• Playing Fair in Business
  • July 16, 2013 | Author: Scott Brearley
  • Law Firm: Singleton Urquhart LLP - Vancouver Office
  • Must parties to commercial contracts "play fair"? While courts have recognized obligations of good faith in the performance and enforcement of contracts in some cases in Canada, no general duty of good faith is implied in all contracts. The requirement to act in good faith is piecemeal and only acknowledged in certain categories of relationships, such as agreements obliging a party to use best efforts.

    The absence of a good faith requirement leaves parties free to pursue their own self-interests when performing contracts, provided they do not breach the contract. Canadian courts have proceeded cautiously in recognizing duties of good faith in the performance and enforcement of contracts. However, other jurisdictions such as England have moved or are moving toward a unified principled approach to a good faith and fair dealing obligation in contracts. A recent example of this approach occurred in an English court that heard the case of Yam Seng Pte Limited v. International Trade Corporation Limited.

    This trial concerned a long-term distributorship agreement. An English supplier had granted exclusive rights to a Singapore company for the distribution of certain Manchester United brand name products in various jurisdictions. The initial agreement was for one year and then extended to two-and-a-half years.

    The distributor gave notice of its intention to terminate the contract owing to a number of breaches committed by the supplier, including providing the distributor with information known to be untrue. The supplier, according to the Court’s judgment, demonstrated a “striking ability to treat wishful thinking as fact.”

    The performance of an agreement of this kind required effective communication and cooperation between the parties. The Court therefore had no difficulty with the notion that a good faith duty could be implied into any ordinary commercial contract based on the presumed intentions of the parties. Long-term relationships, in particular, often need a high degree of communication, cooperation and predictable performance based on mutual trust, confidence and loyalty. In Yam Seng, the Court viewed these principles as implicit in the parties' agreement and necessary to produce the result intended by the commercial actors.

    The English court did not find there was a general duty of good faith in commercial contracts. Before finding such an obligation, a court would consider the particular commercial context in which it was alleged to arise. It would also define fair dealing in the light of conduct that reasonable and honest people would or would not believe to be commercially acceptable.

    This decision could certainly find traction in a Canadian court, especially in cases concerning the performance of long-term contracts. The implications could be significant. Following the reasoning that the parties’ presumed intentions gave rise to a good faith duty in Yam Seng, contracted parties can modify or exclude the scope of such a duty by the express terms of their agreements. Where written contracts do not place limits on this duty, parties should put themselves in a position to prove the performance of good faith efforts in the event that disputes arise.