Quebec (Attorney General) v Pekuakamiulnuatsh Takuhikan, 2024 SCC 39

The Supreme Court of Canada has issued an important decision regarding the government’s duty to perform contracts in good faith; context is particularly important as it concerns the government’s goal of reconciliation with Indigenous communities.

Written for the majority by Justice Kasirer, Quebec (Attorney General) v Pekuakamiulnuatsh Takuhikan, 2024 SCC 39 concerned a contract between the Quebec Government, the Federal Government, and the Pekuakamiulnuatsh Takuhikan (an Indigenous band council). Broadly, the contract was an agreement for the provincial (Quebec) and federal government to provide funding to this Indigenous band council for an Indigenous police force that could provide services adapted to its Indigenous community. This contract had the option to renew every year, which included negotiation of the funding terms for the government to provide.

The question in the case centered around whether or not the provincial government failed to meet (1) their duty of good faith in private law, and (2) their public law legal obligations pursuant to the principle of the honour of the Crown.

The majority of the Supreme Court of Canada decided that, yes, the provincial government failed on both these fronts.

Because Ashmead Law has expertise in commercial litigation, we looked with particular interest at the SCC’s decision regarding the private law duty of good faith.

The SCC reviewed the law surrounding the private law obligation of good faith, and it explained as follows:

• “[g]ood faith requires that every contracting party consider the other party’s interests in the performance of the contract, but not that one party subordinate its own interests to those of the other in so doing …” (para. 9);
• “ … good faith applies [TRANSLATION] “at every stage in the negotiation, performance and termination of a contract” (para. 55);
• “a breach of [good faith] can occur regardless of a party’s intention or state of mind” or “evi[dence] of bad faith” (para. 101);
• “good faith also entails prohibitions … such as those against unduly increasing the burden on the other contracting party, behaving in an excessive or unreasonable manner or jeopardizing the existence or equilibrium of the contractual relationship” (para. 101); and
• “ … good faith must [TRANSLATION] “preside over the entire contractual realm … over both the performance and the formation of the contract” … where parties have provided through a clause that they will have to enter into negotiations, the obligation to conduct the negotiations in good faith flows directly from the contract … therefore, the performance of contractual provisions that contemplate negotiation must, as with any other contractual obligation, be in compliance with the standards of good faith. A breach of good faith in negotiating a renewal contemplated by a contract may thus be a source of contractual liability …”

The SCC found that the provincial government failed to fulfil their duty to negotiate the contract in good faith with the Indigenous band council. While they did provide funding, it was insufficient. Instead of negotiating what level of funding would be sufficient (and sufficient did not mean providing all funding), the provincial government presented the Indigenous band council with a “false choice”—a “knife to the throat”: either accept the level of funding that the Quebec government was providing, or scrap the contract all together, leaving the indigenous community who needed it without an appropriate police force (paras. 131 onwards).

Ashmead Law notes that Justice Cote, writing the dissent, disagreed that Quebec breached their duty to negotiate the contract in good faith. She found that, as agreed upon in the contract: “Quebec undertook to contribute financially to the establishment and maintenance of the [police force] through maximum financial contributions expressly agreed to by the parties. Quebec did not undertake to pay all of the costs incurred, or to fund services equal to those provided in communities in the region.” (para. 246).

Justice Cote’s concern was that, if Quebec was found to be negotiating in bad faith, this signified “rewriting express terms … contrary to the agreement” (para. 247, paraphrased), which would be out of sync with contract law.

Cases like this one raise questions such as: “what is good faith?”, “what are the essential (or express) terms of the contract?”, and “how should the court apply such legal principles when it concerns different legal entities, including the government?”

This case is extensive in its review, and yet, the law remains amorphous in this area. For example, while the principles of good faith are reviewed, few formal factors or tests seem to arise out of these principles. Indeed, the question seems to remain open whether good faith applies in the negotiation or formation of a contract. It follows that, in Canada, good faith in contract law still appears to run on “the vibe of the thing”.

Despite this, Ashmead Law views this case as an important step to developing contract law in Canada and hopes to see and be part of further developments soon.