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The Implied Duty Of Good Faith In Commercial Contracts

April 10, 2024 by Clay Williams, Shane Gardner, Tanvir Gill

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In this episode of the Law Talk Podcast, hosts Clay Williams and Tanvir Gill, along with special guest and associate at FH&P Lawyers, Shane Gardner, dive into the nuanced world of the implied duty of good faith in commercial contracts. From its historical origins to its impactful presence in current legal disputes, the discussion demystifies this legal principle, illustrating its significance through real-world cases. Whether you're navigating the complexities of construction, personal injury, or contract disputes, understanding this duty is crucial for anyone involved in commercial activities.

Clay: Welcome to the Law Talk Podcast! I'm Clay Williams, I'm a partner at FH&P Lawyers and I'm with my usual sidekick Tanvir Gill! Hi Tanvir!

Tanvir: Hi Clay!

Clay: And we've got a special guest today, Shane Gardner!

Shane: Thanks for having me!

Clay: Welcome Shane! So, Shane, you are an associate at FH&P Lawyers. You've been around for a while now, and you are a Litigator, I understand? So, what kind of disputes are you mainly litigating?

Shane: Mostly construction, a little bit of personal injury, but a lot of contract disputes. More and more lately.

Clay: Well, and that's what our topic is! It sounds really boring, it sounds kind of like a law school class, but I think it's really important for our business clients to know about this, and it's “The implied duty of good faith in commercial contracts”

I know you want to yawn, but boy, is it a big deal!

It's a big deal in the legal world right now. So, Shane, why don't you tell us a little bit of the history of how this “Duty” came about? It wasn't around when I was in law school.

Tanvir: It was around when we went to law school!

The implied duty of good faith in commercial contracts: How it started.

Shane: As both of you are aware, and as some of the readers or listeners might be aware as well, the courts are fairly hesitant to download any terms into a contract with any type of ambiguity. But in 2014, there was a landmark Supreme Court Case in which they stated that an “Implied Term of Good Faith” was going to be added to every contract in the commercial context.

So in that case, in 2014 Bhasin v Hrynew, basically what they said in there is that in any commercial context, they're going to download this implied term of good faith into a contract. In this particular case, the plaintiff and the defendant were two parties who were both selling investment products with the same dealer. They had sort of a competitive history of being in dispute with one another. Ultimately, the defendant tried to leverage his relationship with the third party and get the plaintiff sort of special information and take them over through an amalgamation; they budged, they tried to leverage that party, and the plaintiff ended up suing for damages for the position that they would have been in, but for this breach of the duty of good faith in the contract.

Clay: Okay, so let's just talk about what an “Implied Duty” is.

“An implied duty is a duty that's in every contract. It doesn't have to be written down; it's not in the representations and warranties, it's not set out in writing, but it's in every single contract”

Tanvir: For our clients that are going out, doing business, making contracts with people, whether you're buying, selling, whatever it is you're doing, the idea is that when you're out there doing those things, you are doing them in good faith.

Applications of the “Implied duty of good faith”

Clay: This duty has just exploded in the courts lately, and so Shane, the reason that you're here today is that you've been taking a look at this lately. So tell us about some other cases where this Duty has been applied.

Shane: It's a Supreme Court case, that 2014 case that you mentioned before, but like many Supreme Court cases, they're going to come through with something that's very trite, applies across the board, but it's going to leave a lot of windows. The fallout from a practical perspective: how it sort of plays into cases on a case-by-case basis and individual scenarios… So a big issue that's come up and has been dealt with in two semi-recent cases in the Supreme Court of 2020 and 2021 is, “How does that affect someone's discretion to exercise their rights underneath the contract?”

So you say, “Hey, listen, I've contracted here. I've got my rights whether I want to terminate or do something else that clearly says I can in the contract. How was that fettered by this overarching “Duty” where I have to act in good faith? This is what I bargained for; this is what I want to do.”

So, in 2020 there was a fairly large decision that dealt with that specific issue, determining how the implication works out between your duty of good faith and your ability to exercise your rights underneath the contract. So, in that case, you had a Condominium Corp that had hired a property manager that was doing some summer and winter work, snow removal, landscaping, that type of thing, and it was on sort of a 2-year renew period. The contract was originally made in 2010, but in 2012, when the contract came up for renewal, the person who was sort of managing the specific Condominium Corp (property manager) went to a condo meeting (we all know how fun that is) and heard whatever gripes they have with his services, he answered them, and they sort of led him to believe that his contract was going to be renewed.

Clay: How did they lead him to believe it? Is it just not saying anything?

