Bad Faith Discharge
Stacey Reginald Bail”
While employees owe employers a common
law duty of good faith, there is no such general
reciprocal obligation flowing from employer
to employee. The author first demonstrates
how the relationship between employer and
employee is governed by an outmoded legal
structure that does not reflect the reality of
contemporary Canadian society, and then
argues for the recognition by the courts of a
new action in tort for bad faith discharge. Due
to the numerous deficiencies inherent in the
current state of the common law in Canada,
often employees who have been the victims of
a bad faith discharge are not fully compen-
sated. An historical analysis reveals that the
current law continues to reflect the laissez-
faire and class-oriented values of England dur-
ing the height of the Industrial Revolution. By
examining the experience of the United States,
and in particular the states of California and
Montana, the author shows that the recognition
of such a new tort can be accomplished by
extending existing principles. In light of, inter
alia, the judicially recognized goal of protect-
ing employees as a vulnerable class, the courts
should draw on the fundamental principles of
tort law, as well as general considerations of
policy, and recognize an action in tort for bad
faith discharge. Should the courts for some
unfortunate reason not permit a tort action, it is
very difficult to see how the proposed contrac-
tual action would also fail given the numerous
developments in society and the common law
discussed in this article.
L’obligation de common law d’agir avec
bonne foi n’incombent qu’aux employ6s, les
employeurs n’ayant pas A assumer une telle
obligation A l’dgard de leurs employ~s. L’au-
teur d6montre tout d’abord comment la rela-
tion qui lie un employeur A son employ6 est
r6gie par une structure juridique d6passde qui
ne refl~te plus ]a r6alitd contemporaine de Ia
soci6t6 canadienne, pour ensuite pr6ner Fin-
troduction par les tribunaux d’un nouveau d6lit
de common law relatif au congddiement fait
par mauvaise foi. En raison des nombreuses
insuffisances inhdrentes A la common law telle
qu’elle existe actuellement au Canada, il arrive
souvent que des employds victimes d’un con-
g6diement fait par mauvaise foi ne soient pas
entirement indemnis6s. Une analyse histo-
rique du probl~me permet de constater que le
droit actuel refl~te toujours certaines valeurs
basdes sur les distinctions sociales et une atti-
tude de laissez-faire propres A ‘Angleterre au
moment de la rdvolution industrielle. A ]a lu-
mitre de l’exprience des ttats-Unis, et en
particulier des dtats de ]a Californie et du
Montana, l’auteur ddmontre qu’cn d1argissant
les principes actuels, il est possible de recon-
naitre
‘existence de ce nouveau d6lit. En
s’inspirant des principes fondamentaux du
droit de la responsabilit6 civile d6lictuelle
ainsi que de consid6rations d’ordre public
g6ndrales, les tribunaux devraient, A la lumi~re
de l’objectifjudiciairement reconnu de protec-
tion des employ6s appartenant h une classe
vulndrable, reconnaltre
‘existence d’un d6lit
de common law relatif au congddiement fait
par mauvaise foi. Malgr6 l’absence d’une telle
reconnaissance, il est difficile de concevoir
comment le recours contractuel actuel pourrait
aussi 8tre rejet6 compte tenu des nombreux
d6veloppements dans ]a soci6t6 et dans ]a com-
mon law discut6s dans cet article.
* Of the bars of Ontario, Alberta and British Columbia. The author would like to thank George
Vassos, Chris Chenoweth and the editorial board of the McGill Law Journal for their helpful com-
ments. The author was either counsel or co-counsel in Machtinger v. HOJ Industries Ltd., [1992]
1 S.C.R. 986; Ribeiro v. Canadian Imperial Bank of Commerce (1992), 13 O.R. (3d) 278 (C.A.);
Purolator Courier Ltd. v. Lalach (25 March 1993), No. 1924-Ont.; Ruggeiro v. Emco Limited (4
May 1993). 92-CQ-28566 (Ont. Ct. (Gen. Div.)), referred to infra.
McGill Law Journal 1994
Revue de droit de McGill
To be cited as: (1994) 39 McGill L.J. 568
Mode de r6f6rence: (1994) 39 R.D. McGill 568
1994]
BAD FAITH DISCHARGE
Synopsis
Introduction
I.
Deficiencies in the Common Law of Wrongful Dismissal
A. Capped Notice Periods
B. Loss of Reputation
C. Re-Instatement
D. Mental Distress
H. The Employment Relationship in Historical Perspective
I. The American Approach
A. Exceptions to the At-Will Approach
1. Action Based on an Implied-In-Fact Covenant
2. Action Based on Public Policy
3. Action Based on an Implied Duty of Good Faith
B. The California Decisions
C. Tort or Contract?
1. Rise of Action Ex Delicto
2. Application to the Employment Relationship
a. The California Decisions
b. Outside California
IV. Building a Canadian Model
A. Judicial Controls on Expressed Contractual Discretion
B. Common Law Procedural Fairness
C. Canada Labour Code as Evidence of Modern Social Policy
D. Labour Relations
V. Bad Faith as a Tort in Canada
A. Policies and Goals of Tort Law
B. Application of Tort Goals to Bad Faith Discharge
VI. Bad Faith Discharge as a Contractual Action
Conclusion
REVUE DE DROIT DE McGILL
[Vol. 39
If we would guide by the light of reason,
we must let our minds be bold.’
