Top Four Things To Know About `good Faith' And Commercial Contracts

• Published date: 12 October 2022
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Torkin Manes LLP
• Author: Mr Marco P. Falco

The Supreme Court of Canada's precedent-setting decision, Bhasin v. Hrynew, 2014 SCC 71, established that all commercial contracts in Canada are bound by the principle of good faith. This includes an obligation by both parties to perform the contract honestly, to exercise any contractual discretion reasonably, and to co'operate to fulfil the objects of the agreement.

When violated, the duty gives rise to an ordinary breach of contract claim; the aggrieved party can start an action for damages or specific performance, as with any other breach of contract.

Since Bhasin, however, the concept of good faith has developed. The nature of what constitutes a "dishonest" performance of the contract has broadened, as has the recognition that any discretion under the contract must be exercised in accordance with the parties' intentions.

This evolution in good faith jurisprudence has left Canadian courts to balance a delicate tension between allowing commercial parties to contract freely against the need to ensure that parties act with a basic degree of good faith.

A recent decision of the Ontario Superior Court, Bhatnagar v. Cresco Labs Inc., 2022 ONSC 1745, addresses this tension head-on in the context of a share purchase agreement. Bhatnagar provides four key lessons on the nature and scope of breach of contract claims based on the duty of good faith.

A 'smokin' agreement

In Bhatnagar, the vendors of a vape products company brought an application for damages arising from alleged breaches of a share purchase agreement (the SPA).

The vendors had sold their interest in the company to the original buyer pursuant to the SPA. Prior to closing, the respondent cannabis operator (the "respondent buyer") acquired the original buyer's shares in the company pursuant to an arrangement agreement dated April 1, 2019, (the

arrangement agreement). The respondent buyer therefore became liable to the applicant vendors for any amounts owing to them under the SPA by the original buyer.

The vendors started the application, alleging they were still owed various "revenue milestone" and "license milestone" payments under the SPA. The vendors also alleged that the purchaser breached its duty of good faith, i.e. that the vendors were hindered in trying to implement various business measures which would have resulted in the vendors receiving their "revenue milestone" payments in 2019. The allegations against the buyers were that they had:

• Misrepresented the degree of autonomy and discretion...