What does the duty of good faith REALLY mean?

Since the Supreme Court decision in Bhasin v Hrynew[1], which firmly established a duty of good faith in contractual relations, the exact contours of that duty have been a fairly open question. In a recent Ontario Superior Court case, 2336574 Ontario Inc. v 1559586 Ontario Inc.[2], the court examined what that duty looks like in a one-off real estate transaction between sophisticated commercial parties.

The facts, briefly summarized, of the case are as follows: the vendor was a condominium builder and vendor of condominium units.  The purchaser was a corporation that had as its principals business people and experienced real estate investors.  Both sides were represented by experienced counsel at all times.  The parties entered into an agreement of purchase and sale for the purchase of a condominium unit, which allowed the vendor to set the interim occupancy closing date, as well as the final closing date for the transaction.condominium building

When the vendor set the interim occupancy date in September of 2014, the purchaser requested and was granted a series of extensions. The vendor then subsequently set the closing date and what followed was a series of requests from the purchaser to extend the closing date, which the vendor consistently rejected. The purchaser ultimately refused to close by not signing back closing documents or providing closing funds on the day of closing. When the principals of the purchaser tried to close the next day with their own personal funds after a change of heart, the vendor refused and held the purchaser’s deposit ($40,000), as well as the amount that was required to be contributed by the purchaser on interim occupancy ($31,999).

Relying on UK case law the court stated that “a duty of good faith is required in contract law, but it is measured by the specific relationship between the parties.”[3] The court cited with approval the statement that the standard of good faith in a particular transaction is, “whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people.[4]

Applying the standard to this transaction, the court held, “Where the parties have a long-term ongoing relationship, a level of good faith may be expected that imposes flexibility and obligations beyond the letter of the contract; where they are commercially experienced buyers and sellers in a discreet, one-off transaction, the level of contract adherence would not be expected to vary from the strict contractual terms.” The judge went on to state that “Given the relationship of vendor and purchaser in a discreet real estate deal, good faith meant sticking to the contract, not bending the contract – even just a little bit – to one side’s will”.[5]

In the end, the court found in favour of the vendor, finding that since the purchaser did not close on the closing date that was enough to terminate the agreement. The vendor’s actions did not constitute a breach of the duty of good faith because the vendor was following the terms of the agreement of purchase and sale. The vendor was able to keep the $40,000 deposit, but was required to return the $31,999 as that was not a deposit, but rather a payment on account of closing.

This case may provide some important context to how the courts will interpret the duty of good faith. If other courts choose to follow this path, they will look at the relationship between the two parties to the contract, their sophistication and previous history to help inform their analysis of the metes and bounds of the duty of good faith. What seems clear from this case is – sticking to the contract is the safest bet to ensuring you don’t fall foul of the duty of good faith.

[1] 2014 SCC 71

[2] 2016 ONSC 2467

[3] Yam Seng Pte Ltd. v International Trade Corp. Ltd., [2013] 1 A11 E.R. (Comm.) 1321, [2013] EWHC 111 (Q.B.), cited at para 23

[4] Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd., [2013] EWCA Civ. 200

[5] 2336574 Ontario Inc. v 1559586 Ontario Inc., para 25

agreement of purchase and sale Contract Law contractual relations duty of good faith good faith Ontario Superior Court Supreme Court



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