In Styles v Alberta Investment Management Corporation (“Styles”), the Alberta Court of Appeal provided useful guidance on the application of the organizing principle of good faith in contractual performance, established by the Supreme Court of Canada in its landmark decision Bhasin v Hrynew (“Bhasin”). Since Bhasin, there has been a lack of clarity on how to apply and consider the organizing principle. In Styles, the Alberta Court of Appeal (1) expressly declined to expand the organizing principle to create a “common law duty of reasonable exercise of discretionary contractual powers”, (2) recognized other key limitations to the organizing principle, and (3) confirmed the extent of an employer’s duty of good faith when terminating an employee. Styles is the latest example of an appellate court applying Bhasin with caution and restraint.
The organizing principle of good faith
As previously discussed by Geoff R. Hall and Trevor Courtis, Bhasin recognized that there is an organizing principle of good faith in contractual performance. The organizing principle is said to underlie existing doctrines of good faith in contractual performance, which apply in a variety of ad hoc contexts including discretionary contractual powers, insurance contracts, and the manner of terminating an employee.
However, the organizing principle may be used to recognize new doctrines of good faith “where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.” In Bhasin, the Supreme Court of Canada used the organizing principle to establish a new duty of honest performance that requires, at a minimum, the contracting parties do not lie or otherwise knowingly mislead each other.
The Alberta Court of Appeal’s decision in Styles
In Styles, the respondent was terminated from his employment without cause. The issue in dispute was whether he was entitled to bonuses under the appellant’s long term incentive plan (the “Plan”). The trial judge ruled in the respondent’s favour. In finding for the respondent, the trial judge expanded the organizing principle of good faith to include a “common law duty of reasonable exercise of discretionary contractual powers.” The trial judge held that the appellant breached this common law duty when it (1) terminated the respondent without providing reasons, and (2) withheld the respondent’s bonuses without providing reasons.
The Majority of the Court of Appeal (Slatter, O’Ferrall, JJA) allowed the appeal. The Majority held that payment of the bonuses pursuant to the Plan was not discretionary; however, the respondent did not qualify for the bonuses based on the plain wording of the Plan. On the topic of good faith, the Majority noted the following limitations to the organizing principle:
- Bhasin relates to contractual performance and it does not invite the Court to examine the terms of the contract and decide if they are honest, capricious, or negotiated in good faith;
- Bhasin does not make it dishonest, in bad faith, nor arbitrary to require that the other party perform the contract in accordance with its terms;
- the concept of good faith is distinct from the concept of reasonableness and, therefore, the organizing principle of good faith does not create a “common law duty of reasonable exercise of discretionary contractual power”; and
- the principles set out in Bhasin “do not enable either party to insist on covenants and provisos that are not set out in writing in the agreement, nor do they allow the parties to ignore the plain wording of the agreement.”
The Majority also held that the trial judge erred in finding that the appellant breached any duties of good faith when it terminated the respondent without providing reasons. Citing Wallace v United Grain Growers Ltd, the Majority confirmed that an employer’s duty of good faith does not extend to its reasons for terminating the employee because an employer has a right to determine the composition of its workforce. Rather the employer’s duty of good faith only applies to the manner of termination.
Justice Berger concurred in the result, and did not appear to disagree with the principles of good faith as articulated by the Majority.
Significance of Styles
While the organizing principle of good faith marked a fundamental shift in the law of contract, the organizing principle has its limitations. Styles is consistent with the trend of appellate courts applying Bhasin in a cautious and restrained manner (a trend which Geoff R. Hall and Trevor Courtis previously commented on here). Furthermore, Styles provides much needed clarity on the organizing principle of good faith and serves as a powerful reminder that the terms of the contract are at the core of any contractual interpretation exercise.
Date of Decision: January 4, 2017