Recent Developments In The Law Of Good Faith – Key Takeaways

On April 28, 2026, McCarthy Tétrault hosted an exclusive fireside chat exploring recent developments in the doctrine of good faith in Canadian contract law. Brandon Kain, a partner at McCarthy Tétrault and author of Good Faith in Canadian Contract Law (LexisNexis Canada, 2024), was joined by the Honourable Mr. Justice Peter J. Cavanagh of the Ontario Superior Court of Justice (Commercial List) and Christina Porretta, Chief Legal Officer at BDO Canada, for a wide-ranging discussion moderated by Marina Sampson, a litigation partner at McCarthy Tétrault.

Some twelve years after the Supreme Court of Canada’s landmark decision in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”), the principle of good faith has become a central feature of contracts throughout common law Canada. Drawing on judicial, in-house, and scholarly perspectives, the panel canvassed how the doctrine has matured, where uncertainty persists, and how counsel should plead, defend, and advise upon it.

The Evolution of Good Faith Since Bhasin

In Bhasin, the Supreme Court of Canada recognized good faith as a general organizing principle of contract law, along with a mandatory duty of honest performance. Since 2014, the Court has refined this framework, including by:

• Elevating the duty to exercise contractual discretion in good faith to a mandatory requirement, and clarifying that it requires discretion to be exercised reasonably (Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (“Wastech”)); and
• Extending the duty of honest performance to cases where a party knowingly fails to correct misapprehensions that the counterparty draws from their active conduct (C.M. Callow Inc. v. Zollinger, 2020 SCC 45).

Together, these decisions have reframed contract performance as a domain in which conduct, and not only the four corners of the contract, can give rise to liability. Even where a damages claim ultimately rests on an established breach of contract, good faith frequently forms part of the litigation narrative. Because the distinction between the organizing principle of good faith and the specific duties that manifest it can be difficult to maintain, counsel should identify, with precision, the doctrinal hook on which any good faith argument rests.

In-House Counsel Perspectives: Managing Uncertainty

From an in-house standpoint, Bhasin has shifted legal advice from narrow assessments of contractual entitlement toward a broader evaluation of conduct:

• Courts are increasingly attentive to how parties behave in the lead-up to termination, renewal, or the exercise of discretionary rights, including whether one party has fostered misleading expectations about the future of the relationship.
• Provisions conferring “sole discretion” are no longer treated as broadly unreviewable. Under Wastech, discretion must be exercised consistently with the purposes for which it was granted.
• Documenting the rationale for discretionary decisions is essential to risk management. Contemporaneous records can provide persuasive evidence of good faith, while their absence may invite an adverse inference.

Good Faith and Contractual Interpretation

Good faith may inform contractual interpretation, and the Supreme Court made clear in Bhasin that parties are generally taken to intend certain minimum standards of honest conduct. The meaning of a provision, however, is determined by the ordinary process of contractual interpretation, with duties of good faith operating as a constraint on the parties' conduct once that meaning is established.

The Court of Appeal for British Columbia recently confirmed this sequencing in Dhanesar v. Pandher, 2026 BCCA 63 ("Dhanesar"). It reversed a trial decision that had collapsed the two stages by treating the duty to exercise contractual discretion in good faith as if it were a principle of contractual interpretation. The proper approach is to first interpret the purpose of the discretion using ordinary principles of interpretation, and only then to determine whether the duty has been breached. Counsel should resist arguments that effectively use this duty of good faith as a backdoor tool of contractual interpretation.

Discretion and the Wastech Reasonableness Standard

The duty to exercise contractual discretion in good faith requires that discretion be exercised reasonably and in a manner connected to the purpose for which it was granted. As Dhanesar confirms, reasonableness in this context is not the objective "reasonable person" standard applied elsewhere. Instead, it turns on the purpose of the discretion granted and whether it was exercised consistently with that purpose. In other words, the objective benchmark by which reasonableness is to be assessed consists of the parties' own bargain, not an external standard.

This distinction has important practical consequences. A clause requiring performance to be "satisfactory to the buyer", as in Dhanesar, may be properly construed as permitting rejection based on a subjective genuine concern, rather than one which only a reasonable person would hold. Counsel should take care not to apply an objective reasonableness standard to discretionary clauses when their purpose was to confer subjective discretion.

Recent Developments in Specialized Contexts

Three areas merit attention as future flashpoints for the doctrine:

• Crown-Indigenous agreements: The Supreme Court of Canada's recent decision in Quebec (A.G.) v. Pekuakamiulnuatsh Takuhikan, 2024 SCC 39, addressed both the Honour of the Crown and the principle of good faith in the context of a tripartite policing agreement. Crown-Indigenous contracts will engage the Honour of the Crown, which imposes more onerous obligations than duties of good faith, where they are intended to foster the modern-day reconciliation of pre-existing Indigenous societies with the Crown's historic assertion of sovereignty. The Honour of the Crown will not necessarily apply to all Crown-Indigenous contracts, however, and the scope of good faith duties in simple commercial agreements is likely to attract further jurisprudence.
• Good faith and mitigation: In many civil law systems, including Quebec, the duty to mitigate is viewed as an aspect of good faith. The Supreme Court of Canada has been presented with an opportunity to consider how the organizing principle of good faith interacts with mitigation in Aphria Inc. v. Canada Life Assurance Company, SCC Case No. 41665, which was argued in February 2026. The outcome may have meaningful implications for the law of remedies, particularly given the common law approach reflected in cases such as Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971] S.C.R. 562, in which the Supreme Court held that a commercial landlord owes no duty to mitigate when exercising certain rights following the tenant's repudiation of a lease.
• Letters of intent: In Dr. Michael Emon Dentistry Professional Corporation v. Alexander Sevo Dentistry Professional Corporation et al., 2025 ONSC 4961, the trial judge applied the duties of honest performance and good faith discretion to assess a purchaser's conduct under a letter of intent for the sale of a dental practice. Although largely non-binding, the letter contained binding conditions precedent and a discretionary termination right exercisable if the purchaser was not satisfied with his due diligence for any reason. The trial judge found no breach, but confirmed that where a letter of intent is binding even in part, duties of good faith may arise and shape the negotiations it contemplates.

Concluding Tips for Litigants

The panel concluded with practical guidance for counsel making and defending good faith claims:

• Assess every contract case for a plausible good faith claim. The good faith analysis should be on every litigator’s checklist.
• Apply rigour in articulating good faith claims. Locate the impugned conduct within the correct analytical framework and distinguish between the organizing principle and the specific duties that manifest it. Doing so makes it easier for a court to accept the argument without returning to first principles.
• Exercise judgment about which arguments are sound. Weak good faith claims can dilute the persuasiveness of stronger contractual arguments and should be left out where they are unlikely to succeed.
• On the defensive end, challenge meritless bad faith allegations as attempts to salvage a case with no clear breach of contract, and meet legitimate claims head on with appropriate documentary evidence.
• Robust contemporaneous documentation can be an effective tool for defending the exercise of contractual discretion and rebutting allegations of bad faith.
• Draft letters of intent carefully. Termination clauses should be tied to specific, defensible triggers rather than broad, unstructured discretion, and conditions precedent should make clear what is required of each party and what consequences flow from a failure to meet them.

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