Starting in 1997, the Supreme Court of Canada (“SCC”) has rendered a series of decisions that have progressed from the imposition of a duty of good faith and fair dealing on the employer, at the time of an employee’s dismissal, towards a duty of good faith and fair dealing in the overall employment relationship.
In 1997, the SCC decided in the wrongful dismissal case of Wallace v. United Grain Growers Ltd.,  3 SCR 701, that, at a minimum, the employer owed a duty of good faith and fair dealing to the employee at the time of dismissal and explained its rationale as follows:
The contract of employment has many characteristics that set it apart from the ordinary commercial contract. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure. This power imbalance is not limited to the employment contract itself, but informs virtually all facets of the employment relationship. The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence most in need of protection. In recognition of this need, the law ought to encourage conduct that minimizes the damage and dislocation (both economic and personal) that result from dismissal. To ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, breach of which will be compensated for by adding to the length of the notice period. While the obligation of good faith and fair dealing is incapable of precise definition, at a minimum in the course of dismissal employers ought to be candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.
Then, in 2014, the SCC decided in Bhasin v. Hrynew,  3 SCR 494, a breach of contract case, that there was an organizing principle of good faith that parties generally must perform their contractual duties honestly, reasonably, and not capriciously or arbitrarily. This organizing principle was not to be a free-standing rule, but rather a standard that underpinned and was manifested in more specific legal doctrines and might be given different weight in different situations. The SCC stated its rationale as follows:
Canadian common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear. Two incremental steps are in order to make the common law 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 step 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. Taking these two steps will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.
The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.
The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide to future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties.
The principles articulated in the Bhasin decision were discussed by the SCC in 2020 in the wrongful dismissal case of Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26. Although the appeal was decided in favour of the employee on other grounds, the SCC was asked to consider whether a duty of good faith bound the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee. The SCC stated that whether the law should recognize this extension of the duty of good faith was a matter of fair debate.
In a 2020 breach of commercial contract case, C.M. Callow Inc. v. Zollinger, 2020 ONSC 2094, the SCC held that contractual rights and obligations must be exercised and performed honestly and reasonably and not capriciously or arbitrarily where recognized by law, and addressed the measure of damages for breaching the duty of honest performance in contract. The SCC held as follows:
The duty of honest performance in contract, formulated in Bhasin applies to all contracts and requires that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. In determining whether dishonesty is connected to a given contract, the relevant question is whether a right under that contract was exercised, or an obligation under that contract was performed, dishonestly. While the duty of honest performance is not to be equated with a positive obligation of disclosure, in circumstances where a contracting party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct a false impression created through that party’s own actions.
The organizing principle of good faith recognized in Bhasin is not a free‑standing rule, but instead manifests itself through existing good faith doctrines. While the duty of honest performance and the duty to exercise discretionary powers in good faith are distinct, like each of the different manifestations of the organizing principle, they should not be thought of as disconnected from one another. The duty of honest performance shares a common methodology with the duty to exercise contractual discretionary powers in good faith by fixing on the wrongful exercise of a contractual prerogative. Each of the specific legal doctrines derived from the organizing principle rest on a requirement of justice that a contracting party have appropriate regard to the legitimate contractual interests of their counterparty. They need not subvert their own interests to those of the counterparty by acting as a fiduciary or in a selfless manner.
The requirements of honesty in performance can go further than prohibiting outright lies. Whether or not a party has knowingly misled its counterparty is a highly fact‑specific determination, and can include lies, half‑truths, omissions, and even silence, depending on the circumstances. One can mislead through action, by saying something directly to its counterparty, or through inaction, by failing to correct a misapprehension caused by one’s own misleading conduct.
The duty of honest performance attracts damages according to the ordinary contractual measure. The ordinary approach is to award contractual damages corresponding to the expectation interest. That is, damages should put the injured party in the position that it would have been in had the duty been performed. Although reliance damages, which are the ordinary measure of damages in tort, and expectation damages will be the same in many if not most cases, they are conceptually distinct, and there is no basis to hold that a breach of the duty of honest performance should in general be compensated by way of reliance damages.
In a 2021 breach of commercial contract case, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, the SCC clarified the nature and scope of the duty to exercise discretionary contractual powers in good faith. The SCC stated as follows:
The duty to exercise contractual discretion in good faith requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or, in the terminology of the organizing principle in Bhasin, to exercise their discretion reasonably. The duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying the discretion. Where discretion is exercised in a manner consonant with the purpose, that exercise may be characterized as reasonable according to the bargain the parties had chosen to put in place. But where the exercise stands outside the compass set by contractual purpose, the exercise is unreasonable in light of the agreement for which the parties bargained and may be thought of as unfair and contrary to the requirements of good faith.
The measure of fairness is what is reasonable according to the parties’ own bargain. It is not what a court sees as fair according to its own view of the proper exercise of the discretion. Where the exercise of discretionary power falls outside of the range of choices connected to its underlying purpose — outside the purpose for which the agreement the parties themselves crafted provides discretion — it is thus contrary to the requirements of good faith. Courts can intervene where the exercise of the power is arbitrary or capricious in light of its purpose as set by the parties; however, their role is not to ask whether the discretion was exercised in a morally opportune or wise fashion from a business perspective.
What a court considers unreasonable is highly context‑specific, and ultimately depends upon the intention of the parties as disclosed by their contract. Generally, however, for contracts that grant discretionary power in which the matter to be decided is readily susceptible of objective measurement, the range of reasonable outcomes will be relatively smaller. For contracts that grant discretionary power in which the matter to be decided or approved is not readily susceptible to objective measurement, the range of reasonable outcomes will be relatively larger. It is in properly interpreting the contract for the purposes for which discretion was granted that the range of good faith behaviour comes into focus and breaches can be identified.
The cases decided by the SCC after Matthews appear to indicate that Canadian law is moving towards the adoption of an overall duty of good faith and fair dealing in employment law. Perhaps no other area of Canadian law is as context-specific as employment law. The contextual approach usually favours employees, given the power imbalance inherent in most employment relationships. And, given the employers’s scope to make decisions based on information not known or disclosed to employees, and the discretion employers often have to make decisions that disadvantage employees, there will be an impetus towards that adoption.
About the Author: Eric Kay is a partner in firm’s Toronto office. He may be reached at firstname.lastname@example.org.