Legal insight and perspective from the Steinbergs Team
Published: September 9, 2026
Category: Litigation
The paper was titled The Explicit Recognition of Good Faith in Contract Law: The Elephant in the Room. Its central proposition was straightforward: although Canadian common law had not formally recognized a general doctrine of contractual good faith, courts had long been using other legal doctrines to address dishonest, arbitrary and opportunistic contractual conduct. Good faith was already present in substance. What remained was for the courts—particularly the Supreme Court of Canada—to acknowledge it expressly.
In 2014, that prediction became law.
In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court recognized good faith contractual performance as an organizing principle of Canadian common law and created a general duty of honest performance applicable to all contracts.
The Court’s subsequent decisions in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, developed the doctrine further. Together, these cases have changed the legal framework within which Canadian contracts are performed and enforced.
The result is not a broad judicial licence to rewrite agreements in the name of fairness. Nor does good faith require contracting parties to sacrifice their own legitimate interests. It does, however, establish minimum standards of honest and appropriate contractual conduct.
For businesses and individuals entering into contracts today, good faith is no longer merely a moral aspiration or an implied background value. It is part of Canadian contract law.
When the original paper was written in or about 2006, Canadian courts had not yet taken the decisive step of recognizing a general organizing principle of good faith in contract law.
At the time, the law was fragmented. Courts invoked concepts such as:
These doctrines appeared under different names and applied in different circumstances. Nevertheless, they frequently addressed the same underlying concern: one contracting party should not be permitted to use the words of an agreement dishonestly or opportunistically to defeat the bargain’s legitimate purpose.
The original paper argued that good faith already existed as a de facto—meaning practical, even if not formally acknowledged—feature of Canadian contract law. Courts were policing contractual bad faith but had not yet adopted a coherent vocabulary for explaining what they were doing.
That position drew upon the work of Canadian scholars, including Edward Belobaba and Professor John McCamus. Their analysis suggested that good faith could be understood through several established contractual obligations:
The 2006 paper concluded that there was no convincing justification for continuing to deny the existence of a generalized duty of good faith. It anticipated that explicit judicial recognition would eventually follow.
It did.
The traditional common law placed great importance on freedom of contract. Commercial parties were generally expected to protect their own interests, negotiate appropriate terms and accept the consequences of their bargain.
The principal objection to a general good faith doctrine was uncertainty. Critics feared that good faith would allow judges to decide contractual disputes according to personal views of fairness rather than established legal rules. Businesses, it was argued, would no longer know whether the terms of their agreements would be enforced.
That concern was not frivolous. Contract law must provide a reasonable degree of predictability. Parties need to know that negotiated rights and obligations will generally be respected.
However, the concern overlooked the extent to which contract law already relied upon flexible standards such as reasonableness, unconscionability, fairness and legitimate expectations. Courts were already implying terms, controlling discretionary powers and refusing to enforce rights obtained or exercised improperly.
The original paper therefore argued that the debate was not truly between certainty and good faith. The real question was whether Canadian law should continue addressing bad faith through a collection of separate doctrines or recognize the broader principle connecting them.
Explicit recognition could make the law more coherent rather than less certain.
The Supreme Court of Canada confronted the issue directly in Bhasin v. Hrynew.
Can-Am intended to restructure its business and wanted Mr. Bhasin’s agency to merge with that of a competitor, Mr. Hrynew. During this process, Can-Am misled Mr. Bhasin about its intentions and about Mr. Hrynew’s role. Can-Am ultimately exercised its contractual right not to renew the agreement.
The issue was not simply whether Can-Am possessed a right of non-renewal. The contract clearly gave it that right. The issue was whether Can-Am could exercise the right after misleading Mr. Bhasin about matters directly connected to the agreement.
The Supreme Court held that it could not do so without legal consequence.
Justice Cromwell, writing for a unanimous Court, made two significant developments in the common law.
First, the Court recognized an overarching organizing principle of good faith contractual performance. This principle requires parties generally to perform their contractual obligations honestly and reasonably, and not capriciously or arbitrarily.
