I. Introduction

The recent decision of the Canadian Supreme Court in Bhasin v Hrynew^[1] has been heralded, as far as across the ocean,^[2] as breaking new grounds in importing a general duty of good faith from Quebec civil law into the English Canadian law of contracts. As such, the case would testify to Canadian juridical cross-pollination operating both ways. Whereas many have worried about the preservation of Quebec’s civilian distinctness amidst Canada’s dominant common law,^[3] we would now be witnessing a welcome swing back of the pendulum.^[4]

At the risk of disappointing Canadian legal harmonization enthusiasts, I here propose to argue, first, that importing a general duty of good faith into English Canadian contract law would be ill-advised. Not only is such a doctrine unnecessary, it would clash with the internal logic of the common law of contracts, which differs significantly from that animating the civil law of contractual obligations. And as with any ill-fitting legal doctrine, importing this one into English Canadian contract law would be sure to generate conceptual disorder, confusion, uncertainty—all bad things when it comes to law… Second, I will briefly explain why I consider that, as implied by the conditional tense used in the last sentences, the Bhasin decision in fact does not, or at any rate does not yet, effect such an importation.

II. A Good Faith Doctrine Is Ill-Suited to English Canadian Contract Law

My first argument centers on a single case, one that is both old and not typically branded as a good faith case, though I certainly hope to show that such branding would be warranted. I am here thinking of the famous English case of Smith v Hughes^[5], the facts of which are all too well-known. It is the case invoving a sale of oats, which the buyer (a horse trainer) believed to be old, whereas they were in fact new. Crucially for our purposes, the Court there somehow took it to be an established fact that the oat-growing seller knew full well, not just that the oats were new, but also that the buyer believed them to be old, yet neglected to say or do anything to alert the buyer to his mistake. The seller, that is, neglected to alert the buyer to the fact that the oats he was about to buy in fact were of a kind that he had no use for, as horses only eat old oats. So there is a sense in which the seller in that case was all too happy to take advantage of the buyer’s mistake, and the question for the court is whether such advantage-taking should be cause for freeing the buyer from any obligation to take delivery of the oats.

The Court never answers that question directly as its primary concern is to determine the adequacy of the questions put to the jury at trial. But what the Court says about these questions suggests that it considers the seller’s behaviour to be legitimate, at least to a point. That is, the Court considers that the seller might not have had any duty to alert the buyer to his mistake, provided that that mistake was one going to “factual assumptions” as opposed to “contractual terms”^[6]. The Court explains the difference as follows: the buyer’s mistake would be only one of fact, or of “assumptions”, if he believed that the oats that he was buying happened to be old oats, quite apart from any formal warranties that the seller could have given him to that effect. In contrast, if the buyer thought that the contract of sale included (explicitly or implicitly) a warranty from the seller that the oats would be old, the buyer’s mistake would go to the terms of his contract with the seller—it would then be a mistake “as to contractual terms”, not just a mistakes as to facts or assumptions. The difference is crucial, the Court suggests, because the seller not alerting the buyer to his mistake might be acceptable behaviour where the mistake is one of fact, but would be found unacceptable, and a valid cause to void the contract, where the mistake attaches to contractual terms.

The case accordingly begs the question: How can it be that English law would allow the seller to take advantage of the buyer’s mistake of facts? Importantly, moreover, by “English law” I here mean to refer to both Law and Equity. For the Court makes no suggestion that the case should be treated differently under Law and Equity.^[7] The question can accordingly be rephrased as: How can it be that it might perfectly legal, as well as perfectly equitable, for the seller to stay silent in the knowledge that the buyer is operating under a mistake of fact going to a quality of the oats that turns out to be fundamental to him?

