The Supreme Court of Canada (SCC) recently handed down a ground
breaking judgment in Bhasin v Hrynew. It held that there is an
"organizing principle" of good faith in Canadian contract
law which includes a duty to act honestly in the performance of
The case did not involve an employment relationship but the
decision will apply to employment contracts. The defendant and
plaintiff were parties to a commercial dealership agreement. The
defendant acted dishonestly by deliberately misleading the
plaintiff about its intentions as well as the involvement of a
The plaintiff lost the value of his business upon the
agreement's termination and started an action. The SCC found
that the defendant had breached the contract by failing to adhere
to this duty to act honestly.
What the new duty requires:
The duty of honest performance requires parties not to lie to or
knowingly mislead each other about matters directly linked to the
performance of the contract. It does not impose a duty of loyalty
or disclosure, and does not require one party to put the other
party's interests ahead of its own. Parties may still act in
their own self-interest, as long as in doing so they do not lie to,
mislead, or undermine the interests of the other party in bad
faith. The Court distinguished between failure to disclose a
material fact (such as an intention to terminate) and actively
misleading the other party.
The SCC stressed that the principle of good faith should be
applied in a way that allows parties to pursue their individual
self-interest and recognized that parties may cause loss to another
(even intentionally) without running afoul of the principle if they
do so in the legitimate pursuit of economic self-interest.
Parties cannot contract out of or exclude this duty. However,
they may limit the scope of the duty by stipulating the standard of
honesty required as long as the standard respects the minimum core
requirement of honest conduct. The SCC did not set out what would
constitute the minimum core requirement. This to be assessed in
each situation and requires a highly context-specific analysis that
gives proper regard to the legitimate interests of both
Implications for employers:
Until now, it was clear that an employer has a duty of good
faith in the manner of termination. We can expect that lawyers
acting for employees will argue that Bhasin extends the
duty of good faith to all aspects of the employment relationship
and that employers owe a duty of honesty to employees. The full
extent or impact of the duty of honesty on employers is not clear.
The precise impact of the decision on employers will depend on how
courts shape this duty of good faith and the standard of honesty in
future court cases. What can be expected, however, is that employee
counsel will use Bhasin to claim additional damages for
employees based on alleged breaches of the duty of good faith and
honesty, just as we saw in the period following the SCC decision in
Wallace many years ago.
The employer's conduct in all facets of the relationship
could be subject to challenge and scrutiny including:
the reasons for termination
compensation discussions and negotiations;
the financial state of the business;
security of employment;
the reasons or justification for change or maintaining status
plans for restructuring or reorganizing the business (such as a
future merger, acquisition of another business, or a sale of the
The SCC decision suggests that this duty does not require
employers to actively disclose material facts where they have not
been brought into issue. However, an employer that misleads an
employee in answering a question or fails to correct an employee
who expresses an incorrect belief related to the employment could
face allegations that the employer's duty of honesty was
breached. A key question will be what damages an employee can claim
if the employer breaches this duty of honesty. For example, will an
employee who makes a financial commitment on the strength of a
statement from the employer that all is well be able to claim
damages in addition to normal severance if that statement was
misleading, the employee is terminated and the employee suffers
additional damages as a result?
Until courts have further fleshed out the application of this
new duty and provided greater certainty on its scope in the
employment context, employers should exercise caution in
discussions or negotiations with prospective and current employees.
Employers should take care with any communications – active
or passive – that could be construed as dishonest or
misleading towards employees on matters related to their
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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