The Duty of Good Faith: Getting More (or Less) Than You Bargained For. March 6, 2013

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith:

Getting More (or Less) Than You

Bargained For

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith:

Getting More (or Less) Than You Bargained For

Ian R. Dick

Jeffrey E. Goodman

Frank J. Cesario

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Introduction

• The duty of good faith is an important and evolving legal principle that has implications across many legal contexts.

• This presentation will address the duty of good faith in the context of: • dismissal of employees

• commercial contract law and negotiations • shareholder and oppression litigation

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• The employer has an obligation of good faith and fair dealing in the manner of dismissal of an employee.

• A dismissed employee may be awarded damages if:

• the employer acts in bad faith in the manner of dismissal; and • causes mental distress to the employee; and

• the employee suffers actual damages.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

employer and the employee.

• The application of the duty is confined to the manner of dismissal as opposed to the fact of dismissal.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• no requirement of “good faith” reasons for dismissal (i.e. fact of dismissal); • that, as a matter of contract, an employer has an obligation to act fairly and

in good faith in the manner of dismissal;

• “The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection…to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of

dismissal, the breach of which will be compensated for by adding to the length of the notice period.”

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Examples of “bad faith” in the manner of termination:

1. making false allegations of theft at the date of dismissal;

2. not telling an employee of her termination before she made steps to transfer; 3. terminating an employee immediately upon his return from disability leave and

vacation;

4. persisting in unfounded allegations of cause up to the time of trial; 5. unfounded allegations of dishonesty; and

6. having a terminated employee learn from an advertisement that he had been

dismissed to replace him with a lower hourly rate employee

• Must also be intent, malice or extreme disregard on part of employer as opposed to

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Honda Canada Inc. v. Keays (2008, SCC):

• the Court revised its approach to assessing damages for breach of the obligation;

• damages are only available if the mental distress suffered by the terminated employee meets the following conditions:

(1) it is beyond the normal distress and hurt feelings that result from dismissal from employment (manner v. fact); and

(2) it was within the reasonable contemplation of the parties at the time of contract formation that a breach of the contract in certain circumstances would cause the plaintiff particular mental distress.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Honda lead to a predictable result: a proliferation of vague, confusing claims by

plaintiffs.

• How has the law evolved and matured since Honda?

• Economic loss does not lead to “bad faith” damages (Soost, Mathieson);

• Honda did not create a new head of damages (Soost); and

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Certain types of financial loss may be compensable as a component of

reasonable notice but an employer is not liable for financial losses which extend beyond the reasonable notice period itself.

• In Mathieson v. Scotia Capital Inc. (2009, ONSC):

• the Ontario Superior Court rejected the Plaintiff’s claim for bad faith in the manner of termination and his argument that he should be entitled to

damages for the salary and bonuses he would have earned from the date of his termination until his anticipated retirement date, a period of 12 years

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• The damages claimed were not intangible forms such as “mental distress” as contemplated by Honda and Wallace but were economic damages

relating to loss of a job.

• Providing damages up to retirement “would fundamentally change the underlying contractual obligation.”

• The Hadley principle concerning remoteness could not be used to re-write the basic contractual obligations of employment law.

• “Reasonably contemplated” economic damages for any breach of an

employment contract for an indeterminate term were limited to the common law Bardal, factors regarding notice period.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Soost v. Merrill Lynch Canada Inc. (2009, ABCA)

• the Alberta Court of Appeal expressly applied Mathieson in overturning the trial judge’s award of $1.6 million to compensate the Plaintiff, an investment banker, for the loss of his customers resulting from his dismissal. This was in addition to the $600,000 in reasonable notice damages awarded.

• The Court held that, in most cases, a terminated employee suffers losses going beyond the lack of reasonable notice (e.g. loss of prestige, loss of business contacts and opportunities, loss of future income potential due to loss of existing customers, etc.), but that these losses are not compensable as reasonable notice damages, nor as damages for bad faith in the manner of dismissal.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• The losses noted in Soost and Mathieson are excluded because all employment contracts of an indefinite term are deemed to be terminable upon reasonable notice or damages in lieu of notice.