The answer lies, I would suggest, in the objective theory of contracts, which Smith v Hughes also stands for. Under the objective theory of contracts, contracts are formed and interpreted based on what objectively passes between the parties (their words and actions), on what the parties laid out objectively, in the public space between them, not on what might be going on in each of their minds subjectively.^[8] To the extent that the quality of the oats was never discussed by the parties (the issue raised through the first question to the jury), any of their private thoughts or knowledge going to that matter would be considered as falling outside the ambit of their bargain. Of course, matters not openly discussed by the parties can sometimes form an implicit part of their bargain –not all contract terms are explicit—depending on the larger context, industry standards, etc… But here, the sale was one by sample, which suggests that the parties were implicitly agreed that their rights and obligations would be determined by reference to… the sample. That is, the seller was undertaking to deliver “oats matching the sample” and the buyer was correspondingly undertaking to pay for, and accept delivery of, “oats matching the sample”. Quite simply, the terms of the bargain were to buy and sell “oats matching the sample”.

Note that the Court did contemplate the possibility of reading the bargain slightly differently, as buying and selling “old oats matching the sample”, had the word “old” indeed been mentioned by the parties. Had the word “old” been explicitly uttered (again, as per the first question to the jury), the seller delivering oats that either (1) were not old, or else (2) did not match the sample, would have been in breach. But the jury had determined that the word “old” had not been used and the terms of the bargain accordingly were found to be buying and selling "oats matching the sample, regardless of what the parties may or may not know privately about the quality of those oats". From a strict legal standpoint, then, it seemed quite clear that the seller was entitled to abstain from disabusing the buyer of his mistake.

More interestingly in my view, however, is the fact that the same conclusion arguably obtains from an equitable, even moral, standpoint. From the moment that the rules as to the parties’ contractual interaction are clear, from the moment, that is, that the parties are clearly agreed that nothing other than the sample is relevant for determining their rights and obligations, there is nothing wrong—nothing morally wrong—in the seller telling himself : “I know that this buyer mistakenly thinksthat the oats he is about to buy are old, but I also know that, by the rules of contract formation agreed between us, I am entitled to disregard these private thoughts of his”.

Admittedly, a highly virtuous seller might have decided to inform the buyer of his mistake anyway, despite the absence of any (legal, equitable or moral) obligation to do so. But virtue and moral acceptability as we know are not the same thing, and Equity has always insisted on the latter rather than the former. Equity has consistently required of litigants that they not act immorally, perhaps even that they act reasonably, not that they act virtuously.

All in all, then, it seems that the Court determined that the seller had no legal or moral obligation to disabuse the buyer of his mistake. Had it determined otherwise, it would not have just sent the case back for a new trial, as it did. Instead, it would have thereafter launched into a different ruling, in Equity

Now let us compare the above with the equivalent situation at French law. The French counterpart to Smith v Hughes of course is the classic case on the duty to inform (“l’obligation de renseignement”), a subset, and possibly the most representative aspect of the general obligation of good faith in French law. That classic case involved an antique buyer walking into a furniture store after having spotted in the window what looked to him like an authentic Louis XV armchair but was in fact a more recent copy. In the same way that the parties in Smith v Hughes could clearly identify the object of their sale as “the oats in the sample”, the French furniture buyer and seller could clearly point to the object of their contract as “the armchair in the window”. And also like in Smith v Hughes, the buyer was mistaken about a quality of that object that was fundamental to him, namely, it being an authentic Louis XV armchair. But unlike in Smith v Hughes, the Court determined that the furniture seller, knowing about the buyer’s mistake, had an obligation de renseignement—a duty to inform the buyer that the chair was in fact a fake.

So what are we to make of that from a comparative law perspective? Are we to conclude that French contract law is somehow more morally exacting than English contract law?

Not so, I would suggest. The moral bar is no higher at French than at English law. Only, the same moral standard yields different judicial outcomes because it is being applied in very different legal contexts. Unlike in the English context, where as we saw contracts are conceptualized objectively, in the French context, contracts are conceptualized subjectively, as involving the coming together of two private, actual, psychological intentions (two “volontés psychologiques”).^[9] How this came about historically is a long story that reaches beyond the scope of this paper. Suffice it to say that it goes back to the medieval merger of Roman Law with Canon Law, which yielded the Continental Ius Commune that came to feed into the various European civil law systems.^[10] In the same way that, under Canon law, sons and daughters of God communicate with him directly through their individual conscience, contracts at civil law came to be thought of as involving the two parties’ inner thoughts, externalized only insofar as such externalization is, between humans, necessary for these inner thoughts to come together.

