When Good Intentions May Still Amount to Bad Faith Under your Business Contract

Parties to a commercial agreement owe one another extra-contractual duties of good faith. 

This includes both the obligation to perform the agreement honestly (by not lying or actively misleading each other) and exercising any discretion under the contract reasonably, in a manner consistent with the purposes for which the discretion was granted: Bhasin v. Hrynew, 2014 SCC 71;  C.M. Callow v. Zollinger, 2020 SCC 45.

A recent decision of the Ontario Superior Court, 1401380 Ontario Ltd. (c.o.b. Wilderness North Air) v. Wasaya Airways LP, 2024 ONSC 4701, addresses the question of whether a party who seeks to honour the interests of a non-party to the agreement may still run afoul of the duty of good faith.

The Road to Hell is Paved with Good Intentions…

Wasaya involved an action by the plaintiff, Wilderness North Air (“WNA”), which ran a charter airline that delivered fuel by air, against the defendant electricity provider, Hydro One Remove Communities Inc. (“Remotes”).  

Remotes provides electricity to communities in Northern Ontario. Most of these communities are populated by First Nations.

The defendant, Wasaya Airway LP (“Wasaya”), also provided fuel transportation services by air and is a limited partnership owned by twelve First Nations communities.

WNA was the successful applicant for a contract issued by Remotes to deliver fuels to five remote communities that were accessible only by air and winter roads (the “Primary Communities”).  

WNA was also the successful applicant to deliver fuels to seven other communities (the “Secondary Communities”).  

Wasaya was unsuccessful in its bid to be awarded either contract to deliver fuel to the Primary and Secondary Communities.

As a result of Wasaya not being awarded the contracts, a series of Band Council Resolutions (“BCRs”) were promulgated, establishing that the First Nations communities would not allow anyone other than Wasaya to deliver fuel on their lands.

In view of the BCRs, Remotes advised WNA that it would no longer be using its services for four of the five Primary Communities and that Wasaya and other cargo delivery services would be serving these communities instead.  

Ultimately, Wasaya was also contracted exclusively to deliver fuels to the Secondary Communities.

WNA claimed damages against Remotes, alleging that Remotes had breached its contract with WNA. WNA further claimed damages against Wasaya for inducing breach of contract.

The Trial Judge awarded WNA damages for breach of contract against Remotes and held Wasaya jointly and severally liable with respect to a certain portion of the damages.  

Duty of Good Faith Applies to the Contracting Parties, No One Else

Among other findings, the Trial Judge held that Remotes breached the contract by violating its duty of good faith.

However, the Court found that Remotes did not breach the duty to perform the contract honestly.  

There was no evidence that Remotes ever lied or mislead WNA. Remotes was clear that it perceived the BCRs as a serious obstacle to WNA’s ability to deliver fuel to the Primary and Secondary Communities and that the contract between Remotes and WNA could therefore not continue. 

While Remotes could have been more forthcoming in its discussions with the First Nations communities in an effort to have them rescind the BCRs, Remotes did not mislead WNA in requiring it to continue to ask for rescission of the BCRs itself as a precondition to continuing the ongoing contract obligations.

That being said, Remotes did act in bad faith by exercising its contractual discretion unreasonably.

The contract between Remotes and WNA included a discretionary cancellation clause which gave Remotes broad discretion to cancel the contract in changing circumstances, where, for example, fuel requirements and delivery mechanisms could not be fulfilled.  

The agreement also included another clause which allowed Remotes to transport the needed fuel to First Nations communities where a vendor, i.e., WNA, could not deliver the fuel itself.

The Court held that Remotes exercised its discretion under these provisions of the contract in a manner inconsistent with the purpose for which the discretion was granted. 

While Remotes’ reasons for cancelling the contracts with WNA were “honourable in wanting to respect the BCRs”, its insistence that WNA seek to have the BCRs rescinded, when it knew this would never happen, amounted to an unreasonable exercise of discretion:

While Remotes’ motives and conduct vis-á-vis the First Nations were honourable in wanting to response the BCRs, Remotes exercised its contractual discretion under these provisions [in] a manner inconsistent with the purpose for which the discretion was granted…

…

…it was never [WNA’s] responsibility…to fix the problem that arose when the communities chose to issue further and more forceful BCRs in support of Wasaya’s position. While [WNA] needs to able to deliver fuel, this was not an issue of [WNA’s] making.

…

Remotes argues that its recognition of the First Nations’ rights to govern the territories and traditional lands renders its actions reasonable….[however] Remotes should have given greater consideration to the clear direction of the Wasaya communities in the procurement process before entering into the Contract…

…

Remotes argues that its actions were reasonable because of its statutory obligation under the Electricity Act to provide electricity [to remote communities]. I have found that [WNA] was capable of delivering in accordance with the requirements of the Contract. Furthermore, while Remotes has a clear statutory duty, it also had a contractual obligation to [WNA] and a contractual duty of good faith.

To Whom Does Good Faith Apply?

Wasaya illustrates an important point about how Canadian Courts approach the concept of good faith obligations under a commercial agreement: the duty to act in good faith is owed to the contract’s counterparty.  

Even in circumstances where a contractual party may be acting with the best of intentions, in the interests of non-parties to the contract and even in accordance with related statutory obligations, such conduct does not absolve the contracting party of the good faith duty it owes to the other party to the agreement. 

Liability for breach of contract attaches to the parties to the agreement, even where they may be acting in good faith vis-à-vis their obligations to others.

While the Courts can apply a holistic analysis to the factual matrix in deciding whether a breach of good faith has taken place, that analysis necessarily applies to the parties to the agreement. Other factors are extraneous to the contract.

Accordingly, the Courts’ “bad faith” analysis is circumscribed to the contractual parties’ conduct toward one another, not how they act to the world at large.  

Marco P. Falco is a Partner in the Litigation and Dispute Resolution Group at Torkin Manes LLP whose practice focuses on civil appeals and judicial review. You may contact Marco about your commercial agreement at mfalco@torkin.com. Please note that a conflict search will need to be conducted before your matter is discussed and confidential information should not be disclosed in the context of your communications to the firm until a conflict search has been resolved.