Second, the Court recognized a specific duty of honest performance. Under that duty, contracting parties must not lie or knowingly mislead one another about matters directly linked to the performance of their contract.
Can-Am breached that duty by dealing dishonestly with Mr. Bhasin during the period leading to non-renewal.
The decision confirmed the principal thesis of the 2006 paper: good faith was not foreign to Canadian contract law. It was an underlying principle already reflected in numerous established doctrines. The Court’s task was to recognize the principle and provide it with a more coherent structure.
The elephant in the room had finally been acknowledged.
The importance of Bhasin should not be understated, but neither should the decision be treated as an unlimited fairness doctrine.
The Court did not hold that:
A fiduciary must ordinarily act loyally in the beneficiary’s best interests. Good faith is a less demanding standard. A contracting party remains entitled to pursue its own economic interests.
The crucial limitation is that a party must not pursue those interests dishonestly in relation to the performance of the contract.
The duty of honest performance also differs from an implied contractual term. It is a legal doctrine applying to all contracts as a matter of law. Because it represents a minimum standard of contractual honesty, parties cannot exclude it through an “entire agreement” clause or other contractual language.
The parties may shape the content of their relationship, but they cannot authorize one another to lie about contractual performance.
The Supreme Court returned to good faith in C.M. Callow Inc. v. Zollinger.
Callow provided winter maintenance services to a group of condominium corporations. The agreement allowed the condominiums to terminate the contract on ten days’ notice if Callow’s services were no longer required.
The condominiums decided to terminate but did not immediately tell Callow. During the summer, Callow performed additional work without charge in the hope of maintaining the winter contract. Through their words and conduct, representatives of the condominiums led Callow to believe that the contractual relationship was secure.
The condominiums then waited until the point at which Callow was unlikely to obtain replacement winter work before giving notice of termination.
The Supreme Court held that the condominiums had knowingly misled Callow and had breached the duty of honest performance.
The significance of Callow is that dishonesty is not limited to an express lie. Half-truths, omissions and silence may amount to dishonest performance where they form part of conduct that knowingly creates or maintains a false impression about the contract.
This does not establish a general duty of disclosure. Ordinarily, a party is not required to volunteer information merely because the other party would find it useful.
However, a party cannot knowingly allow the other side to continue operating under a mistaken belief that the first party created or reinforced through its own communications and conduct.
The distinction is practical:
Businesses should therefore assess not only whether particular statements are technically true, but also whether the overall course of conduct is knowingly misleading.
The Supreme Court addressed a related but distinct aspect of good faith in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District.
Wastech had a long-term contract to transport waste to several disposal facilities. The contract gave the regional district discretion to allocate waste among those facilities. The manner in which that discretion was exercised affected Wastech’s profitability.
The district exercised its allocation power in a way that prevented Wastech from achieving its target operating ratio. Wastech argued that this breached the duty of good faith.
The Supreme Court disagreed on the facts but confirmed an important legal doctrine: where a contract grants one party discretion, that discretion must be exercised consistently with the purpose for which it was granted.
The question is not simply whether the outcome is fair to the affected party. Nor does the duty require the party holding the discretion to subordinate its own interests.
The question is whether the discretion was exercised for a purpose connected to the contractual grant of power. An exercise of discretion may be improper if it is arbitrary, capricious or unrelated to the purpose contemplated by the agreement.
In Wastech, the contract gave the district broad discretion over waste allocation. The Court concluded that the district had exercised that discretion for an authorized purpose, even though the result was economically unfavourable to Wastech.
This illustrates an essential limit on good faith: disappointment is not the same as bad faith. A contractual decision can materially harm one party without being dishonest or legally improper.
It is also important to distinguish the cases accurately. Bhasin established the organizing principle of good faith and the duty of honest performance. Wastech specifically addressed good-faith limits on the exercise of contractual discretion.
Following Bhasin, Callow and Wastech, several propositions can be stated with confidence.
Good faith is an organizing principle
Good faith is a principle that helps courts understand and develop more specific contractual doctrines. It is not, by itself, a free-standing claim whenever one party believes it has been treated unfairly.
A claimant must generally identify a recognized good faith doctrine applicable to the conduct in question.