This arguably explains why the French furniture seller might have had a moral obligation to alert the buyer of his mistake whereas the English oats seller had none, even under a same moral standard.^[11] Quite simply, in a setting where contracts are understood subjectively, as the meeting of the two parties’ internal intentions, the seller has no moral license to disregard the buyer’s mistake. Unlike his English counterpart, he simply has no objective rules of contracting to fall back on that would entitle him to disregard any knowledge he might have about the buyer’s inner frame of mind bearing on the contract. Indeed, the parties’ inner thoughts here are not peripheral to the contract; they are the contract. Thus, the seller lacks any basis that would justify him remaining passive in the face of the buyer’s subjective mistake. At French law, in other words, the rules of the contracting game are such that the seller knowing the buyer to be mistaken is on notice that there is something deeply wrong with the contract itself, for he knows full well that his and the buyers’ minds simply are not ad idem. His failing to disabuse the buyer of his mistake accordingly would result, quite simply, in his knowing that there is no contract to stand on to begin with. At least, that is so under a subjective theory of contracts.

So one and the same moral standard—say, some general ‘absence of disingenuousness’^[12]—but respectively applied in very different contracting contexts. In the context of objective contract formation and interpretation, it can be said that the seller is not being disingenuous in assuming that he has no duty to inform, whereas his failure to inform cannot but be disingenuous in the context of subjective contract formation. As it is a very short step from inner thoughts/psychological intention to good faith (conceptualized as disingenuousness), an obligation of good faith happens to be just part and parcel of contracts construed subjectively, as they are at French law, whereas the same obligation necessarily remains extraneous to contracts construed objectively, as they are at English law. In that sense it can be said, I would submit, that a general good faith doctrine, in effect being wired into French contractual logic, makes perfect sense at … French law, but is out of place at English law.

Now I just argued that there (rightly) is no equitable duty to inform in cases of unilateral mistakes of fact known to the non-mistaken party at English law because the non-mistaken party is not being disingenuous if she ignores the mistake in such cases. But that is not to say that where there is disingenuousness (or some sort of foul-play), English law should remain blind to it. And as a matter of fact, it does not. Going back to Smith v Hughes, it is worth recalling that the Court there suggested that the non-mistaken party’s knowledge of the other party’s mistake, while irrelevant where the mistake is one of fact, might in contrast be relevant where the mistake is instead one going to contractual terms. Recall also that the Court is there addressing only the second of two questions put to the jury (the first being whether the word “old” had been used in the discussions leading to the contract). Now, what is the relevance of that?

Well, if the word “old” had in fact been used, an argument could be made, as we saw, that the contract objectively construed imposed on the seller a duty to deliver “old oats matching the sample”, with the result, again, that the seller delivering oats that either were not old or else did not match the sample would be in breach. If so, we would end up in exactly the same place as we do in the French case, i.e. with the buyer being under no obligation to accept delivery of the oats or armchair. What is particularly interesting, however—and crucial to my argument—is that we reached this same result through very different means: unlike the French Court, its English counterpart need not delve into the inner thoughts of the parties in order to get to that result. That is, the English Court is perfectly able to get to a determination that the buyer is free of any obligation to take delivery through good old contractual interpretation, through objective reconstruction of the (explicit and implicit) terms of the contract. For that is precisely what the objective theory of contract stands for.

But there is more. Short of contractual interpretation (should it not be possible to read explicitly or implicitly the word “old” into the contract), there is at least one other means^[13] that the Court has at its disposal for refusing to impose on the buyer an obligation to take delivery, which other means takes us back to the second question to the jury.

