Canada: Alberta Court Of Appeal Revisits Contractual Good Faith Principles

Last Updated: January 12 2017
Article by Scott H.D. Bower and Russell Kruger

The organizing principle of good faith and the duty of honest contractual performance laid down by the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71 [Bhasin] do not give courts the ability to review the fairness of a contract's terms, the Alberta Court of Appeal recently held in Styles v Alberta Investment Management Corporation, 2017 ABCA 1 [Styles].

In Styles, the majority of the Court of Appeal emphatically outlined the limits of Bhasin and provided helpful guidance about how it will be applied. In Bhasin, the Supreme Court held that while good faith is an "organizing principle" of Canadian contract law, it generally only gives rise to an explicit duty of good faith in certain situations which have been previously recognized by courts. The Supreme Court also held that contracting parties have a duty to perform contracts honestly, without lying or knowingly misleading other parties.

In Styles, Mr. Styles' employer terminated him without cause approximately three years after hiring him as an investment manager. While there was no issue with respect to payment in lieu of notice, Mr. Styles had entered in to a Long Term Incentive Plan (LTIP) which provided that he would receive certain bonus payments after four years had elapsed. The LTIP explicitly provided that if Mr. Styles was not "actively employed" with the employer at the time that four year period elapsed, he would not be entitled to any part of this bonus.

Upon termination, the employer did not pay Mr. Styles any bonus under the LTIP. At trial, Mr. Styles successfully argued that he was entitled to recover damages for such bonuses, with the trial judge finding that the employer had the discretion to award or withhold the bonus amounts under the LTIP. Holding that the Bhasin principles obliged the employer to exercise this discretion reasonably and fairly, the trial judge ruled that withholding the bonus amount was contrary to Bhasin.

In overturning the trial judge, the majority of the Court of Appeal discussed the limits of the principles developed in Bhasin. The Court began by holding that the LTIP gave no discretion to the employer to grant or withhold bonus payments if an employee was not employed for four years. Further, the Court held that it was an error to characterize the decision to terminate an employee without cause as an exercise of contractual "discretion" which a court could review for its good faith or lack thereof.

The Court stressed that the "organizing principle" of good faith does not impose a duty of good faith on contracting parties in all situations; rather, it is generally limited to the particular contractual situations outlined in Bhasin in which such a duty has been recognized in the past. While Bhasin recognized a duty of good faith on the part of employers in the "manner of termination" of employees, the Court noted that this did not extend to the employer's "reasons for terminating the contract of employment". Provided proper notice or pay in lieu of notice is provided, employers need not have a good faith reason for terminating an employee. As a result, the principle of good faith does not permit a court to review an employer's reasons for termination.

The Court also stressed that the second Bhasin principle, the duty to "act honestly in the performance of contractual obligations" and not to "lie or otherwise knowingly mislead" another contracting party, is a "very narrow concept". The duty simply requires that one does not lie or knowingly mislead one's contracting partner; it does not impose any "duty of loyalty" to the other contracting party or similar duty. The principle also does not permit a court to review the fairness of the terms of a contract.

As such, the Court emphasized that the performance of a contract in accordance with its strict terms, as was done by the employer in this case, does not constitute a breach of Bhasin even where the terms may seem "unfair" to one contracting party:

Bhasin does not invite judicial examination of the rights granted by  contracts to determine if they are "fair", or whether the consequences of performance are more or less advantageous to either party than that party might have hoped or desired. ... Bhasin is not to be used as a tool to rewrite contracts, and award damages to contracting parties that the court regards as being "fair", even though they are clearly unearned under the contract.

The Court also stated that Bhasin does not create "any general principle of 'reasonable exercise of discretion' in contractual performance." It is not a breach of Bhasin for one contracting party to exercise its discretion under a contract according to its own legitimate self-interest. Granting one party discretion under a contract is a "method of risk allocation", and absent any dishonesty, Bhasin does not give courts permission to "second-guess" a party's exercise of its discretion under a contract.

Interestingly, the Court of Appeal also developed the Supreme Court's recent decisions in Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37 and Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, which held that appeal courts will review the interpretation of standard form contracts on a standard of correctness, given the precedential value of the interpretation of such agreements. The Court of Appeal in Styles held that a compensation arrangement such as the LTIP in this case, which is used with multiple employees and not negotiated, will constitute a standard form agreement, the interpretation of which a court will review on a correctness standard. As such, Styles appears to signal that courts will regard much more than mass consumer contracts to be "standard form contracts", showing a willingness to review the interpretation of a broader array of contracts on a correctness standard in the future.

Styles thus gives important guidance on the scope of Bhasin. Where, as in Styles, an agreement is clear and unambiguous, courts will not be permitted to review the contents of the arrangement on the basis of the principle of good faith or the duty of honest contractual performance. In short, Bhasin does not permit review of the fairness of a contract's terms.

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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Scott H.D. Bower
Russell Kruger
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