In the twelve years since the Supreme Court of Canada’s landmark decision in Bhasin v Hrynew, 2014 SCC 71, the “organizing principle of good faith” has become a central, and ever-developing, feature of contract litigation throughout Canada.
Earlier this year, in Dhanesar v. Pandher, 2026 BCCA 63, the BC Court of Appeal:
- provided new guidance regarding how the “organizing principle” plays a role (or more correctly, does not play a role) in how courts will interpret contractual language which confers discretion on one of the contracting parties; and
- clarified that there is not an objective “reasonable person” standard that applies when considering whether discretion is being exercised in good faith; rather, the question is whether the discretion was exercised in a manner consistent with its purpose. It is only where a party exercises discretion for an improper purpose – that is ulterior or extraneous to their intentions – that it is exercised in bad faith.
The Facts
The underlying dispute centers around the purchase of a newly constructed four-bedroom property located in Abbotsford, British Columbia (the Property). The appellant was the purchaser, and the respondents were the sellers.
Following negotiations, the parties entered into a contract under which the respondents agreed to construct and sell the Property to the appellant. This contract contained a Substantial Completion clause, which required the respondents to deliver either an unconditional occupancy certificate or “other evidence satisfactory to the Buyer” demonstrating that construction of the Property had been completed. This clause provided:
SUBSTANTIAL COMPLETION
It is a fundamental term of this contract that the Seller must have finished all work, and delivered to the Buyer by the Completion Date, an unconditional Municipal/City/Regional District Occupancy Certificate or other evidence satisfactory to the Buyer that construction is finished.
After construction was substantially complete, the respondents’ contractor requested a final inspection from the City of Abbotsford. The City did not approve the Property and required a reinspection due to several outstanding deficiencies, including the need for a retaining wall.
The respondents subsequently applied for and obtained a provisional occupancy permit for the Property. Before the respondents disclosed this to the appellants, however, the appellants learned from the City that the final inspection had been rejected and that only provisional occupancy had been granted.
The appellants did not complete the purchase on the Completion date. As a result, the respondents commenced an action seeking damages for breach of contract.
BCSC Decision
The central issue at trial was the interpretation of the phrase “or other evidence satisfactory to the Buyer” in the Substantial Completion Provision.1 While both parties agreed that the respondents had not provided an unconditional occupancy certificate by the completion date, they disagreed on whether the buyer’s satisfaction was to be assessed subjectively or according to an objective standard.2
The trial judge held that this clause required evidence to satisfy a reasonable person applying the buyer’s subjective but reasonable standards, rather than granting the buyer unfettered discretion.3
Applying that interpretation, the trial judge concluded that the respondents had established substantial completion through alternative evidence, including the provisional occupancy permit, photographs, videos, and information from the appellant’s realtor, appraiser, home inspector, and sister. The trial judge further found that the remaining deficiencies were minor, that there were no life-safety concerns, and that the Property was substantially complete despite the absence of a final occupancy certificate.4
The Court found that the appellant acted unreasonably and contrary to the duty of good faith by focusing solely on the lack of an unconditional occupancy certificate while disregarding the other available evidence.5 The appellant failed to properly consider whether the Property was substantially complete, mistakenly believed they had absolute discretion under the contract, and therefore wrongfully refused to complete the purchase.6
The Appeal
The narrow issue on appeal was whether the trial judge made an error of law by applying incorrect principles of contractual interpretation to the Substantial Completion Provision.7
The Court of Appeal concluded that the trial judge made two errors.
The Court began its analysis by reviewing the law governing the general duty of good faith in the exercise of contractual discretion. The Court traced the development of this duty to the seminal decision in Bhasin v. Hrynew, which recognized good faith as an organizing principle of Canadian contract law.
The Court then considered the Supreme Court of Canada’s subsequent decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, which clarified the content of the duty of good faith in the exercise of contractual discretion. In particular, the Court of Appeal highlighted the following principles from Wastech:
- The duty to exercise contractual discretion in good faith is not based on implied terms in the contract but rather is a general doctrine of contract law that operates in all cases irrespective of the parties’ intentions.
- Contractual discretion must be exercised reasonably, which in this context means in a manner connected to the purposes for which discretion was conferred.
- To determine the range of good faith behaviour, it is first necessary to interpret the contract—in accordance with the ordinary principles of contractual interpretation—and to determine those purposes.
- In a contractual context, the choices available to a party exercising discretion are ascertained principally by reference to the contract, which is the “first source of justice between the parties”.
- Where the discretion is exercised in a manner consistent with its purpose, that exercise may be characterized as reasonable according to the parties’ own bargain.
- Where discretion is exercised for an improper purpose—that is ulterior or extraneous to their intentions—then it is exercised in bad faith.
- This general duty of good faith in exercising discretion interferes very little with freedom of contract because: (1) contracting parties will rarely expect discretion to be exercised in a manner unconnected to the purposes for which it was conferred; and (2) the content of the duty is guided by the will of the parties.8
In applying these principles, the Court of Appeal found two interrelated legal errors that justified the appeal.
First, the judge improperly treated the duty of good faith as a principle of contractual interpretation, rather than as a common law doctrine that limits how contractual discretion may be exercised after the contract has been interpreted.9
The Court explained that the proper approach is to first determine the purpose of the discretion conferred by the contract through ordinary principles of contractual interpretation. Only after identifying that purpose does the duty of good faith apply to ensure the discretion is exercised consistently with it. By relying on good faith to define the scope of the appellant’s discretion, the trial judge conflated these two distinct steps.10
Second, the Court held that the trial judge incorrectly equated the duty of good faith with an objective reasonableness standard. Wastech does not require a reasonable person test; instead, it requires that contractual discretion, even if broadly or absolutely conferred, be exercised in a manner connected to the purpose for which it was granted. Accordingly, the trial judge applied the wrong legal principles in interpreting the contract and assessing the appellant’s exercise of discretion.11
The Court set aside the trial judge’s decision and ordered a new trial.
Key Takeaways
1. To determine if contractual discretion was exercised in bad faith, the Court undertakes a two-stage analysis:
- First, the Court will determine the proper interpretation of the contract and the purpose for which the discretion was conferred. This interpretation must be conducted using ordinary principles of contractual interpretation. Considering the “organizing principle of good faith” at this stage of the analysis is an error; and
- Second, after the purpose for which the discretion has been granted is determined, the Court will then consider whether the conduct of the defendant amounted to bad faith as it was “capricious or arbitrary because it was unconnected to the purpose for which the discretion was granted”.
2. In assessing whether contractual discretion has been exercised in good faith, “reasonableness” is not evaluated against the standard of an objective reasonable person. As noted above, the relevant inquiry is whether the exercise of discretion was consistent with the contractual purpose for which the discretion was granted. Applying an objective reasonableness standard is therefore an error of law.
For more information on the issues discussed in this article or for assistance with your contractual disputes, contact Joseph Ensom or Jonathan Stokes.
1. Reported at Pandher v Dhanesar, 2025 BCSC 316. All pinpoint citations refer to the BCCA decision.