On its face, the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”) does not seem particularly relevant to Canadian employers; however, at least one trial court has applied Bhasin to significantly expand the scope of the existing duty on employers to act in good faith at the time of dismissal.

The issue in Bhasin was whether the common law in Canada imposes a duty on parties to perform their contractual obligations honestly, and if so, whether the plaintiff had breached that duty when it refused to renew a dealership agreement with the defendant. As many employers in Canada know, the Supreme Court of Canada has long recognized that employers owe employees an implied duty of good faith that arises at the time of dismissal. While the full scope of the duty is undefined, it has been held that the duty requires employers to refrain from being untruthful, misleading, or unduly insensitive in the course of dismissing an employee.

In Bhasin, the Supreme Court of Canada held that it was time for the common law in Canada to evolve to recognize a new duty that applies to all contracts and requires the parties be honest with one another in relation to the performance of their contractual obligations. The Supreme Court of Canada found that, in carrying out the performance of the contract, a contracting party should have “appropriate regard” to the legitimate contractual interests of the other contracting party. The scope of the “appropriate regard” that is required will depend on the context of the relationship. Specifically, the Supreme Court of Canada found that contracting parties are not permitted to act in a manner that is capricious or arbitrary. It was also held that the contractual duty of good faith was a general doctrine of contract law that applied to all contracts. As such, the duty operates irrespective of the intentions of the parties and the parties may not contract out of it.

Recently, the Alberta Court of Queen’s Bench applied Bhasin in the employment context. InStyles v. Alberta Investment Management Corp., 2015 ABQB 621 (“Styles”), the Queen’s Bench considered a dismissed employee’s entitlement to a Long Term Incentive Plan (“LTIP”) bonus. The plaintiff had been dismissed without cause before the maturity date of a number of payments under the LTIP valued at a total of approximately $450,000.00. The employee filed a claim for wrongful dismissal which was heard by way of a summary judgement trial. Under the terms of the LTIP, participants were entitled to a yearly grant paid out at the end of a four year term based on certain corporate performance benchmarks. The LTIP required active employment to maintain eligibility for the payment. After three years of employment with the defendant, the plaintiff was dismissed and informed that he was not eligible for the accrued LTIP payments because he would not be actively employed on the maturity date of the plan.

The Queen’s Bench adopted the reasoning in Bhasin to find that the discretionary power of an employer must be wielded reasonably, and with appropriate regard for the legitimate interests of its contracting partner / employee. The Queen’s Bench stated as follows:

In my opinion, and based on the factual matrix of the subject contract between the Plaintiff and the Defendant, the compensation scheme that was outlined in the LTIP assumes that the parties intended certain minimum standards of conduct, and as a matter of contractual principle, it can be assumed that both parties could expect that the contract would be performed honestly, and reasonably, including that the Defendant would not deprive the Plaintiff of the benefit of the agreement.

The Queen’s Bench agreed that the applicable employment contract granted the employer discretion to dismiss the plaintiff without cause; however, the exercise of the employer’s discretion was found to undermine the legitimate interest of the plaintiff to the LTIP. As a result, the employer’s actions were found to be contrary to the duty to act in good faith that was recognized in Bhasin. This finding was made despite the fact that the employer was exercising a discretionary power that it was expressly granted in the employment contract when it dismissed the plaintiff. The Queen’s Bench held that the employer’s exercise of discretion was unfair, unreasonable, and arbitrary because it disentitled the plaintiff to a benefit under the contract that he had earned.

While the decision of the Queen’s Bench in Styles v. Alberta Investment Management Corp. is being appealed, the genie may be out of the bottle with respect to the contractual duty of good faith in the employment context. As a result, employers and employer counsel should brace themselves for possible claims based on Bhasin.