Recall that the issue with that second question was the extent to which it sufficiently emphasized the difference between mistakes in assumptions and mistakes as to contractual terms (as the seller’s awareness of the first would be relevant but his awareness of the second would not be). One of the judges in fact explicitly suggests that the seller knowing about the buyer’s being mistaken as to contractual terms might be estopped (in Equity) from pursuing the judicial enforcement of the contract.^[14] Now, Equity and estoppel certainly delve in private, inner thoughts—“disingenuousness”—ill-intentions on a subjective level. The problem is, we just concluded that the seller was not disingenuous when disregarding the buyer’s mistake of fact. So how can it be that the same seller with respect to the same contract might be found not disingenuous when ignoring mistakes of fact but disingenuous when ignoring mistakes as to contractual terms? In other words, how is it that it might be proper for Equity to step in only with respect to the latter kind of mistakes?

I would suggest that such apparently paradoxical conclusions in fact stand to reason. As we saw, one is not being disingenuous when disregarding mistakes about which one is told by the law that they fall outside the ambit of the bargain. But there is no way that one could claim to have believed that any mistake as to contractual terms likewise fell outside the ambit of the bargain, seeing that the ambit of the bargain is defined precisely through … the terms of the contract. As the Court of Chancery of Delaware stated in US West, Inc. v Time Warner Inc.:

[I]t is logically impossible for a contracting party, operating in good faith, both to have a subjective interpretation of ambiguous contractual language different from that of her counterparty and to know of her counterparty’s differing interpretation.^[15]

Thus, in the same way that the French furniture seller had an obligation to inform because he ought to have known, from the moment that he realized that he and the buyer were not ad idem with respect to the object of the contract, that there was something deeply wrong with the contract itself, the oat seller in Smith v Hughes ought to have known that there was something deeply wrong with his contract from the moment that he realized that the buyer believed the contract to contain a warranty as to the oats being old. In both cases, the seller is acting disingenuously if he does not bother to do anything to correct the buyer’s mistake.^[16]

In sum, short of objectively reconstructing the contract through implied terms matching the mistaken party’s interpretation of it, English courts have the means to sanction disingenuousness through estoppel. And that is why I want to claim that a general duty of good faith simply is not needed at English contract law: implied terms at law and estoppel at Equity there do the job just fine. But my claim is stronger. As indicated in the Introduction, I want to claim that a general duty of good faith would be, not just superfluous, but in fact deleterious to the English law of contract.

For the purpose of that argument, we need to take a step back and consider the overall picture of what has been said so far. As arguably is the case with the rest of English and French contract law, we notice an important difference in the overall structure of arguments, having to do with the structuring, in particular, of the law of principle and the law of exception.

The general tendency at French law has been to aim, to the extent possible, to account for, and eventually subsume, all emerging exceptions within the body of the law of principle.^[17] An ideal body of principles would there be one, that is, whose various applications are specified as fully as possible from the very outset.^[18] Indeed, the above-mentioned merger of Canon and Roman law entailed that there be no formal distinction between the legal and the equitable for the simple reason that what is legal should also be equitable, and conversely.^[19] A legal rule that would call for an exception on grounds of inequity accordingly would be, quite simply, just an incomplete, imperfect, inadequate legal rule, and hence to be made more completely, perfectly, adequately equitable from the outset.

In contrast, the general tendency at English law is, for historical^[20]—and, it has convincingly been argued, also for conceptual reasons^[21]—to formally distinguish between the legal and the equitable, with a view to producing judicial outcomes that end up being both fair (equitable) and legal through a constant dialectic movement between Law, the law of principle, and Equity, the law of exception—though much ink admittedly has been spilled on the question of which is the principle and which is the exception, in fact.^[22] That constant dialectic movement between Law and Equity has been key to the English legal system yielding fair outcomes while maintaining the integrity—the internal coherence—of the two bodies of law. Indeed, it arguably is thanks to this dialectic movement that English law has been able to preserve the integrity of such pillar legal doctrines as consideration (no less than the very crystallization of the objective theory of contracts), and offspring rules such as govern third-party beneficiary situations^[23] and unilateral contract modifications^[24], as well as to offer a coherent treatment of public policy violations^[25]. If so, uprooting good faith from Equity and subsuming it into Law would pose a serious threat to the smooth interaction between, and hence also to preserving the respective integrity of, these two bodies of law. It would simply risk destabilizing the precarious equilibrium attained by English law through centuries of careful judicial balancing, fine-tuning, and constant re-calibrating.