• As such, dismissal is never a “breach” of an indefinite term contract of

employment, and the only losses which are compensable are those flowing from the alleged failure to give reasonable notice.

• The Courts in Soost and Mathieson found that the Hadley principle cited in

Honda, does not create a new head of damages, it merely establishes a

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

benefits for duration of reasonable notice period.

• Damages for manner of termination = compensable damages for undue mental distress that could have been contemplated as a result of breach of obligation to act in good faith in carrying out dismissal.

• Post-Honda decisions have also noted that punitive damages are not to be confused with the mental distress analysis, and may only be awarded

exceptionally, where conduct warranting retribution, deterrence or denunciation by the courts supports the claim. (Altman v. Steve’s Music Store Inc. (2011

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

• Implications for Employers: • Generally:

• exercise caution and apply forethought in dismissing employees – do not

act on impulse or in the heat of the moment.

• avoid conduct the courts have identified as bad faith behaviour. • always act with respect and preserve the employee’s dignity. • be upfront and honest regarding your reasons for dismissal.

• When faced with a claim for “mental distress,” “mental suffering,” “aggravated

damages” or “moral damages”:

• decipher the claim, and determine if damages are being claimed in tort (bad

faith) or contract (notice period).

• either way, determine whether the plaintiff has pled and proven damages. • determine how best to respond to each distinct allegation.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in the Manner of Dismissal

Conclusion

• Honda opened the door for a number of new and novel claims seeking to expand

the scope of damages.

• Subsequent cases have clearly narrowed extent of damages to liability for reasonable notice and damages for proven undue mental distress.

• Adding complexity and animosity to what should be relatively straightforward “notice cases”.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

employer’s obligation to avoid acting in bad faith in the manner of dismissal. • So what is the duty of good faith in the commercial context?

• The foundational case in Ontario on the duty of good faith is the decision of the Court of Appeal in Transamerica v. ING Canada Inc. (2003), where

Transamerica claimed for damages for misrepresentation and breach of warranties and covenants contained in a share purchase agreement. In its

defence, among other things, ING pleaded that Transamerica breached certain implied duties of good faith and fair dealing and was precluded from asserting certain claims.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

“Canadian courts have not recognized a stand-alone duty of good faith that is independent from the terms expressed in a contract or from the objectives that emerge from those provisions. The implication of a duty of good faith has not gone so far as to create new, unbargained-for, rights and

obligations. Nor has it been used to alter the express terms of the contract reached by the parties. Rather, courts have implied a duty of good faith

with a view to securing the performance and enforcement of the

contract made by the parties, or as it is sometimes put, to ensure that parties do not act in a way that eviscerates or defeats the objectives of the agreement that they have entered into [.]”

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• Three key themes emerge from this passage, and they all serve to anchor any analysis of the duty of good faith to the terms of the contract:

(1) the duty of good faith must be tied to the terms of the contract: there is no free-floating duty to act in good faith;

(2) the terms of the contract can be supplemented by the “objectives that emerge” from those terms; and

(3) the duty of good faith does not create “new, unbargained-for, rights and obligations”.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• In National Logistics v. American Eagle Outfitters Canada (2012, ONSC) the

defendant brought a motion for summary judgment to dismiss the plaintiff’s claims, which included a claim for breach of the duty of good faith.

• The specific contractual provision related to the defendant’s responsibility to

provide volume projections and information required by the plaintiff for planning.

• The Court found that the clause was “purely operational” and merely required the

defendants to provide accurate volume and related information “so that the plaintiff is in a position to ensure that it can effectively provide logistics services.”

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• The Court in National Logistics found that the clause did not impose a broader obligation on the defendant “to provide information regarding its long-term

intentions.”

• This was not the type of case referred to in Transamerica where the conduct of a party in the performance of the contract amounts to an evisceration of the

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• Courts have used the doctrine of good faith to police the bargain the parties have already made and to supervise performance of their contractual obligations

(Barclays Bank (2011, ONSC)).

