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Supreme Court of Canada (SCC) to Address the Duty of Good Faith in Employment Contracts

What role does good faith play in contractual performance?

Duty of Good Faith in Contract Law

The landmark SCC decision in Bhasin v Hrynew identified two steps to make the common law more coherent and just:

The acknowledgement of an organizing principle of good faith in contractual performance 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.”  
Recognition of a common law duty of honest performance

Good faith is not a stand-alone duty but the principles of good faith can inform the evolution of the common law. The broad principle of good faith entails honest, candid, forthright and reasonable conduct in the performance of a contract. The duty of honest performance is a narrow duty not to lie or knowingly mislead the other party.

The Bhasin decision has left some uncertainty as to the scope of the duty and the way in which the common law will evolve now that an organizing principle of good faith in contractual performance has been recognized by the Supreme Court of Canada.

Duty of Good Faith and the Employment Contract

Employment law already recognizes a duty of good faith in the manner of dismissal. Employers are required to conduct themselves in a candid, reasonable, honest and forthright manner in the manner of dismissal. A duty of good faith has not been recognized in the performance of the contract or to override express contractual provisions of the employment contract.

A 2018 Nova Scotia Court of Appeal case addressed the issue of whether bad faith conduct can override the express provisions of a Long Term Incentive Plan.

Matthews v Ocean Nutrition Canada Limited

Matthews involved the constructive dismissal of an employee of 14 years who was integral to the success of the company. The trial court found that he was constructively dismissed through the behavior of his employer. The trial court found that a change in reporting structure and limiting responsibilities and hours constituted a constructive dismissal. The evidence indicates that the Chief Operating Officer, to whom Mr. Matthews reported, was disrespectful, dishonest, secretive and unreasonable. Mr. Matthews ultimately resigned from Ocean Nutrition.

Mr. Matthews had a Long Term Incentive Program (LTIP) agreement aimed to incentivize and retain management by sharing in the profits upon the sale of the company. However, under the contract, his entitlement to such a payment required Mr. Matthews to be an active employee at the time of realization to qualify.

The realization event for payments under the LTIP occurred approximately 14 months after Mr. Matthews resigned resulting in a loss of approximately $1.85M which he would have received under the LTIP.

Trial Court Decision

The trial judge found that Mr. Matthews was entitled to 15 months of common law reasonable notice. The trial judge also found that the LTIP payment was an integral part of his compensation and awarded the payment as it would have been payable within the 15 month notice period.

Appeal Court Decision

The Nova Scotia Court of Appeal upheld the 15 month notice period and the finding of a constructive dismissal. However, the majority found that the trial judge erred in awarding the LTIP payment as per the clear terms of the LTIP agreement.

Justice Scanlan provided a strong dissent at the Court of Appeal finding that “this case cries out for resolution.” In particular, Justice Scanlan relied upon the duty of good faith and honesty in the performance of the employment contract.

Duty of Good Faith and Express Contract Provisions

The disagreement between the trial court and the Court of Appeal as well as the majority and dissent at the Court of Appeal highlight the uncertainty as to the scope and application of the duty of good faith in contractual performance.  

This case will provide the Supreme Court of Canada the opportunity to clarify the application and the scope of the duty of honest performance and the organizing principle of good faith.

This decision could result in a broadening of the duty of good faith as it is applied in the context of employment law. We will have to wait until the Supreme Court of Canada hears this case in October 2019 for some clarity on this issue.

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Brianne Kostal, law student