In the 14 months since the Supreme Court of Canada rendered its landmark decision in Bhasin v. Hrynew, 2014 SCC 71 [1] the general organizing principle of good faith in contract law has been applied in a very restrained manner by courts across Canada. The recent decision of the Ontario Court of Appeal in Bank of Montreal v. Javed, 2016 ONCA 49 is a further example of this trend.

The Good Faith Principle

In Bhasin, the Supreme Court of Canada recognized a general organizing principle of good faith that underlies the law of contracts.[2] The good faith principle is already reflected in many of the existing doctrines of contract law, including unconscionability.[3] The principle may be used to develop the law of contract “where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.”[4]

The Supreme Court in Bhasin used the good faith principle to recognize a new duty of honest performance “which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”[5] For further discussion of Bhasin, see our previous post here.

The Facts in Bank of Montreal

In Bank of Montreal, the defendant, Mr. Shah, was a director of a corporation that operated a donut shop (the “Corporation”). Mr. Shah provided a guarantee to the Bank of Montreal (“BMO”) to secure a small business loan for the Corporation. He subsequently resigned as a director and ceased to have an active role in the operation of the restaurant, but continued to be bound by the guarantee. In 2013, he requested information about the Corporation’s business accounts from BMO. BMO denied this request as the Corporation had withdrawn its authorization to provide this information to Mr. Shah. The Corporation subsequently defaulted on its loan and BMO sought to enforce the guarantee.

Mr. Shah argued, among other things, that the series of events following the signing of the guarantee had rendered the guarantee unconscionable.

The Doctrine of Unconscionability

Unconscionability is a doctrine that permits a party to void a contract that is manifestly unfair. In order to demonstrate unconscionability, a contracting party must show that the other party 1) enjoyed unequal bargaining power, and 2) a substantially unfair bargain resulted.[6] Traditionally, the inquiry has been directed at whether the contract was manifestly unfair at the time the contract was entered into.

The Ontario Court of Appeal Declines to Extend the Doctrine

Mr. Shah argued that, in light of the recognition of the duty of honest performance in Bhasin, the doctrine of unconscionability should be extended to assess a party’s performance of its obligations under an agreement, not merely the equities of the agreement itself.

The Ontario Court of Appeal did not accede to this argument, stating that:

Bhasin does not provide any basis for the appellants’ argument that the Supreme Court extended the common law test for unconscionability. Bhasin recognized a duty of honest performance. There is no basis in the evidence for suggesting that the Bank did not conduct itself honestly throughout. Cromwell J. also observed that a duty of honest performance should not be confused with a duty of disclosure. The motion judge did not err in rejecting the appellants’ arguments on unconscionability.[7]

The Restrained Application of the Good Faith Principle

The decision in Bank of Montreal is consistent with the restrained manner in which courts across Canada have applied Bhasin. The Bhasin decision, which was rightfully seen by commentators as ground-breaking when it was rendered, has been described by the courts as “a very measured case which makes little incremental change to the common law”[8] and does not warrant “a wholesale revision of contract law to invite subjective assessments of the business practices and morals of parties before the court outside of or beyond the existing law.”[9]

Courts have frequently resisted the argument that existing contract law principles should be modified on the basis of the good faith principle. For example, courts have declined to modify the doctrine of implied terms on this basis.[10]

The duty of honest performance, meanwhile, has been reduced to a “duty not to overtly lie to your contractual counterparty.”[11] Parties generally remain entitled to rely on the express terms of their agreement.[12]

Conclusion

The Supreme Court of Canada was careful to note in Bhasin that its recognition of the organizing principle of good faith was not intended to re-write the law of contract, but could be used in certain circumstances to develop the law where appropriate. The open-ended nature of the Supreme Court’s comments created some concern that Bhasin may be used by lower courts to apply the existing doctrines of contract law in an ad hocmanner to fit the sympathies of the parties before them. However, this concern has not been borne out. This is a welcome development for the stability of contract law and the ability of parties to rely on the express terms that they have bargained for in their agreements.

Case Information

Bank of Montreal v. Javed, 2016 ONCA 49

Docket: C60246

Date of Decision: January 18, 2016