III. Did Bhasin Import a Doctrine of Good Faith into Canadian Contract Law?

The final question that I propose to briefly address here concerns the extent to which, if at all, Bhasin did in fact effect the importation here advised against. Did Bhasin indeed establish a general duty of good faith running through English Canadian contract law? I would argue that it does not, at least not in and of itself, despite its having been described as such.^[26]

The Court admittedly uses language pointing in that direction, as it repeatedly mentions an “organizing principle of good faith” that would be running through numerous existing contract doctrines.^[27] But the Court’s conclusion in the plaintiff’s favour could have been reached precisely through the application of at least one of these existing doctrines, namely, that of implied terms, discussed above:^[28] the contract at issue being a long-term retail dealership contract, thus one that is ‘relational’ to some extent, an implied duty of honest contractual performance could quite easily have been read as forming an implicit part of it (as the Court itself recognizes).

Had the Court unequivocally and exclusively resorted to the doctrine of implied terms, its ruling would have fallen squarely within “good old contractual interpretation” at Law—and the careful balance between Law and Equity set by English Canadian courts to that point would have remained unscathed. In numerous places, indeed, the Court expresses its concern to insure that “the duty of honest performance interfere […] very little with freedom of contract,”^[29] and to avoid causing the parties to “forego advantages flowing from the contract”^[30]. Moreover, it takes care to emphasize that its proposed “organizing principle” should not be taken to displace the specific existing doctrines reviewed.^[31] Finally, it refers approvingly to the American case law on good faith, which is known to interpret that notion very narrowly, as entailing quasi-fraudulent conduct.^[32]

Yet the Court nonetheless insists that the duty of honest contractual performance, as it sees it …

… should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on freedom of contract, such as the doctrine of unconscionability… Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it.^[33]

It accordingly seems clear that the Court is, in the end, quite keen to steer clear of “good old contractual interpretation”, and have its ruling cast instead as one falling under Equity.

The exact holding of the case hence remains quite difficult to pin point with any kind of certainty (should any case holding ever be amenable to such “pin pointing”…). But it seems at least arguable that the Court’s proposed reconceptualization of existing contract doctrines as structured around a general “organizing principle of good faith” is mere obiter dictum. The holding of the case would then lie instead with its more narrow remarks concerning a duty of honest contractual performance, the exact source and nature of which would remain to be ascertained through future judicial developments.

IV. Conclusion

In this Volume, Paul Daly argues that “Bhasin […] be seen for what it is: a masterpiece of … incrementalist common-law reasoning which seeks to avoid radical change in the law.”^[34] I could not agree more. Despite the Court’s at times ambivalent words to the contrary, that case arguably effected no more than to enlist good old contractual interpretation, in particular, the doctrine of implied terms, in the service of safeguarding party expectations regarding honesty in contractual performance. Anything more “radical” would have been both unnecessary and undesirable, I here argued. As the combination of implied terms at Law and estoppel at Equity provides English Canadian courts with all that they may need to sanction contractual conduct qualifying as inappropriate by English Canadian legal standards, a more general good faith doctrine is unnecessary. Moreover, as adding tools to an already complete judicial arsenal is bound to generate incoherence and confusion, such more radical development would also prove undesirable. Of course, whether English Canadian courts have in fact been making full use of the means available to them remains an open question. But simply adding to their existing arsenal is no answer to that (different) problem.