Canada: Good Faith: Two Court Decisions Bring Greater Certainty, Coherence To Law Governing Contract Negotiations, Performance

Last Updated: March 9 2015
Article by H. Todd Greenbloom

If you negotiate a contract with another business, do you have a legal obligation to negotiate in good faith?

If you have signed a contract with somebody else, do you have a legal obligation to carry it out it in good faith?

In the U.S. and Quebec, the answer is yes, at least to the second question, where there is a recognized duty of good faith in the enforcement of contracts. If you are operating in Canada's common law jurisdictions, where there has not been a "free-standing" duty of good faith in commercial contracting historically, the answer is maybe.

The Supreme Court of Canada and the Ontario Superior Court of Justice have published judgments recently that add to the discussion. 

As a practical matter, these judgments will provide businesses that are negotiating and/or performing contracts with greater insight as to what commercial behaviour Canada's common law courts may, or may not, find acceptable. 

The Supreme Court's judgment in Bhasin vs. Hrynew published November 13, 2014, addresses good faith in contract performance and enforcement. 

The Ontario Superior Court of Justice's judgment in SCM Insurance Services Inc. v. Medisys Corporate Health LP, published April 28, 2014, speaks to good faith in contract negotiations.

Good Faith in the Performance/Enforcement of a Contract

In Bhasin v. Hrynew, Canadian-American Financial Corp. (Can-Am) marketed education funds through a dealer network. Bhasin was one of those dealers. All sales were the sales of Can-Am and the dealers received a commission. The relationship resembled a franchise in many respects, but was not a franchise because no payments flowed from the dealers to Can-Am. Similarly, the relationship had many attributes of an employment relationship, but it was not because of the independence afforded the dealers in setting up their networks. 

Hrynew was one of Can-Am's largest dealers and had very good working relations with the Alberta Securities Commission (ASC), an important ingredient in this business. Hrynew wanted to acquire Bhasin's business but Bhasin refused to sell. Hrynew actively encouraged Can-Am to force the sale. 

Can-Am had concerns about its relationship with the ASC. In order to deal with those concerns, Can-Am appointed a Provincial Trading Officer (PTO). The PTO was Hrynew. Bhasin refused to let Hrynew, in his capacity as PTO, review Bhasin's books and records as Bhasin was concerned about his competitor accessing his confidential information. Can-Am assured Bhasin that Hrynew was bound by a confidentiality obligation and so Bhasin's concerns were misplaced. Additionally, Can-Am, in its dealings with the ASC, proposed a plan in which Bhasin would work for Hrynew's dealership. This was not communicated to Bhasin.

Can-Am threatened to terminate Bhasin's dealership if Bhasin did not permit Hrynew, as PTO, to audit the Bhasin records. Eventually, Can-Am advised Bhasin that Bhasin's dealership would not be renewed. Following the termination, the majority of Bhasin's work force was retained by Hrynew.

On its face, the case had two simple themes. (a) Can-Am had a right to refuse a renewal. (Parenthetically, how could Bhasin be entitled to damages when Can-Am was merely exercising its rights?) (b) Can-Am had deliberately misled Bhasin and acted in a manner that had the effect of Hrynew expropriating Bhasin's business.

The trial judge found that Can-Am did not act honestly and, had they done so, Bhasin might have acted differently and salvaged some value. The Alberta Court of Appeal ruled that the lower court was wrong in applying a duty of good faith, especially where there was an entire agreement clause, and the effective result was that Can-Am was doing nothing more than exercising its contractual rights. 

The Supreme Court determined that there is a duty to act honestly in all contracts. It affirmed the trial judge's finding that Can-Am acted dishonestly with Bhasin throughout the period leading up to its exercise of the non renewal clause, both with respect to its own intentions and with respect to Hrynew's role as PTO. Can-Am was found liable for damages equal to what Bhasin's economic position would have been had Can-Am fulfilled its duty of honesty (being the value of the business around the time of the non-renewal).

While the Supreme Court recognized that the current Canadian common law regarding the duty of good faith in the performance and enforcement of contracts is: (i) uncertain; (ii) lacks coherence; and (iii) is out of step with Quebec and the U.S., it chose to impose an incremental step moving Canada closer to the U.S. and Quebec. 

It did this by recognizing that good faith is an organizing principle -- not a law but a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations. -- and that parties to a contract have a duty of honesty with each other. 

This duty now applies to all contracts. 

Duty to Negotiate in Good Faith

As a result of the Bhasin decision, a binding agreement containing an obligation to negotiate a future agreement now imposes a duty to act honestly. A party to a negotiation, where the negotiation is contemplated in a binding agreement, cannot mislead the other party. This may be nothing more than an obligation to refrain from negotiating in bad faith, but there can be no question that where a commitment is made in an agreement to negotiate in good faith, there will be restraints on the parties' conduct in the negotiation.

