Supreme Court To Revisit Good Faith

On June 26, 2019, the Supreme Court of Canada (SCC) granted leave to appeal the Ontario Court of Appeal's decision in CM Callow Inc. v. Zollinger (Callow),1 a case involving the scope of the organizing principle of good faith and related duty of honest performance. The case will require the SCC to revisit these issues for the first time since 2014.

Legal background

In 2014, the SCC recognized in Bhasin v. Hyrnew,2 that there was an "organizing" principle in contract law. The SCC provided a broad framework for the application of the good faith principle, and established a universal duty of honest performance in contractual relationships as an aspect of good faith. However, within that the broad framework of good faith, much uncertainty remained. One aspect of uncertainty was to what extent good faith can supplement, modify or qualify bargained for contractual rights. This has been illustrated in the context of contractual termination rights since 2014.

Two relatively recent cases highlight this uncertainty. In Styles v. Alberta Investment Management Corp,3 an employee lost entitlement to payment under a long-term incentive plan due termination of employment without cause. At issue was whether good faith and honest performance required the employer to exercise its discretion reasonably when terminating an employee without cause, where doing so would deprive the employee of a substantial benefit. The Alberta Court of Appeal concluded that the employer had the right to terminate the employee's contract on appropriate notice at its absolute discretion, even if the termination prevented the employee from becoming entitled under the long-term incentive plan. It was considered that a finding of liability would improperly expand the principle of good faith to include a new common law duty of reasonableness and would override the terms of the bargain made by the parties.4

The ruling in Styles seems at odds with a recent decision from the Ontario Court of Appeal (OCA). In Mohamed v. Information Systems Architects Inc,5 Information Systems Architects Inc. (ISA), a consulting firm, exercised its express contractual right to terminate Mohamed's employment in its absolute discretion. ISA did so when its client demanded such due to Mohamed's criminal record. The OCA held that, despite ISA having a seemingly unfettered contractual right to terminate, good faith restricted that right, and required ISA to, at least, offer a job to Mohamed before terminating...