• Even where good faith is not pleaded, courts have held that one contracting party owes the other an implied duty to carry out its obligations or to exercise any discretion in the contract in good faith (Barclays Bank (2011, ONSC)). • Contracts in which performance is dependent upon one party’s exercise of

discretion are characterized by an implied duty of good faith performance: i.e. the discretion must be exercised reasonably and in good faith and in light of the purposes for which it was conferred (Barclays Bank (2011, ONSC)).

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• In Shelanu (2003, ONCA) the Court held that “the fact that contractual terms are ultimately complied with, does not mean that there has been no breach of the duty of good faith”.

• In Barclays Bank the Court stated that a duty of good faith does not preclude self-interested behaviour and that a party under such a duty may be required to temper its self-interest, but not to avoid it.

• In Romani & Associates v. SurNet (2012, ONSC) the Court held that the

defendant was not under any obligation to treat the Plaintiff better than provided by the Agreement’s strict terms: each side was entitled, within the bounds of honest dealing, to take its own interest into account.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• The ONCA had left open the possibility of a duty of good faith in bargaining (Cornell Engineering, 2001).

• The SCC held in Martel (2000) that “a duty to bargain in good faith has not been recognized to date in Canadian law” in the context of finding no tort law duty of care during contract negotiations.

• However the ONCA refused to extend the “doctrine of good faith” to pre-existing contract negotiations (Oz Optics, 2011) because:

• other causes of action already provided appropriate remedies; and

• courts have not extended good faith beyond the context of a contractual relationship.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• Georgian Windpower v. Stelco (2012, ONSC) confirmed that an agreement to

negotiate in good faith is unenforceable on the basis that the concept is repugnant to the adversarial position of the parties when involved in negotiations.

• Best efforts or best endeavours are analogous to good faith because best

efforts means “taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving ‘no stone unturned’.” • The Court concluded that “an agreement to use best efforts to negotiate, like

good faith, is similarly unenforceable. Such an agreement is uncertain and incapable of giving rise to an enforceable obligation. It is also contrary to the rationale behind negotiation that each party seeks to reach the most favourable agreement for themselves.”

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith in Commercial Contracts

• The law on the duty of good faith will hold the parties close to the terms of the contract and the objectives that are grounded in those terms.

• While the term “good faith” may appear to invite a broad-ranging claim about the party’s conduct in the context of a contractual relationship, the law does not support that kind of claim and the courts of Ontario will enforce the strict bounds of these legal principles.

• But the Court of Appeal held last week that “the jurisprudence on the duty of good faith and fair dealing… is not settled in this country” (Kang v. Sun Life (2013, ONCA).

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Shareholder and Oppression Litigation

• The oppression remedy is an equitable remedy which seeks to ensure fairness and gives the courts a broad, equitable jurisdiction to enforce not just what is legal but what is fair as it relates to an individual’s rights and not necessarily arising from a contract between the parties.

• With its focus on fairness, the courts have considered “bad faith” behaviour in setting out the boundaries of “oppression”.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Shareholder and Oppression Litigation

• In BCE Inc. v. 1976 Debentureholders (2008) the SCC found that in assessing an oppression claim, the courts must determine whether the evidence supports:

(1) the claim that a stakeholder had a reasonable expectation; and

(2) whether that reasonable expectation was violated as a result of conduct that amounted to “oppression”, “unfair prejudice” or “unfair disregard” of the relevant interest.

• The Court found that “oppression” is conduct which is coercive and abusive, and suggests bad faith.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Shareholder and Oppression Litigation

• In Fracassi (2011, ONSC), the Court set out some categories of conduct that could be considered “oppressive”, including:

(1) lack of a valid corporate purpose for the transaction;

(2) failure to take reasonable steps to simulate an arm’s length transaction; (3) lack of good faith on the part of the directors of the corporation;

(4) discrimination between shareholders with the effect of benefiting the majority shareholder to the exclusion/detriment of the minority shareholder; (5) lack of adequate/appropriate disclosure of material information to the

minority shareholder; and

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Legal counsel advising in connection with shareholder and oppression law,

business litigation and pension and benefit plan matters will often be required to address conflicts of interest in retaining external counsel, providing advice to their clients, or even acting as a member of committees or boards.

