By Samantha Stepney, Lawyer.
Over the past several years, the general organizing principles of “good faith” and “honesty” in contractual performance as set out in the Supreme Court of Canada’s decision of Bhasin v. Hrynew have received much attention from employment lawyers. One argument that has been considered is whether certain contractual terms (most often severance-limiting clauses) can be rendered unenforceable due to a breach of these principles during either pre-contractual negotiations or performance of the contract.
A recent decision from the Court of Appeal of Alberta (the “ABCA”) appears to have precluded this argument. Put simply, the ABCA case of Styles v. Alberta Investment Management Corporation may significantly limit how the duties of “good faith” and “honesty” are applied in the employment law context going forward.
The employee in Styles moved from Ontario to Alberta in 2010 to take up a position with the employer as an investment manager. His employment was governed by a written employment contract which provided for a base salary plus potential bonuses under two bonus plans, the Annual Incentive Plan and the Long Term Investment Plan (the “LTIP”).
Under the LTIP, no bonus was payable for at least four years. Further, to be eligible for a bonus, the employee had to be an active employee of the employer on the vesting date; otherwise it “may be forfeited.”
In 2013, the employee was dismissed without cause, after fewer than four years of employment. The employer did not pay him any bonuses under the LTIP.
The employee brought an action against his ex-employer, seeking payment of the LTIP bonus.
The trial judge concluded that the LTIP bonus was payable. She reviewed Bhasin and expanded the principles articled in that case to include a related general organizing principle described as a “common law duty of reasonable exercise of discretionary contractual powers.”
The trial judge found two “discretions” at play:
- The words “may be forfeited” in the LTIP gave discretion to the employer; and
- The decision to terminate the employee without cause was a discretionary decision.
According to the trial judgement, under the “common law duty of reasonable exercise of discretionary contractual powers”, these discretionary decisions had to be exercised “fairly and reasonably”. It was “not fair” to take advantage of the employee’s hard work, and then terminate him without cause where the consequence would be an ineligibility for the bonuses, since this conduct failed to meet the “minimum standard of honesty” required in Bhasin (although there was no evidence that the termination was done in bad faith, i.e., to intentionally deny the employee the LTIP bonus).
Despite the terms of the LTIP, the trial court awarded the employee $444,205 in damages for lost bonuses.
The employer appealed the trial court’s decision.
The primary issue before the ABCA was whether the employee was entitled to bonuses under the LTIP. Disagreeing with the trial judge’s analysis, the ABCA concluded that he was not.
The appeal court explained that “simply reading the contract, the action should have been dismissed”, and that the only basis on which the employee could succeed was if he could show that, in law, the employer could not rely on the plain wording of the LTIP.
The ABCA’s reasons in Styles (which are discussed in more detail below) indicate that if parties to a contract have agreed to its terms, that contract cannot be rendered unenforceable due to a breach of the organizing principles of good faith and honesty described in Bhasin.
In reaching its decision, the ABCA considered the meaning of Bhasin at length.
First, the ABCA clarified that the SCC rejected a universal organizing principle of good faith contractual performance. Rather, this principle should only be applied to situations where it has previously been invoked (e.g., in employment law, but only with respect to the “manner of termination”), with only a limited ability to extend the law.
In other words, the duty of good faith is not a “stand-alone“ concept, but rather explains other more specific rules that are applied in specific, established situations. The ABCA stated as follows at paragraph 45:
Applying the “organizing principle of good faith” involves a difficult balancing exercise. Contracting parties are generally entitled to perform (and expect performance of) the contract in accordance with its terms. They are entitled to act in their own best interests: Bhasin at para. 70. But at some point they cannot perform certain contracts in a way that seeks to “undermine [legitimate contractual] interests in bad faith”: Bhasin at para. 65. The danger lies in imposing “legitimate contractual interests” that are contrary to the plain wording of the contract, or that involve the imposition of subjective expectations and interpretations on the contract. As a result, this “organizing principle” should only be applied to situations where it has previously been invoked, although there is a limited ability to extend the law: Bhasin at paras. 71, 93. [emphasis added]
At paragraph 53, the ABCA reiterated the SCC’s statement in Bhasin that, even when the organizing principle of good faith applies, it must not “… veer into a form of ad hoc judicial moralism or ‘palm tree’ justice.”
Without getting into any detail, the ABCA also clarified that Bhasin does not establish any general principle of “reasonable exercise of discretion” in contractual performance (at least not in Alberta).
While the SCC in Bhasin did recognize a common law duty to act honestly in the performance of contractual obligations, this new duty simply means that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” In Styles, the ABCA explained that “this is a very narrow concept, which does not create any duty of loyalty, disclosure, or forgoing of contractual advantages”. [emphasis added]
The ABCA went on to further articulate the meaning of Bhasin in the context of the duty of honesty as follows:
- The Bhasin principle of honesty relates to the performance of the contract, not negotiation or its terms;
- A contract should be enforced according to its terms, unless it is unconscionable or contrary to public policy;
- Bhasin does not make it dishonest, in bad faith, or arbitrary to require that the other party perform the contract in accordance with its terms;
- 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; and
- Bhasin is not to be used as a tool to rewrite contracts and award damages that the court regards as being “fair”, even though they are clearly unearned under the contract.
- The reasonable expectations of the contracting parties are to be found in the wording of the contract, not in the court’s perception of what is “fair” in the abstract.
In short: While honesty (and good faith) remain the best policy when performing a contract, it does not appear that (in Alberta, at least) they are required to enforce contractual terms.
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