The Duty of Good Faith and Conditions Precedent

Has Bhasin heralded a new approach?

The Duty of Good Faith and Conditions Precedent

The Supreme Court of Canada’s decision in Bhasin v. Hrynew1 highlights a disconnect between the modern common law analytical framework applied to contractual performance and the British Columbia courts’ approach to conditions precedent.

In the cases pre-dating Bhasin, British Columbia courts recognized three types of conditions precedent: (1) those that are objective; (2) those that are partly subjective/partly objective; and (3) those that are entirely subjective. While the former two types resulted in the formation of a contract, the latter did not. The “contract” was regarded as being at the offer stage and revocable at will.

The British Columbia courts’ approach to conditions precedent has not been without criticism. Slatter J. of the Alberta Court of Appeal stated that finding a condition “wholly subjective” (and, therefore, finding there to have been no contract), would create “great uncertainty.” He astutely noted that in many cases a condition is not “capable of definitive objective analysis.”2

Ontario has adopted a different approach and implied a duty of good faith to the exercise of discretion granted the party who might remove the condition. The latitude to be given to that party in exercising such discretion will be informed by the wording of the condition.3

While the facts in Bhasin were unrelated to conditions precedent, the court recognized two important principles applicable to all contracts. Firstly, that good faith contractual performance is an organizing principle of contract law. Secondly, there is a common law duty of honest performance that applies to all contracts.

The court stated that a contracting party must have appropriate regard for the legitimate interests of his or her contracting partner. Furthermore, in justifying its holding, the court stated that the law must reflect “the dynamic and evolving fabric of our society” and the reasonable expectations of commercial parties.

The British Columbia approach, in effect, gives no weight to those concerns. Any contractual analysis is avoided by simply holding that the existence of a subjective condition precedent precludes the formation of a contract.

Contrary to the trend toward good faith, the law in British Columbia only benefits the dishonest and those who act in bad faith.

As noted, in Ontario, a duty of good faith is imposed on all parties benefitting from conditions precedent. If there were any concern that this creates unmanageable difficulties for courts and litigants, presumably it would have arisen. Such a concern would presumably also arise in the context of other contractual arrangements.

Taking the approach that a subjective condition precedent precludes formation of a contract runs contrary to the holding in Bhasin, the rationale underlying that holding, and the general trend toward good faith. Furthermore, as the Ontario experience shows, it is simply not necessary.

It remains an open question whether the British Columbia approach can survive when conditions precedent are viewed under the analytical approach set out in Bhasin. It would be a welcome change in the law were the British Columbia courts to recognize that Bhasin mandates adopting an approach like the one in Ontario. That is, all conditions – regardless of how subjective they may be – imply a duty of good faith. Those who would be dishonest should no longer be able to shield their conduct from review by the rule that no contract was ever formed.

  1. [2014] 3 S.C.R. 494 [Bhasin]
  2. See for example Castledowns Law Office Management Ltd. v. FastTrack Technologies Inc., 2009 ABCA 148 at paras. 69-70, Slatter J., dissenting 
  3. See Greenberg v. Meffert (1985), 50 O.R. (2d) 755 (C.A.) and Marshall v. Bernard Place Corp. (2002), 58 O.R. (3d) 97 (C.A.)