Shane: Through silence, essentially. They said, “Here's our issues,” and he said “Okay, I'll take care of them!”. That's the end of it. Let bygones be bygones, and let's move forward. I believe that was in the spring of 2012, so through the summer months, he continued to work under the understanding that he was going to have his contract renewed in the fall, so in that Summer period, he's saying, okay, well, as I've got this future business relationship, I'm going to give you guys a couple of freebies - I'm going to go with the extra mile, work a little bit later, and it turns out that all the while the Condominium Corp knew they were going to fire him, but they let him go out out of his way and gave him the extra extension and that type of thing

Clay: Because they were offered these freebies.

Shane: Exactly. He says, “Okay, well, I've got this future business relationship, so I'm going to go the extra mile,” essentially, and then in 2012, after the Spring is over, he finds out his contract's getting terminated.

So he turns around and sues for the loss of opportunity that he would have had if they had been upfront with him. He says, “Okay, you guys knew you were going to fire me; you let me waste my time. I could have secured another contract with someone else, so I'm suing you for the damages of the loss of opportunity and me being able to go with a third party.” And he won.

Clay: I guess one of the things that maybe wasn't that clear in that chronology was that the condo board went on and decided they were going to fire him but just didn't tell him. “We'll fire them later, but let's get this free stuff.”

Shane: Yeah, exactly. In their defence, they're saying, “Well, it's really our discretion underneath the contract. We're not breaching any of the express terms of the contract, but you know, we're kind of being quiet about it. We're not really being upfront. And again, practicing in good faith, we're sort of taking advantage of the situation.”

But I can understand it from a certain extent from the condo to say, “Well, this is the contract as we've drafted it, you've agreed to it, and we're just going to exercise our right! So how can you turn around after the fact and say I wasn't acting in good faith when that's not really in the contract?”

But that circles back to the major issue that was dealt with in 2014 about these “implied duties.” So for the listeners or viewers, the concern is that you've got these duties in the contract that you might not even be aware of, and then you might act in a certain way underneath what's actually expressed in your contract, but the court might want back whatever advantage you get from however you're acting.

Clay: So don't enter into a contract; don't act within the terms of the contract unless you're doing so pursuant to what the contract is for, not for another reason. One of the cases we discussed getting ready for this was the situation of the employer grabbing some shares. Why don't you talk about that a little bit?

Shane: I think everyone can sort of understand some issues with your employer. So, in that case, it was a situation where an employer took advantage of an employee contract; essentially, what they did is there were some complaints against the employee, and they built them up a little bit without actually investigating them, and within the contract itself there was an ability for the employer to buy the shares that the employee had earned during the course of his employment, so what they did was they fired him with cause, they purchased his shares back for a dollar, they didn't properly investigate it and in that case the employee sued for breach of contract. One of the sub-issues being that they breached the implied duty of good faith, and he won as well.

Again, that was a situation where one of the people who had contracted wasn't acting in good faith but, on paper, was exercising the rights that they had been given underneath the employee contract.

Clay: That one hits home because I see quite a bit of these trumped-up for-cause arguments, and so, in that case, it was being done for an improper purpose.

I think the takeaway from all this is you better be really careful about why you are doing something, and you're doing it pursuant to the good faith of the contract.

Shane: And the impact of the implied terms like whether it's in the construction context, the implied duty to perform the work in a workman-like matter…I think a lot of people go on places like Legal Depot and try to build their own contracts, and they think they've got a contract there, but what you don't see is sort of what's in between; the gray area that a lawyer can help advise you on. Helping you understand what those implied duties are that you don't have the benefit of seeing on a piece of paper but might turn around and you might be found l for something like that.

Tanvir: I don't want our listeners to think that this only applies in certain situations; if you are doing construction or if you are in an employee-employer relationship; it's not specific scenarios that this applies to. There is an overarching duty of good faith. So, Shane, what's a key takeaway with this topic?

Shane: I'm sort of in tandem with what you said - the broad scope of everything. I think that contracts are difficult enough when you're trying to sift through what you can see, let alone trying to work through with what you can't, so you've got these implied duties that are downloaded into the contract, and as a layperson, if you don't have a lawyer, you might not even understand they're there. So it's important to have a trained set of eyes to go through your contracts with you.

Questions? We're ready to help. Please contact Clay Williams or Tanvir Gill, or any of the team at FH&P Lawyers.

Disclaimer: This material is provided for informational purposes only and should not be construed as legal advice on any subject matter. Consult with a qualified lawyer for advice on specific legal issues.