhaps opened the door for
future cases to expand the debate on contractual duties of good
1 2011 ONCA 714.
2 978011 Ontario Ltd v Cornell Engineering
Co (2001), 53 OR (3d) 783 (CA).
3  1 SCR 111.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
The Alberta Court of Appeal provided useful guidance on the application of the organizing principle of good faith in contractual performance, established by the Supreme Court of Canada in its landmark decision Bhasin v Hrynew.
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