Since the Supreme Court of Canada's leading 2014 decision in Bhasin v. Hrynew, 2014 SCC 71, all Canadian contracts are subject to a duty of good faith.
This includes both the duty to perform the contract honestly and a requirement to exercise any contractual discretion under the contract reasonably: C.M. Callow Inc. v. Zollinger, 2020 SCC 45; Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7.
Canadian contract law restricts the application of good faith to binding and enforceable agreements – or so it would seem.
Ostensibly, good faith applies to the performance of agreements, not to the parties' conduct that precedes them.
The negotiation process, which could theoretically be fraught with misrepresentations, lies, or arbitrary and capricious conduct, does not attract contract law scrutiny – at least not until the parties formally enter into a binding agreement.
Two recent decisions of the British Columbia Court of Appeal and the Supreme Court of Canada offer apparently conflicting views on whether contractual negotiations are subject to a duty of good faith.
While adjudicated in very different contexts, it is possible to reconcile their application and discern the scope of good faith applicable to both pre- and post-contractual conduct.
A. No General Duty of Good Faith Applicable to Contract Negotiations
In Lee v. Ocean Pacific Hotels Ltd., 2025 BCCA 57, the British Columbia Court of Appeal established the general principle that parties to a contract do not have a duty to bargain in good faith.
Lee involved the negotiation of casual employment agreements between the defendant hotel operator and its employees. Following the COVID-19 pandemic, the operator was unable to offer regular shifts to certain of its employees and instead offered them the option to change their employment status from regular to casual.
The former employees commenced a class action against the hotel operator, alleging, among other things, that the operator breached its duty of good faith during the process of negotiating the new contracts by dishonestly withholding information about health benefits coverage under the contracts.
The motion judge certified the class action for breach of honest contractual performance. The British Columbia Court of Appeal reversed.
Citing a 2018 decision of the Ontario Court of Appeal, Larizza v. Royal Bank of Canada, 2018 ONCA 632 , the British Columbia Court of Appeal in Lee noted that the duty of honest contractual performance, as set out in Bhasin, arises "in the context of the performance of the contract, and not from the circumstances leading up to the formation of the contract". [emphasis added]
The Court cited a number of decisions across the country which support the view that the duty of good faith cannot apply to pre-contractual negotiations: Wonderville Child Centre Inc. v. Highwood Enterprises Ltd., 2018 BCSC 1759; The Power Limited Partnership v. OEFC, 2016 ONSC 4415; Doucet and Dauphinee v. Spielo Manufacturing Incorporated and Manship, 2011 NBCA 44; Okanagan Equestrian Society v. North Okanagan (Regional District), 2018 BCSC 800.
These decisions notwithstanding, the Court in Lee recognized that the Supreme Court of Canada has not provided the final word on whether the duty of honest contractual performance applies to contractual negotiations:
Despite the fact that the SCC has not explicitly found there is no manifestation of good faith which could apply to pre-contractual negotiations, there is still a developing consensus, with which I agree, that a claim for breach of the duty of honest contractual performance cannot be based on dishonest conduct connected to contract negotiations. It is my view that in recognizing the contractual duty of honest performance in Bhasin, the Court did not intend to establish a contractual duty to negotiate in good faith.
In the Court view, any dishonest conduct by the parties occurring before the parties formally enter into a contract is adequately captured by tort law, namely the torts of negligent and fraudulent misrepresentation: "[b]oth torts are based on a contracting party being wrongfully misled by statements made leading to the formation of the contract".
Of course, reliance on tort law alone to address dishonest conduct be problematic; proving fraudulent or even negligent representation poses a high onus on the plaintiff, who has to prove a number of elements in order to be successful. By comparison, breaches of contract are arguably a lot easier to establish.
While the Court in Lee does not expressly address this issue, the implication appears to be that the standard of proof for pre-contractual dishonesty is higher – once the parties enter into the contract, however, this triggers the duty of good faith, meaning the aggrieved party need only show a breach of contract to seek damages.
B. What if there is an Express Duty to Negotiate the Contract?
The analysis is Lee, however, ignores a key issue: what if the contract includes a positive obligation to negotiate?
The Supreme Court of Canada had the opportunity to address this issue in late 2024 in its decision, Québec (AG) v. Pekuakamiulnuatsh Takuhikan, 2024 SCC 39 P.T.
P.T. concerned a claim by the Band Council representing the Pekuakamiulnuatsh Innu First Nation in Mashteuiatsh (the "Band Council") against the Governments of Québec and Canada (the "Government").
Pursuant to agreements between Band Council and the Government, the Government had an obligation to make financial contributions to the Band Council's police force. The Band Council argued that between 2013 and 2017, the Government's funding proved to be inadequate, such that the Band Council incurred significant operating deficits.
The Band Council argued that the Government breached its obligations to renegotiate the agreements in good faith because the Government knew that the budgets and funding provided in the contracts were inadequate to operate a police force.
Québec declined to renegotiate its contract on renewal to provide further funding to the Band Council.
Critically, the agreements expressly contemplated "renewal negotiations for the funding clauses.
The majority of the Supreme Court of Canada held that, pursuant to Article 1375 of the Civil Code of Québec, CQLR c. CCQ-1991, Book Five, Québec's refusal to renegotiate its financial contribution under the agreements violated the duty of good faith.
Québec chose to continue the relationship with the Band Council while refusing to revisit the police force's funding, even though it knew the force was underfunded. Such conduct amounted to bad faith.
The Court held that where a contract provides for its negotiation, after the contract is entered into, the duty of good faith under Québec's Civil Code is triggered:
After a contract is entered into..."the obligation to negotiate in good faith may...have a contractual basis and flow from the terms of the contract"...especially where the parties intend to renew the contract in a manner contemplated by it...Thus, where parties have provided through a clause that they will have to enter into negotiations, the obligation to conduct the negotiations in good faith flows directly from the contract. A breach of good faith in negotiating a renewal contemplated by a contract may thus be a source of contractual liability...
P.T. does not impose an "extra-contractual" good faith duty – instead, the obligation flows directly from the parties' agreement to negotiate, as already set out in their agreement. Whether the logic of P.T. will apply to common law provinces outside Québec remains to be seen.
Negotiate Cautiously
For now, the Lee and P.T. decisions can be reconciled.
Lee provides that there is no general obligation to negotiate an agreement in good faith in Canadian contract law. Bad faith behaviour during the negotiations leading up to the contract can be addressed by the misrepresentation torts.
P.T. , however, establishes a key exception: if the contract expressly imposes a duty on the parties to negotiate, then good faith is triggered as part of the contract's performance.
Should Lee proceed to the Supreme Court of Canada, the analysis above may very well change again – it remains to be seen if the Court, post-Bhasin, has any appetite to extend good faith to the pre-contractual factual matrix.
Until such time, commercial parties should nevertheless govern themselves in accordance with basic principles of honesty and reasonableness in the negotiation of their business agreements.
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