In Canada, all parties to a contract have a duty to perform their contract in good faith.
Much judicial ink has been spilled on what this means.
At a minimum, the duty of good faith includes an obligation to perform the contract honestly and reasonably, to exercise any discretionary power under the agreement in good faith, not to evade contractual duties, and to co-operate in or to achieve the objects of the agreement itself.1
A recent decision of the Ontario Court of Appeal, Royal Bank of Canada v. Peace Bridge Duty Free Inc.,2 sheds light on just how aggressive parties can act in the performance of the contract, including any duty to negotiate under the agreement.
Peace Bridge establishes that Canadian Courts will not employ good faith as a vehicle to impose judicial moralism – aggressive behaviour by the parties to the contract, including acting entirely in one's own economic self-interests, is perfectly acceptable.
Nor will Courts use the doctrine of good faith to help the parties achieve a desired substantive outcome under the agreement.
Pandemic Woes
Peace Bridge involved a dispute between the tenant, Peace Bridge Duty Free Inc. ("PB"), which operated a duty-free shop at the land border between Fort Erie, Ontario and Buffalo, New York.
The landlord is the Buffalo and Fort Erie Peace Bridge Authority (the "Authority").
Section 18.07 of the lease between PB and the Authority (the "Lease") provided that "in the event of an unanticipated introduction of or a change in any Applicable Laws [which cause] a material adverse effect on the business operations of [PB]...the [Authority as Landlord] agrees to consult with [PB] to discuss the impact of such introduction of or change in Applicable Laws to the Lease".
PB invoked section 18.07 of the Lease at the outset of the COVID-19 Pandemic. The parties agreed the Pandemic constituted a "change in applicable laws", given the shutdowns imposed by Canadian governments during the material time.
Following negotiations pursuant to section 18.07, the parties reached agreement on the rent payable from November, 2021 until the end October, 2026.
However, the parties could not agree on the rent payable during the period when the store was closed before re-opening in September, 2021 (the "Closure Period").
PB sought a Court Order imposing a rent abatement or adjustment during the Closure Period.
The Motion Judge dismissed PB's motion and declined to grant it a judicially-imposed rent abatement or adjustment.
The Court of Appeal upheld the Motion Judge's ruling on appeal.
Acting in One's Economic Self-Interest or Aggressively Does Not Amount to Bad Faith
Among other arguments, PB advanced on appeal that the Authority had failed in its duty of good faith performance when it negotiated the rent abatements for the Closure Period pursuant to section 18.07 of the Lease.
PB argued that the Authority had acted aggressively, making unrealistic demands for payment of deferred rent which accumulated during the Closure Period.
The Authority also rejected PB's "business plan", which proposed that base rent be eliminated in favour of a percentage-based rent instead.
Overall, the Authority also took a strong position on refusing to accept a total rent abatement, on refusing a shift to a percentage-based rent under the Lease, and on an extension of the Lease.
Both the motion judge and the Court of Appeal held that none of this conduct rose to the level of bad faith.
1. Acting "Aggressively" Does Not Amount to Bad Faith
The Court of Appeal noted that, during the section 18.07 negotiations, the Authority was "assertive, even 'aggressive'". However, this conduct did not amount to bad faith.
Instead, as the Court noted, refusing to fulfill the obligation to negotiate under section 18.07 could amount to bad faith. So could being dishonest, acting with ulterior motives, or exercising discretion with an "improper purpose". But the Authority engaged in none of this misconduct.
Aggressive behaviour during the negotiation process did not amount to contractual bad faith.
2. Acting in One's Economic Self-Interest
Citing Bhasin, supra, at para. 57, the Court observed that a party can sometimes cause loss to another, even intentionally, in the "legitimate pursuit of economic self-interest". However, this would not amount to bad faith.
In fact, Courts have frequently encouraged such behaviour "on the basis of economic efficiency".
In Peace Bridge, the Authority acted in its own self-interest, which was perfectly acceptable. The Authority "was entitled to fiercely protect its interests without breaching its good faith obligations".
The Authority was "under significant financial pressure" during the Closure Period because PB's rental income was not being paid.
While the Authority may have taken a tough position on refusing to accept a complete rental abatement, the Court noted that PB's proposals were putting forth terms that were simply unacceptable to the Authority. PB's business plan would allocate the risk of the Lease entirely to the Authority.
It was not "bad faith" for the Authority to reject a plan that simply did not accord with any of its financial well-being.
3. Good Faith does Not Require Complete Capitulation in the Negotiation Process
The Court of Appeal was disinclined to use good faith as a vehicle for PB to receive the substantive results it wanted, i.e. a total rental abatement and shift toward percentage-based rent.
The discretion codified under section 18.07 of the Lease "did not oblige the Authority to capitulate to [PB's] demands".
The Authority engaged in years of negotiations and entertained multiple forms of resolution, including two rent deferral agreements, providing financial assurances, partial repayment plans and rent repayment schedules. Despite all these efforts, however, the parties could not agree on how to resolve their dispute.
In these circumstances, the fact that the Authority, in the negotiation process, did not accept every term proposed by PB did not amount to a bad faith exercise of discretion under the Lease.
The Limits of Good Faith
Peace Bridge emphasizes that while parties have an obligation to perform the contract in good faith, the doctrine is limited.
Canadian Courts will not police aggressiveness or misconduct under the auspices of good faith.
Good Faith does not represent a tool by which to impose judicial moralism or re-write the contract between the parties.
Nor is it a doctrine that leads one contractual party toward its most favourable substantive outcome.
In this respect, good faith remains a limited doctrine, even in the negotiation context – absent evidence of an ulterior motive or dishonesty, Courts will reluctantly scrutinize parties' behaviour that is simply aggressive or represents acting exclusively in their own financial interests.
Footnotes
1. See generally Bhasin v. Hyrnew, 2014 SCC 71; Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7; 2161907 Alberta Ltd. v. 11180673 Canada Inc., 2021 ONCA 590.
2. 2025 ONCA 54.
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