Jim’s 2024 Hot Topic – The duty of good faith in domestic arbitration – #885

Rather than picking a specific case for a Holiday Hash-over I’ve opted for a broader theme: since arbitration is contractual, to what extent do/should the principles set out in the SCC’s 2014 decision in Bhasin v. Hrynew  2014 SCC 71 (“Bhasin”) and its descendants apply to a Canadian domestic arbitration and what practical difference might it make?

International Arbitration:
I’ve focused on domestic arbitration because principles of “good faith” already have a place in international arbitration. [See e.g., B.C. International Commercial Arbitration Act, s. 6(1)(a), Ontario International Commercial Arbitration Act, Article 2A(1), and the Manitoba International Commercial Arbitration Act, s. 12(1), and generally the proposition that civil law jurisdictions, and much of the United States, do recognize an obligation of good faith in contractual dealings.]

Domestic Legislation:
The domestic arbitration statutes (other than Quebec and, I would argue, BC) are silent as to “good faith” except regarding an addressee of a notice or document having to establish that “acting in good faith” they didn’t receive it [e.g., Manitoba Arbitration Act, s.52(5), Ontario Arbitration Act, s. 53(5)]. Although s. 22 of the B.C. Arbitration Act doesn’t use the term “good faith” it does expressly address what I believe to be the essential elements of a good faith obligation with respect to an arbitration agreement. (I’ll return to this in a minute):

“General duties of parties

22 (1) Parties to arbitral proceedings must do all things necessary for the just, speedy and economical determination of the proceedings, in accordance with the agreement of the parties and the orders and directions of the arbitral tribunal.

(2) A party must not wilfully do or cause to be done any act to delay or prevent an arbitral award being made.”

The Common Law
Ever since Bhasin, Canadian contract law has been subject to “a general organizing principle of good faith” expanded from a duty of good faith performance of some kind that was previously recognized to exist in certain broad categories of cases. As creatures of contract, it must follow that the principles set out in Bhasin apply to arbitration agreements in Canadian domestic arbitrations.

I’m not aware of any cases that have directly addressed the question, though it seems inevitable they will. However, I am aware of two sources that appear to treat the obligation of good faith as a given in Canada in this context.

First in Bank-Strox Renovation Inc. v. Lugano View Limited, 2024 ONSC 1901, while discussing a respondent’s obligation in an arbitration to “keep the case moving”, the Ontario Superior Court said when dealing with an arbitration: “…The rules of contract interpretation apply and require that both parties fulfil their contract obligations to each other in good faith and take the steps necessary to arbitrate the case.” [I discussed Bank Strox in a previous Arbitration Matters comment, Parties share responsibility to keep arbitration moving,# 835]

Second, in Arbitration Law of Canada: Practice & Procedure, 4th, New York, Juris Publishing, 2022, Brian Casey says (at 6.14), “As arbitration is a creature of contract, it is to be carried out in good faith.”

Neither offers any authority to support these statements and, certainly pre-Bhasin, I suspect many Canadian lawyers would reject the existence of so broadly stated an obligation of good faith in Canadian contract law. That said, since Bhasin, good faith must play a role in domestic arbitrations when the parties’ obligations under the arbitration agreement are considered.

Bhasin – A Refresher
Let’s start with a (very) brief refresher on the key takeaways from Bhasin and the Supreme Court’s follow-on decisions in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”) and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2020 SCC 7 (“Wastech”).

Bhasin recognized:

 “an organizing principle of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance. That organizing principle is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.

The Court went on to explain this organizing principle as the proper foundation for three existing lines of authority where “good faith performance of some kind has been found to exist: “(1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties.” But, noting the categories aren’t closed, the Court added a new rule requiring contracting parties to comply with a “duty of honest performance.”

Callow clarified the relationship between the duty of honest performance and the principle of good faith. The Court held the duty of honest performance requires a party to act honestly and not mislead or deceive the other party in relation to contractual matters. While that does not rise to creating a duty of loyalty or of disclosure, a party cannot “lie or otherwise knowingly mislead” the other party “about matters directly linked to the performance of the contract.”