Bhasin v. Hrynew makes it clear that the new duty of honesty does not include a duty of loyalty or of disclosure. Clearly, parties to a negotiation, even where committing to act in good faith, are not required to reach an agreement, act in their own self-interest, or disclose all they know. (With respect to disclosure, caution must be exercised when an omission could be misleading.)

What is not clear is whether one party's refusal to negotiate at all confers any rights on the other party who wants to negotiate.

The case law already recognizes that a contractual right to negotiate in good faith can be a binding obligation where what is being negotiated is fairly specific, and where a party's conduct regarding negotiations can be measured against an objective standard. 

The recognition of good faith as an organizing principle may result in more weight being given to the recognition of an enforceable right to negotiate in good faith that flows from Molson Canada 2005 v. Miller Brewing Co. In this case, the parties themselves understood from the circumstances, in which an express commitment to negotiate in good faith was given and intended, that any breach of the specific commitment was to have some legal consequences. 

As a result, a refusal to negotiate, in the presence of a commitment to negotiate in good faith, especially where the parties clearly intended that some negotiation take place, may now, more than ever, mean the party refusing to negotiate is liable for damages. 

This prospect emerges clearly in the Ontario Superior Court of Justice judgment in SCM Insurance Services Inc. v. Medisys Corporate Health LP. 

SCM's subsidiary, Cira, is a national provider of independent medical assessment services. Medisys is a provider of preventive, diagnostic and consultative healthcare services. Until 2011, Medisys also operated an independent medical examinations business in competition with Cira. Cira purchased Medisys's independent medical examinations business. As part of the transaction, Medisys provided a five-year non-competition and non-solicitation covenant. 

Before the expiry of the five-year non-competition covenant, Medisys purchased, from Plexo, Plexo's business, which included a division that, if operated by Medisys, would result in Medisys being in contravention of its non-competition covenant with Cira.

Medisys sought a waiver of the non-competition covenant in connection with the Plexo acquisition. Medisys and SCM entered into an agreement in which they agreed to negotiate the sale of the Plexo assessment business to SCM. In order to permit the negotiations, SCM waived compliance with the non-competition covenant. In the event that SCM and Medisys could not reach an agreement in the sale and purchase of Plexo, Medisys would have eight months to divest itself of its offending division. 

Medisys and SCM failed to reach an agreement. The parties proceeded on the basis of a price being five times sustainable EBITDA (earnings before interest, taxes, depreciation and amortization), but they could not agree on the value of the sustainable EBITDA. So, SCM rejected Medisys' offer to sell the division for $5.4 million. Medisys eventually entered into an agreement to sell the division to a third party for $4.35 million. SCM sought an injunction to prevent the sale to the third party.

The central issue in SCM's injunction motion was SCM's allegation that Medisys had a duty of good faith with respect to its obligation to offer SCM the first opportunity to negotiate the purchase of the division. 

Although the judge recognized that there is case law that suggests that an obligation to negotiate an agreement or to negotiate an agreement in good faith is unenforceable, the judge did not think that this principle should be applied in this case. 

The judge "proceeded on the basis that the parties intended that Medisys would be subject to an enforceable obligation to negotiate the sale of the business with the plaintiffs prior to offering it to any third party. Such an obligation is a necessary corollary of the fact that the plaintiffs' waiver constituted valid consideration in favour of Medisys. In these circumstances, the parties must have intended that the Medisys obligation to offer the business to the plaintiffs would constitute an enforceable obligation." [para 35].

It is interesting to note that the judge found that the parties created an enforceable obligation to negotiate, even though the agreement itself did not expressly state that the parties would negotiate in good faith.

The judge determined that the terms proposed by Medisys in its negotiations were not unreasonable and therefore were not in breach of Medisys' duty of good faith negotiation, and that Medisys had an honest belief that its approach to the estimation of sustainable EBITDA was reasonable and therefore consistent with its obligation to offer SCM the opportunity to purchase the division. 

The SCM case seems to reinforce the following concepts regarding a duty to negotiate in good faith:

  • where value is given for a right to negotiate, there can be an enforceable obligation to negotiate in good faith if the parties intend a consequence for one that does not do so. The obligation can be implied where that is the clear intention;
  • parties' conduct cannot be with a view to defeating the purpose of the contract, and 
  • parties have to act honestly with each other.

Although parties to a contract have a duty to act honestly with each other, and although a duty of good faith may be applied more freely then previously, it does not appear that there has been any movement towards the concept of a duty of good faith with respect to negotiations in the absence of a contract. 

It would appear that there has been no movement away from the concept that a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations, and is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.

Original Newsletter(s) this article was published in: Blaneys on Business: March 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

H. Todd Greenbloom
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions