Good Faith in Execution (aka Performance) of Agreements

So what’s in a word? One is curiously reminded that one should use words carefully by an excerpt from Shakespeare’s Hamlet, Act V Scene I:

First Clown: What is he that builds stronger than the mason, the shipwright, or the carpenter?
Second Clown: The gallows-maker, for that frame outlives a thousand tenants.
First Clown: I like thy wit well, in good faith: the gallows does well; but does it well? It does well to keep those that do in.

The phrase "execution of an agreement" can have two meanings: (i) confirming the existence of a contract, usually by having it signed, although it is possible to execute an oral agreement and (ii) the performance of obligations agreed to in the contract.

An agreement to agree is not a binding contract, as my colleague Geoff Hall pointed out in his book Canadian Contractual Interpretation Law (2007, LexisNexis), at page 132:

Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.) is a leading Canadian decision on agreements to agree and aptly sets out the various subissues raised by the proposition that an agreement to agree cannot be enforced … In other words there are three separate sub-propositions contained within the basic notion that an agreement to agree is unenforceable. First, there is no enforceable contract where essential terms have not been agreed but instead have been left by the parties for future agreement. Second, there is no enforceable contract where the provisions of what has been agreed are insufficiently certain. Third, there is no enforceable contract where the parties intend that a preliminary agreement is not to create binding contractual relation until a subsequent formal document is executed.

However, once a contract has been entered into, there is a duty on the parties to govern their actions in the performance or execution of the terms of that contract in good faith, notwithstanding that the words "in good faith" are likely not explicitly included within the contract.

As Blair J.A. stated in Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 (CanLII) at para. 69:

Although Canadian law has not yet recognized a standalone ‘duty of good faith’ in the performance of a contract that is independent from the terms of the contract, as the United States has done, the jurisprudence establishes that there is an implied contractual duty of good faith not to act in a way that defeats or eviscerates the very purpose and objective of the agreement.

What constitutes acting "in good faith"? The Supreme Court of Canada in Roncarelli v. Duplessis (1959), 16 D.L.R. (2d) 689 said that "‘good faith’ … means carrying out the statute according to its intent or purpose, it means good faith in acting with a rational appreciation of that interest and purpose." In that regard, the word "contract" could be substituted for "statute." McEachern C.J.S.C. in Nystad v. Harcrest Apt. Ltd. 1986 CanLII 1057 (BC S.C.) at para. 18 adopted the following interpretation of "good faith":

‘Good faith,’ according to Black’s Law Dictionary, 5th ed. (1979), has no technical meaning but is a term used to ‘describe that state of mind denoting honesty of purpose, freedom from intention to defraud and generally speaking, means being faithful to one’s duty or obligation,’ or ‘an honest intention to abstain from taking any unconscientious advantage of another, even though the technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render the transaction unconscientious.’

But what would excuse a party for not carrying out its end of the bargain? Is the duty of good faith performance an obligation of "Do or Die"? Certainly it is obvious that one cannot rely on one’s own breach: see Southcott Estates Inc. v. Toronto Catholic School Board, 2010 ONCA 310 (CanLII) at paras. 13-14.

Parties are able to be excused from their legal obligations if they prove that there has been frustration: see Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para. 53, where Binnie J. for the court stated:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance becomes ‘a thing radically different from that which was undertaken by the contract’: Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., [1960] S.C.R. 361…

However, if the parties had contemplated the possibility of such a difficulty arising, then frustration would not have come into play.

What then of the old trio — force majeure, Act of God and vis major? Mozley & Whiteley’s Law Dictionary (1988, 10th ed., Butterworths) describes these terms as:

(a) force majeure — Irresistible compulsion or coercion; (b) Act of God — An extraordinary occurrence or circumstance which would not have been foreseen and which could not have been guarded against; an accident due to material causes, as e.g. a destructive storm or a sudden and unforeseen death; and (c) vis major — Irresistible force; e.g. an interposition of human agency as is from its nature and power absolutely uncontrollable; e.g. the inroads of a hostile army or forcible robberies, may relieve a person from liability under a contract.

It would seem that sometimes these phrases are haphazardly included in a contract without any thought as to their implications. If one wants to be certain that the occurrence of such a contingency will in fact excuse performance, then it would seem appropriate to describe that excuse as including specific types of events and anything of a similar nature or impact. It is well to note that force majeure clauses may exclude financial incapacity as was the case in Atcor Ltd. v. Continental Energy Marketing Ltd., [1996] 6 W.W.R. 274 (Alta C.A.). However, it should be noted, that even without such exclusionary wording, courts have accepted the traditional common law position that a party is not excused from performing its obligations because of what in Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC, [2010] EWHC 40 (Comm) was described as "unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets." In that case, Hamblen J. stated at para. 40:

It is well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event. Thus the failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure…

It is also important to appreciate that, as Kerans J.A. said at pages 288-9 of Atcor:

… in the absence of clearer words to the contrary, a supplier is not excused from non-performance by a force majeure event if the sole consequence of that event is to drive him to buy from another supplier and make a smaller profit. He is excused, however, if the solution in all the circumstances is not reasonable.

In Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149 (CanLII), McDonald J.A. for the court observed at paragraph 15:

With respect to force majeure, the force majeure clause applies when circumstances occur which were unforeseen or beyond a party’s control and does not apply to normal business risk or to reallocate bargained for contractual risk: Atlantic Stock Limited v. St. Anne-Nackawic Pulp and Paper Co. Limited, [1976] 1 S.C.R. 580 at para. 4.

Given the desire for certainty (and thus the avoidance of protracted expensive litigation), it would seem helpful to specify an exclusion of financial incapacity if that is in fact desirable and to be explicit and expansive in defining that exclusion. "Belt and suspenders" fashion does not make for elegant dress, but it may well be safer in avoiding a wardrobe malfunction.

Then there is the issue of to what standard of performance does the good faith obligation hold a party? The cases generally seem to skirt this, seemingly relying upon the circumstances prevailing. In CEP Holdings Limited v. Steni AS, [2009] EWHC 2447 (Q.B.), a case regarding whether there had been a breach of an "all reasonable endeavours" clause, Gloster J. reviewed the plaintiff’s efforts to market and promote the sale of the defendant’s products, the nature of its marketing organization, the adequacy of systems for the preparation of rolling forecasts and logs of specifications and quotations, the extent of cooperation with the defendant, the distribution of the defendant’s literature and marketing materials, and its attendance at fairs and seminars.

There seems to be an almost inexhaustible list of possibilities of standards of performance for executing one’s obligations (as set forth hereafter in the paragraph listing alternatives (a) through (i)). It may be desirable to pick and choose which one fits the circumstances of the case at the time of drafting the contract. It would likely seem that the base foundation for performance would be to use one’s "reasonable efforts." Higher than reasonable efforts would "best efforts." One may query whether a party under a reasonable efforts clause is obligated to use its best efforts since employing one’s best efforts would be entirely possible for a party to achieve; however, it appears that the case law has accepted that a "reasonable efforts" clause does not require a party to leave no stone unturned.

The question of what are one’s "best efforts" was canvassed in Atmospheric Diving Systems Inc. v. International Hard Suits Inc., [1994] 5 W.W.R. 719 (B.C.S.C.) at pages 735-6:

  1. "Best efforts" imposes a higher obligation than a "reasonable effort."
  2. "Best efforts" means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion, and leaving no stone unturned.
  3. "Best efforts" includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.
  4. The meaning of "best efforts" is, however, not boundless. It must be approached in the light of the particular contract, the parties to it, and the contract’s overall purpose as reflected in its language.
  5. While "best efforts" of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith.
  6. Evidence of "inevitable failure" is relevant to the issue of causation of damage, but not to the issue of liability. The onus to show that failure was inevitable regardless of whether the defendant made "best efforts" rests on the defendant.
  7. Evidence that the defendant had acted diligently, could have satisfied the "best efforts test as relevant evidence that the defendant did not use its best efforts."

But what of the following phrases, which are frequently found in contracts? How are these to be interpreted? Where on the spectrum do they fit?

  1. every effort;
  2. maximum efforts;
  3. good faith efforts;
  4. all reasonable bona fide (aka good faith) efforts;
  5. commercially reasonable best efforts;
  6. all reasonable endeavours;
  7. commercially reasonable efforts;
  8. all feasible efforts;
  9. in a commercially reasonable manner; and
  10. endless variations of this theme.

Perhaps the ranking from highest to lowest obligation would be as indicated from (a) to (i) with "best efforts" fitting in between (b) and (c).

Care should be taken to appreciate whether the nuances (sometimes referred to as "nuisances") of these phrases add — or subtract — to the burden (and to what degree). As was observed in Castledowns Law Office Management Ltd. v. FastTrack Technologies Inc., 2009 ABCA 148 (CanLII) by Slatter J.A. (in dissent, but not on this issue) at para. 67:

Some authorities hold that a ‘true’ condition precedent cannot be waived. Other cases discuss whether the contracting parties have a duty to act reasonably and diligently to have the conditions met. Neither of these issues need be discussed here. Both contracts specifically provide that the condition can be waived. They both have ‘good faith and diligence’ and ‘reasonable efforts’ clauses. Of course what would amount to good faith, diligence and reasonable efforts will vary depending on the nature of the condition.

So what’s in a word? In the end result, it is important to choose words carefully in drafting a contract. Otherwise one opens the door to Wonderland, where the Red Queen is able to say that a word means exactly what she says it means. In which case, the gallows may have another tenant.

Honourable James M. Farley, QC