Contracts Must be Carried Out Fairly and Honestly

Publication: Dismissal And Employment Law Digest
Article Date: December 16, 2014

The Supreme Court of Canada in the case of Basin v. Hrynew, which was released on November 13th, 2014, establishes a new good faith doctrine which includes a duty of honesty between contracting parties. Although the facts of the case involve an agreement governing the relationship between a company and retailed dealer, the principles enunciated by the Supreme Court of Canada have far reaching implications. The court has ruled that contracting parties must act not only in good faith, but honestly in carrying out the terms of the contract. That means that each contracting party has a duty to act fairly and honestly when dealing with the contractual interests of the other party to the contract.

Clearly parties cannot knowingly mislead one another when entering into an employment relationship. Yet it is common for the employer to exaggerate the benefits of the new employment, and for the employee to enhance his or her qualifications in order to persuade the new employer of the value he or she is bringing to the employment relationship. That in itself does not constitute a breach. The court does not deal with the issues relating to entry into the contractual relationship but rules solely the ongoing, mutual, commitment of the parties during the life of the contract.

For example, employer and employee enter into a contractual arrangement, in writing or verbally, that forms the basis of their employment relationship. Does the Supreme Court of Canada decision mean that the employer or employee, who does not act with good faith and honesty in carrying out the terms of the employment relationship, open up a claim for breach of contract damages? Can either party walk away from the employment contract because there was a duty of good faith and honesty which was violated? What are the damages flowing from such a violation? How are these damages to be calculated?

The court relies on the decision of Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 106 N.S.R. (2d) 180 (S.C. (T.D.)), aff’d on narrower grounds (1992), 112 N.S.R. (2d) 180 (S.C. (App. Div.)). In that case Mr. Justice Kelly (at para. 38), said the following: “the law requires that parties to a contract exercise their rights under that agreement honestly, fairly and in good faith. This standard is breached when a party acts in a bad faith manner in the performance of its rights and obligations under the contract. “Good faith” conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breached when a party acts in “bad faith” – a conduct that is contrary to community standards of honesty, reasonableness or fairness.”

The Supreme Court of Canada goes on to propose that: “This Court ought to develop the common law to keep in step with the “dynamic and evolving fabric of our society” …. The court says that “the current approach to good faith performance lacks coherence and proposes that this decision will “bring a measure of coherence and predictability to the law …”.

If a contracting party has not been honest in its contractual performance, the gates open to an allegation of bad faith in the performance of the contract. The law now requires honest, candid, forthright or reasonable contractual performance. Up until this important decision the common law of contract placed great weight on the freedom of contracting parties to pursue their individual self-interest during the term of the contract. That self-interest is now necessarily bound to a concept of good faith and honesty. The Supreme Court of Canada, in its decision, points out: …“it is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” The court makes it clear that under this new principle that it is fundamental to every contractual relationship that, “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”. Although the court indicates that this new duty of honesty and fairness represents a “modest incremental step” and future courts may limit what appears to open the flood gates to a whole new species of litigation, nonetheless, a giant step has been taken by the court which will impact directly on the future of employment disputes since, after all, they are all about contractual performance.

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