On a quick reading of the case, I think the emphasis on honesty may
slight a more convincing basis for the decision that also sounds in
good faith. As I understand it, C failed to disclose to B that it
had decided to termination its contract with B at the expiration
date and merge B's business with the business of B's hated rival,
H. I would be uncomfortable with a rule imposing a duty to disclose
in this situation, if these were the only facts. But there is
more. C facilitated the take-over (merger) by requiring B to turn
over confidential business records to H. C made some affirmative
misrepresentations in this context. Lying is worse than not
disclosing. But, and this is the key bit, C may well have been
violating its rights under the contract with B in demanding the
information be turned over when C's purpose in making the demand was
to facilitate H's take-over. This is an abuse of rights. The duty
of good faith is often used to check abuse of rights. A famous US
case, Fortune v. NCR, illustrates. NCR terminated Fortune, an
at-will employee, because he had made an enormous sale and was going
to collect a large bonus, but only if he was an employee when the
sale was consummated. NCR could terminate Fortune for any reason,
good or bad, but it could not terminate him for the purpose of
cheating him of a promised bonus.
On 11/13/14, 3:04 PM, Angela Swan
wrote:
Since the
Supreme Court relied heavily on my arguments, spread over 30
years, I have an “interest” in the decision. Stephen Smith
misunderstands the function of good faith. At base, it says
no more than, “Don’t be a scumbag!”. Behaving honestly and
decently does
not entail an obligation to disclose anything, except
to the extent that disclosure is necessary to prevent that
which has been disclosed from being misleading — a duty
familiar to securities lawyers.
The case does
not make the law uncertain. My argument for years
has been that there are pockets or instances of obligations
where good faith standards were imposed; what Cromwell J.
has done is to bring these “distributed” instances together
in a general organizing principle. Every solicitor advising
a client will tell it to behave decently and, what’s even
more important, it’s impossible to conceive of any
contractual relation (that is not evanescent) as not being
infused with obligations of good faith. As I said, and as
Cromwell J. said, obligations of good faith performance
“inhere” in the parties’ relation; they are not externally
imposed. An obligation to behave decently does not make a
contract vague, it does not inject some undesirable and
foreign obligation; it recognizes what almost all parties
accept as the way to behave in a contractual relation.
Angela Swan
The decision
has indeed been hailed in the Canadian press as finding a
general duty of good faith in contracts, but (and with all
respect to my namesake down the hall) it does not exactly
say that.
As para 33
below indicates, what it says is that good faith is a
‘general organising principle’ of Canadian contract law. So
far as general
duties are concerned, the only such duty that the
Court finds is a duty of ‘honesty’ (see para 73 below). The
court explains this duty as one of various specific duties
that are explained by the organising principle of good
faith—but it does not say that the principle itself is a
general duty. To the contrary, after explaining in detail
the various arguments made in favour of a general duty of
good faith and describing the various jurisdictions that
have adopted such a duty, the Court explicitly limited
itself to finding (merely) a general duty of honesty.
The duty of
honesty, at least as understood by the Supreme Court, is
much more limited than a general duty of good faith. As
noted in para 73 below, it only requires that ‘parties
must not lie or otherwise knowingly mislead each other about
matters directly linked to the performance of the contract’. The existence of this duty provides
plaintiffs with arguments and remedies not found within the
law governing fraud and misrepresentations (primarily
because reliance is neither a part of the cause of action
nor the measure of the remedy—the latter is contractual),
but it does not go much beyond that protection and is of
course much more limited in other respects (primarily in
that it requires fraud-like intent). The Court explicitly
refused to find that the duty of honesty encompassed a duty
of disclosure.
Steve
Today the Supreme Court of Canada held
that there is a general duty of good faith in contracts in
common law Canada:
[33] In my
view, it is time to take two incremental steps in order to
make the common law less unsettled and piecemeal, more
coherent and more just. The first step is to acknowledge
that good faith contractual performance is a general
organizing principle of the common law of contract which
underpins and informs the various rules in which the
common law, in various situations and types of
relationships, recognizes obligations of good faith
contractual performance. The second is to recognize, as a
further manifestation of this organizing principle of good
faith, that there is a common law duty which applies to
all contracts to act honestly in the performance of
contractual obligations.
[73] In my view,
we should. I would hold that there is a general duty of
honesty in contractual performance. This means simply that
parties must not lie or otherwise knowingly mislead each
other about matters directly linked to the performance of
the contract. This does not impose a duty of loyalty or of
disclosure or require a party to forego advantages flowing
from the contract; it is a simple requirement not to lie or
mislead the other party about one’s contractual
performance.
--
Mark P. Gergen
Robert and Joann Burch D.P. Professor of Tax Law and Policy
University of California, Berkeley School of Law
598 Simon Hall
Berkeley, CA 94720-7200
Tel 510 643-9577
Fax 510 643-7397
mgergen@law.berkeley.edu