Both sides in employment relationship should take heed to top court’s ruling on contracts
On Nov. 14, 2014, the Supreme Court of Canada released a landmark decision in Bhasin v. Hrynew, which recognized, for the first time, a general duty of honesty when performing a contract. This decision has significant ramifications for employers, employees, and the public at large, as this new duty applies to all contractual relationships.
Harish Bhasin and Larry Hrynew both operated businesses which sold education savings plans for Canadian American Financial Corp. (Can-Am).
Bhasin’s relationship with Can-Am was governed by a three-year fixed term contract that would automatically renew unless one of the parties gave six months’ notice to the contrary.
Hrynew wanted to capture Bhasin’s market and on multiple occasions proposed a merger of their two businesses. Bhasin rejected Hrynew’s proposals. Unable to secure a merger with Bhasin, Hrynew instead began to put pressure on Can-Am to not renew its contract with Bhasin.
Can-Am began to deal with Bhasin dishonestly and repeatedly misled him on a number of issues, including its future plans for his business. Ultimately, Can-Am provided Bhasin with written notice of its decision to terminate the contract.
After losing his contract with Can-Am, Bhasin’s business suffered greatly. Bhasin sued both Hrynew and Can-Am, alleging, among other things, that Can-Am breached an implied duty of good faith in their contract. While Bhasin was successful at trial, the decision was overturned by the Alberta Court of Appeal, which found no such duty existed. Bhasin appealed to the Supreme Court of Canada.
The Supreme Court’s analysis
The court reviewed the current state of Canadian law and noted the piecemeal approach that existed in relation to the duty of good faith performance of contracts across different areas of law. In order to fix this inconsistency, Justice Cromwell, writing for a unanimous Supreme Court, wrote:
“In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.”
In defining the contours of the new general principle of good faith contractual performance, the court explained that in carrying out her own performance of a contract, a contracting party should have appropriate regard to the legitimate contractual interests of its contracting partner. The duty of good faith contractual performance is not a fiduciary duty and does not require that a party put another party’s interests first. It simply requires that a party not undermine another party’s interests in bad faith.
Duty of good faith in employment relationship
The concept of an implied contractual duty of good faith is not new in the employment context. In 2008, the Supreme Court recognized an implied term of good faith governing the manner of dismissal and that, in particular, an employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.” However, this concept did not previously extend beyond the manner of dismissal.
As an extension to the general principle of good faith contractual performance, the court also recognized a duty of honesty in contractual performance. As the court explained, “This simply means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s own contractual performance."
The purpose of this duty is to ensure that each party can rely on a minimum standard of honesty from their contracting partner and to allow each party a fair opportunity to protect their interests if the contract does not work out.
In this case, the court held that Can-Am’s conduct, in repeatedly misleading Bhasin, violated the duty of honesty and, as a result, the company was ordered to pay damages.
Takeaways for employers
Expect to see a lot of this decision in pleadings. While the common law already recognized a duty of good faith in relation to the manner of dismissal, this decision appears to open up the duty of good faith to all aspects of the employment relationship, including discipline, salary/bonus payments, promotions, and investigations. This may lead to an increase in damage claims alleging that an employer has acted dishonestly in some aspect of the employment relationship, especially where there is a valid termination clause that would otherwise limit an employee’s entitlement to damages.
Implications beyond the employment relationship. This decision applies to all contractual relationships and provides protection to non-employees, such as independent contractors.
Employees beware. The principle of good faith contractual performance and duty of honesty applies to all parties to a contract, including employees. This decision potentially opens the door for more claims by employers against former employees.
Honesty is the best policy. It has yet to be determined how this decision will be applied by lower courts. In the meantime, all parties to a contract should act honestly and in good faith at all times to best protect themselves from litigation.
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