The Duty of Good Faith & Employment Contracts

Written on behalf of Peter McSherry

The Supreme Court of Canada is expected soon to release its decision in an important case involving the duty of good faith and fair dealing owed between contracting parties who happen to be an employer and employee.

Summary of Prior Cases

The reader may be wondering what all the fuss is about, as employers have been held in prior cases to owe such a duty of good faith. That statement is not completely correct however, as the cases below demonstrate. Let’s go under the hood and take a closer look.

Wallace v. United Grain Growers Ltd.

The “first” leading case was decided in 1997. In that case, the employer had made allegations of misconduct against the employee, which it withdrew immediately prior to the trial date. The Supreme Court determined that (1) the employee was owed a duty of good faith and fair dealing at the time of termination and (2) a violation of this duty will be actionable.

The remedy, the Court stated, may be two-pronged. The first is to allow for an increased notice period. The second aspect of the remedy, often forgotten, is that where the unfair conduct results in an additional loss of employment, the employee may be entitled to additional compensation. This second prong remains very much in place, yet it is often overlooked. It is clear that where the unfair conduct extends the period of unemployment, this is actionable. The most obvious example would be an unfair employee reference alleging cause for the termination, which is not supported by the facts. However, such a reference made wrongly but in good faith and with a proper investigative basis is likely not actionable.

The “time of termination” has been fairly liberally interpreted and is not limited to the moment of termination itself. It may include preparatory steps and even conduct after termination.

Honda Canada Inc. v. Keays

This case was refined by a second Supreme Court decision which altered the first prong of the remedy set out in the case above. Instead of awarding an increased notice period, this decision required the trial judge to assess the mental anguish caused by the employer’s unfair conduct. This principle has given rise to awards of what is now referred to as “aggravated” or “moral” damages.

Bhasin v. Hrynew

Bhasin, another Supreme Court of Canada decision from 2014, imposed a duty of good faith and fair dealing between contracting parties. The issue now before the Supreme Court is what impact this duty may have upon employer and employee, not simply at the time of termination, but rather throughout the employment relationship.

Pending Decision – Ocean Nutrition Canada Ltd. v. Matthews

The question in this pending SCC decision becomes how this principle should be applied to employer and employee relationships. Strictly speaking, on the words of the contract in the case at hand, the employer had no obligation to pay incentive sums for the duration of the notice period. There was a powerful dissent in the Nova Scotia Court of Appeal which argued that the employer’s unfair conduct led to the employee resigning (that is, the employee was constructively dismissed). As a result, the employer’s conduct should not allow it to rely upon the employment contract as it did to deny the employee’s incentive claim.

The case has now been argued before the SCC and the full decision will soon be released. It will no doubt be a defining decision on the extent of the duty of good faith and fair dealing between employers and employees, at least, until the next one.

Get Advice and Know Your Rights

The common law relating to the employer/employee relationship is dynamic and ever-evolving. It is important to consult an experienced employment lawyer to determine your specific rights and obligations under the law. If you have any questions about constructive dismissal or bad faith dealings, contact the offices of Guelph employment lawyer Peter McSherry. We can guide you through the issues, help you understand your rights, and defend your position. Contact us online or by phone at 519-821-5465 to schedule a consultation.