• It is important to identify, avoid and address conflicts of interest in those specific contexts in accordance with the Rules of Professional Conduct.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Subrule Rule 2.02(1.1) deals with a lawyer’s obligation when her client is

an organization and states that, even where instructions may be received from an officer, employee, agent, or representative, when a lawyer is

employed or retained by an organization, including a corporation, the lawyer must, in exercising her duties and in providing professional services, act for the organization.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• In-house counsel providing advice in connection with the dismissal of employees will often be required to interact with unrepresented individuals (e.g. employees) who may be adverse in interest.

• As such, counsel must be mindful of his or her obligations to unrepresented (and represented) individuals as dictated by the Rules of Professional Conduct

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Under Rule 2.04 (14), when dealing with unrepresented persons, lawyers have an obligation to:

(a) urge the unrepresented person to obtain independent legal representation,

(b) take care to see that the unrepresented person is not proceeding under the impression that his or her interests will be protected by the lawyer, and (c) make clear to the unrepresented person that the lawyer is acting

exclusively in the interests of the client and accordingly his or her comments may be partisan.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Under Rule 6.03 (7), once an employee obtains counsel, lawyers must not: (a) approach or communicate or deal with the person on the matter, or (b) attempt to negotiate or compromise the matter directly with the person. • Under Subrule 7.01 there are limited exceptions to this rule where the individual

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• A dismissed employee may also claim personally against a fellow employee or manager at the Company, who might have an interest that is not totally

synchronous with the Company’s.

• In such circumstances, in-house counsel must be aware of the Rules of Professional Conduct concerning conflicts of interest.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Rule 2.04 deals with avoiding conflicts of interest.

• Conflict of interest is defined under the Rules as an interest:

(a) that would be likely to affect adversely a lawyer’s judgment on behalf of, or loyalty to, a client or prospective client, or

(b) that a lawyer might be prompted to prefer to the interests of a client or prospective client.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Under Rule 2.04(2)-(5), lawyers are required to avoid conflicts of interest such that they may not:

• Advise or represent more than one side of a dispute.

• Act or continue to act in a matter when there is or is likely to be a conflicting interest unless, after disclosure adequate to make an informed decision, the client or prospective client consents.

• Act against a client on a matter for which they have previously represented the client or against persons who were involved in or associated with the client in: the same matter, any related matter, or (with some exceptions), in any new matter, if the lawyer has obtained from the other retainer relevant confidential information unless the client and those involved in or associated with the client consent.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Subrule 2.04(6) deals with Joint Retainers and allows a lawyer to accept

employment from more than one client in a matter or transaction provided that the lawyers advises the client that

(a) the lawyer has been asked to act for both or all of them,

(b) no information received in connection with the matter from one can be treated as confidential so far as any of the others are concerned, and

(c) if a conflict develops that cannot be resolved, the lawyer cannot continue to act for both or all of them and may have to withdraw completely.

• Subrule 2.04(7) deals with joint retainers where there is a continuing relationship between the lawyer and one of the parties to the retainer. This provision

requires that the lawyer advise the other client of the continuing relationship and recommend that the client obtain independent legal advice about the joint

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

Rules 2.02, 2.04 and 6.03 – Identifying Your Client, Dealing

with Unrepresented and Individually Named Employees

• Subrule 2.04(9) and (10) outlines a lawyers obligation where clients have

consented to a joint retainer and an issue contentious between them or some of them arises. In such a case, the lawyer must:

(a) not advise them on the contentious issue, and

(b) refer the clients to other lawyers, unless (i) no legal advice is required, and (ii) the clients are sophisticated, in which case, the clients may settle the contentious issue by direct negotiation in which the lawyer does not

participate.

• Subrule 2.04(10) deals with the exception to this rule and allows clients who consent to a joint retainer to agree that if a contentious issue arises the lawyer may continue to advise one of them. In that case, if a contentious issue does arise, the lawyer may advise the one client about the contentious matter and shall refer the other or others to another lawyer.

The Duty of Good Faith: Getting More (or less)

Than You Bargained For – March 6, 2013

The Duty of Good Faith:

Getting More (or Less) Than You

Bargained For