Wastech addressed the exercise of a contractual discretion and held the duty of good faith requires “reasonable” exercise of contractual discretion, i.e., “in a manner consistent with the purposes for which [the discretion] was granted in the contract.” Parties are not required to subordinate their interest to those of other parties provided they meet this standard.

Good Faith and an Arbitration Agreement:
Now let’s consider the contract in question, namely, the arbitration agreement. Dispute resolution clauses come in all shapes and sizes so the precise language of the arbitration agreement will be critical. Nonetheless I would argue that some broad generalizations can be made:

  1. By agreeing to arbitrate a dispute (absent evidence to the contrary) the parties should be presumed to be seeking the perceived advantages of arbitration, generally seen as, confidentiality, customization of the process, choosing their decision maker, and greater finality.
  2. If the parties chose an institutional arbitration or chose to adopt the rules of a given institution, they have already agreed on most of the procedural aspects where – as I’ll discuss below – the duty of good faith might kick in.
  3. For ad hoc arbitration, which is still the case for most Canadian domestic arbitrations, no procedural guideposts have been expressly adopted.
  4. Especially with ad hoc arbitrations, the provincial statutes form a backdrop that enables a party to, among other things, seek a stay of a court action, apply for consolidation (joinder) or apply for the appointment of an arbitrator. These provide some relief to the party seeking to move an arbitration forward against potential delay by the other side.
  5. Any talk of divining the parties’ intent by the words they used in an arbitration clause is in some respects a sham. The practical reality is these clauses typically find their way into agreements on the advice of counsel or as part of a standard form contract and are rarely the subject of much, if any, negotiation.

Applying these broad principles, arbitration agreements appear to engage at least two of the traditional categories identified in Bhasin as examples of the organizing principle of good faith:

  1. In the absence of a pre-selected set of procedural rules or an arbitral institution (and even then) the parties must cooperate to achieve the objects of the contract.
  2. Each party has a degree of discretion under the contract in selecting an arbitrator and, in a very real sense, how they choose to participate in the process.

The third category (seeking to evade contractual duties) and the new category created in Bhasin (honest performance) kick in where one party has decided to “play silly buggers” by which I mean things like, filing a court action where a stay should be inevitable or resisting the stay motion in the same circumstances, refusing to appoint an arbitrator, or raising frivolous procedural roadblocks. None of these is consistent with the purpose of the arbitration agreement.

In these circumstances, I say Bhasin imposes a requirement on the parties to act in good faith in enabling the arbitration to proceed as intended because that is the purpose of the arbitration agreement. Though that should not extend to requiring a party to forego legitimate arguments or positions regarding how the arbitration should proceed.

The Practical Implications?
While I do believe the good faith obligations contemplated in Bhasin apply to arbitration agreements in Canada, I am not convinced their application will make much practical difference to the way arbitration is already being conducted.

The logical scope of the duties connected to an arbitration agreement all relate to how a party behaves in respect of the arbitration process. In my view, s. 22 of the B.C. Arbitration Act covers the waterfront of the sorts of behaviour that would be captured. As far as I’m aware, s. 22 has not been judicially considered in this context so the courts haven’t yet offered any guidance.

Common sense says the application of good faith principles will have a practical impact only if one party is failing to live up to its obligations. (If both parties are acting in good faith there’s nothing to fight about.)  But, where someone is not acting in good faith, the Bhasin principles will affect two situations. First, on the period leading up to the commencement of the arbitration (up to and including the appointment of the tribunal) and second, regarding the conduct of the arbitration itself. (Whether the breach might also create a separate actionable wrong is another question for another day.)

Where does this leave the aggrieved party? Not much further ahead I’m afraid. In the former situation their only recourse is to the courts. Certainly, one party’s’ bad faith should colour the court’s views and (likely) lead to enhanced costs awards. But the parties still have to get in front of a judge and in doing so, the advantages of arbitration are already being whittled away. In the latter situation, a tribunal is in place and so should be able to deal with a party’s bad behaviour.

At the end of the day, I don’t believe applying the Bhasin principles to domestic arbitrations will make much practical difference to the parties beyond the moral suasion that already exists.