The British Columbia Court of Appeal ("BCCA") recently clarified the nature of the duty of honest performance in pre-contract negotiations. The duty creates expectations for the way parties in contractual relationships conduct themselves, but apparently not for parties who are negotiating a contract. This is consistent with the division between contract law – which requires a contract to ground a breach – and tort law – which will continue to be the foundation for claims regarding pre-contract misrepresentations.
In the recent decision of Ocean Pacific Hotels Ltd. v. Lee, 2025 BCCA 57, the BCCA allowed the appeal of Ocean Pacific Hotels Ltd. ("Ocean Pacific"), a hotel in Vancouver that is the defendant in a class action brought by former employees.1 The BCCA agreed with Ocean Pacific that the lower court's certification of three common issues, which related to Ocean Pacific's duty of honest performance, was in error. Central to Ocean Pacific's argument was that the duty of honest performance does not extend to pre-contractual dishonesty.
The BCCA set aside the judge's order certifying the common issues relating to the plaintiffs' allegations that Ocean Pacific breached its duty of honest performance, but refused to strike those claims entirely.2 Rather, the plaintiffs were granted leave to amend their pleadings, and the matter was referred back to the lower court.
Background
Like many businesses, Ocean Pacific's operations were significantly impacted by the COVID-19 pandemic. In Summer 2020, Ocean Pacific offered its hourly employees an option to sign revised employment agreements that would adjust their employment from regular to casual. Several employees signed and continued their employment on the understanding that their benefits coverage would continue in their new casual roles. The benefits coverage for those employees ended in January 2021 after Ocean Pacific elected not to seek approval from its carrier for ongoing coverage. Three of those employees brought a class action on behalf of the impacted employees against Ocean Pacific in which they allege, among other things, that Ocean Pacific breached its duty of honest performance in the pre-contractual negotiations of the casual employment agreements.
Central to the plaintiffs' claim is the sequence of events that led to the expiration of their benefits. The casual employment agreements included a term that the employees would continue to receive extended benefits coverage "subject to and in accordance with the terms and conditions of the applicable plans and policies and the continued approval of [Ocean Pacific's] carrier". The plaintiffs allege Ocean Pacific had only arranged a temporary grace period of coverage and did not intend to seek ongoing coverage, and further allege Ocean Pacific withheld that information to induce them to enter into the casual employment agreements.
The Duty of Honest Performance
The duty of honest performance evolved as a doctrine beneath the organizing principle of good faith in contractual relationships. Parties in contractual relationships owe several duties to one another under this principle to encourage fair and equitable dealings in commercial settings. These duties have evolved from the common law and have been incorporated under the good faith principle in an attempt to consolidate and clarify what it means to deal in good faith. To assess whether a party has breached the duty of honest performance, courts take a contextual approach and look at the facts surrounding the formation and performance of the contract and the nature of the relationship between the parties.
Prior to 2014, there were inconsistent approaches to the concept of good faith; it was assessed on a case-by-case basis. Then came the Supreme Court of Canada ("SCC") decision Bhasin v Hrynew, 2014 SCC 71 ("Bhasin"). Writing for the court in Bhasin, Justice Cromwell confirmed there is a general duty of honesty in contractual performance and recognized a distinct new duty under the principle of good faith: the duty of honest performance is "a simple requirement not to lie or mislead the other party about one's contractual performance".3
In 2020, in C.M. Callow Inc. v Zollinger., 2020 SCC 45 ("Callow"), the SCC expanded the principle of good faith and articulated a test to establish whether there has been a breach of the duty of honest performance. A party claiming that another party breached this duty must demonstrate: 1) the alleged dishonesty is directly linked to the performance of the contract; and 2) the defendant's conduct constitutes dishonesty within the meaning in Bhasin.4 It is not enough for one party to allege the other acted dishonestly while both were performing their obligations under the contract if the conduct complained of is unrelated to the performance of the contract.5
BC Supreme Court Decision
The lower court certified the plaintiffs' class action based on claims in breach of contract and breach of the duty of honest performance, and for punitive damages. With respect to the claim for breach of the duty of honest performance, the lower court held that the pleadings must allege "the defendant lied or knowingly misled the plaintiffs about a matter directly related to the performance of the contract".6 The lower court found that this had been met and framed the key issues as follows:
- Did the defendant intentionally mislead the Class members about the limited continuation of their benefits?
- If so, did that conduct amount to a breach of the defendant's duty of honest performance of its contractual obligations toward Class members?
- If so, what remedies are the Class members entitled to?
BC Court of Appeal Decision
On appeal, Ocean Pacific argued the lower court erred in certifying the issues regarding its duty of honest performance. Ocean Pacific's primary argument was that there must be a direct link between the alleged dishonesty and the performance of the contract.7 Ocean Pacific also argued that allegations of dishonesty arising during the formation of a contract or in connection with a proposed future contract are inadequate to support a claim for breach of the duty of honest performance.8 The BCCA agreed and allowed the appeal on the basis that dishonest conduct during pre-contractual negotiations cannot form the basis of a claim for breach of the duty of honest performance, even where that conduct is intended to induce the formation of a contract.9
In response, the plaintiffs argued that pre-contractual dishonesty can be directly linked to contract performance and can thus form the basis of a claim for breach of the duty of honest performance.10 In support of their argument, the plaintiffs relied on their assertions that Ocean Pacific acted dishonestly while negotiating a contract and that Ocean Pacific intended to mislead the respondents into accepting unfavourable terms. The BCCA was not convinced, finding that "it would create confusion and difficulty in application to permit the duty of honest performance to be applied to the combination of a present and future contract."11
Notably, while Ocean Pacific's alleged dishonesty about the continuation of the benefits occurred before the employees signed the casual employment agreements, the employees were still under their former employment agreements. The argument is still available to the plaintiffs that Ocean Pacific breached the duty of honest performance of the existing employment contracts, rather than the new casual agreements.
Future Implications
This decision confirms that the duty of honest performance, as a principle of good faith, does not extend to pre-contractual negotiations. While the SCC has never explicitly rejected that the principle of good faith applies to pre-contractual negotiations, courts continue to interpret that it was not the SCC's intention in Bhasin to create a duty to negotiate in good faith. This is consistent with contract law principles, since, without a contract, there can be no breach. However, a party who has been wronged during negotiations before a contract exists is not left without a remedy: it remains possible to bring claims for misrepresentation in connection with pre-contract misconduct.
Footnotes
1. Ocean Pacific Hotels Ltd. v. Lee, 2025 BCCA 57 (the "BCCA Decision").
2. Other issues were certified for the employees' class action, which Ocean Pacific did not appeal.
3. Bhasin at para. 73.
4. 10066055 Manitoba Ltd. v Canada (Parks Agency), 2024 FC 266 at paras. 21-25.
5. Callow at para. 49.
6. Lee v Ocean Pacific Hotels Ltd., 2023 BCSC 1650 at para. 82.
7. The BCCA Decision, supra note 1 at para. 24.
8. ibid.
9. ibid at para. 36.
10. ibid at para. 35.
11. ibid at para. 71.
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