Every contract includes a duty of honest performance
Parties must not lie or knowingly mislead each other about matters directly linked to contractual performance.
This duty applies regardless of whether the agreement expressly mentions good faith.
Dishonesty can include conduct, omissions and half-truths
A technically accurate statement may still be misleading when considered in context. Silence may also become dishonest if a party knowingly maintains a false impression that it created.
Contractual discretion has limits
A discretionary power must be exercised for purposes consistent with the agreement. The broader the contractual grant of discretion, the broader the range of permissible decisions—but even broad discretion is not necessarily unlimited.
Good faith does not require commercial self-sacrifice
Parties remain free to pursue their own contractual and economic interests. Good faith does not transform an ordinary commercial relationship into a fiduciary one.
Express contractual rights remain important
Good faith generally operates through and alongside the agreement. It does not give courts unrestricted authority to replace negotiated terms with terms considered more reasonable after the fact.
The duty of honest performance cannot be excluded
A contract cannot authorize dishonest performance. Carefully drafted language may clarify expectations and the purposes of discretionary powers, but it cannot eliminate the minimum requirement of honesty.
The modern doctrine has practical consequences throughout the life of a contract.
Agreements should identify:
Words such as “sole discretion” remain relevant, but they should not be treated as a complete answer. The contractual purpose of the discretion remains important.
Organizations should maintain accurate records of representations made during performance. Internal decisions should be compared with what has been communicated to the other contracting party.
Particular care is required where one party has decided to terminate, not renew or materially alter a relationship but continues to communicate in a manner suggesting that the relationship will continue unchanged.
Possessing a clear termination right does not necessarily protect a party from liability for dishonest conduct leading up to its exercise.
A party may be entitled to terminate without cause but may still breach the contract by misleading the other party about whether termination is being considered or has already been decided.
Canadian common law has not recognized a general duty to negotiate every contract in good faith. Parties ordinarily remain entitled to bargain in their own interests and to walk away before an agreement is reached.
However, dishonest misrepresentation, fraudulent concealment, negligent misrepresentation, estoppel, unjust enrichment and obligations arising from an existing contractual relationship may still apply. Negotiations concerning the performance, renewal or amendment of an existing contract may also engage the duty of honest performance.
Allegations of “bad faith” should not be used as a substitute for identifying the particular contractual obligation said to have been breached.
A proper analysis asks:
This approach keeps the analysis tied to the agreement rather than to an undefined appeal to fairness.
The core position advanced in the 2006 paper was that Canadian law had already travelled most of the distance toward recognizing good faith. Courts were addressing dishonest and opportunistic conduct under a collection of established doctrines. What remained was the final, explicit step.
Eight years later, the Supreme Court took that step in Bhasin.
The prediction was therefore not that courts would abandon freedom of contract or replace commercial agreements with judicial assessments of fairness. It was that Canadian contract law would eventually acknowledge the principle already operating beneath the surface: contractual rights must be performed honestly and, in appropriate circumstances, exercised consistently with the purposes for which they were granted.
That prediction has been borne out.
The Supreme Court’s later decisions have also confirmed an important part of the original thesis. Recognition of good faith did not bring about the collapse of contractual certainty. Instead, the Court has developed the doctrine incrementally, identifying both its content and its limits.
Good faith remains a developing area. Future cases will continue to define its application to long-term commercial relationships, automated decision-making, relational contracts, termination rights and complex contractual networks. Its increasing relevance may be particularly evident where contractual power and information are concentrated in one party’s hands.
What was once the “elephant in the room” is now an express part of Canadian law. The challenge is no longer persuading courts that good faith exists. The challenge is understanding precisely when it applies, what it requires and how contracts should be drafted and administered in response.
The recognition anticipated in 2006 eventually arrived. In that respect, the paper was not merely academic commentary on where the law stood—it correctly identified where Canadian contract law was going.
Derrick Fulton's practice focuses on litigation, with a specialization in both corporate and commercial cases. His expertise extends to civil litigation areas such as personal injury, business disputes, construction lien, pharmacy, and condominium law.