Introduction
Ordinary employees owe their employers a common law duty of good faith2
and have an obligation to serve faithfully.3 Equity imposes upon some employees
even more onerous fiduciary obligations.4 If one of the purposes of the law is, as
Blackstone says, to protect “the weal from the insults of the stronger”5 one
would think there would be a reciprocal obligation flowing from employers to
employees. Although there is some evidence that the law is now moving in this
direction in Canada,6 some two hundred years after Blackstone’s Commentaries
on the Laws of England, it is still not a generally recognized principle that
employers have an implied obligation of good faith and fair dealing.7
The thesis of this article is that the common law should recognize an obli-
gation of good faith and fair dealing owed by employers in all employment rela-
tionships.’ Employers who terminate employment in bad faith9 and not in the
‘New York State Ice Co. v. Liebmann, 285 U.S. 262 at 311 (1932), Brandeis J.
2See 57134 Manitoba Ltd. v. Palmer (1989), 26 C.P.R. (3d) 8, 44 B.L.R. 94, 37 B.C.L.R. (2d)
50 (C.A.) [hereinafter Palmer); Wilson Trophy Co. (B.C.) v. Chorney (1991), 35 C.P.R. (3d) 161
(B.C.S.C.); Faccenda Chicken Ltd. v. Fowler, [1986] 1 All E.R. 617 (C.A.).
3See Esher M.R.’s remarks in Pearce v. Foster (1886), 17 Q.B.D. 536 at 539 (C.A.). Pearce v.
Foster was applied in Canadian Imperial Bank of Commerce v. Boisvert, [1986] 2 F.C. 431, 13
C.C.E.L. 264 (C.A.).
4Some courts have gone to remarkable lengths to impose fiduciary obligations on relatively low
ranking employees. In Hudson’s Bay Co. v. McClocklin, [1986] 5 W.W.R. 29,42 Man. R. (2d) 283
(Q.B.), fiduciary obligations were imposed upon the manager of the hearing department of a
department store. Several decisions have imposed fiduciary obligations upon ordinary sales repre-
sentatives. See generally P. Wardle, “Post-Employment Competition – Canaero Revisited” (1990)
69 Can. Bar Rev. 233. Quaere whether this trend is reversing. See Crain-Drummond Inc. v. Hamel
(1991), 35 C.C.E.L. 55, 36 C.P.R. (3d) 151 Ont. Ct. (Gen. Div.), aff’d (1991), 36 C.P.R. (3d) 163
(Ont. Div. Ct.); R.W Hamilton Ltd. v. Aeroquip Corp. (1988), 65 O.R. (2d) 345, 22 C.P.R. (3d)
135 (H.C.J.); Palmer, supra note 2.
5W. Blackstone, Commentaries on the Laws of England, vol. 3 (Chicago: University of Chicago
6See Part V.B., below, for a discussion of this issue.
7See generally I. Christie, G. England & W.B. Cotter, Employment Law in Canada, 2d ed.
Press, 1979) at 2.
(Toronto: Butterworths, 1993) at 414-17.
s refrain from referring to the traditional phrase “contract of employment” because it will be
argued that the use of contract law to protect employees has failed dismally, and we should now
be thinking in terms of tort to protect the interests and expectations of employees. On the use of
a tort model, see generally L. Blades, “Employment at Will v. Individual Freedom: On Limiting
the Abusive Exercise of Employer Power” (1967) 67 Colum. L. Rev. 1404; M. Cohen, “Recon-
structing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort” (1985) 73
Calif. L. Rev. 1291.
Not all commentators have given up hope of using a contractual paradigm to prevent abusive
discharges. See K. Swinton, “Contract Law and the Employment Relationship: The Proper Forum
for Reform” in B. Reiter & J. Swan, eds., Studies in Contract Law (Toronto: Butterworths, 1980)
357; J. Shapiro & J. Tune, “Implied Contract Rights to Job Security” (1974) 26 Stanf. L. Rev. 335.
9fhe courts are comtortable witnout a specific definition of bad faith. The words “good faith”
and “bad faith” are already used in, and defined by, statutes. E.P. Belobaba, “Good Faith in Can-
adian Contract Law” in Commercial Law: Recent Developments and Emerging Tr hds (Toronto:
De Boo, 1985) 73 at 76, states that in 1985 “[s]ome 153 federal statutory provisions and 285 pro-
1994]
BAD FAITH DISCHARGE
bona fide best interests of their businesses should not benefit from the inherent
deficiencies in a wrongful dismissal action, which often fails to make whole the
real losses of employees who are victims of bad faith discharges. It will be
argued that, given social evolution and a view on how we treat individual mem-
bers of society which has changed drastically over the last one hundred years,”
a progressive and enlightened society has a legitimate economic and moral
interest in preventing bad faith discharges.
Oliver Wendell Holmes accurately stated that the common law represents
societal values which have progressed through history.” It will be argued that
the blind use of the commercial contractual paradigm to determine rights and
obligations in the employment relationship in the common law provinces is no
longer adequate to enforce community values which have long since progressed
since the height of the Industrial Revolution. Furthermore, it will be submitted
that the courts have inadvertently imposed the laissez-faire attitudes, values and
presumptions of a society long since faded into history onto a society with a
fundamentally different view on industrial relations and the degree of protection
the common law ought to afford its vulnerable members.
This article will conclude with a proposal that common law jurisdictions
ought to recognize a tort action for bad faith discharge. If the courts are not will-
ing to recognize a new nominate tort, they should recognize a new contractual
action based upon an implied term of good faith and fair dealing, a term to be
implied by law. 2
I. Deficiencies in the Common Law of Wrongful Dismissal
An action for wrongful dismissal is based on a “contract of employment”.
In every such contract there is at least a “presumption”‘ 3 that the &mployer will
vincial provisions employ[ed] a good faith standard without further amplification or statutory def-
inition” and that “[i]n our everyday vocabulary and in much of our law, good faith remains a func-
tional and familiar concept.” Termination in bad faith is distinguishable from a “wrongful
dismissal”, which is merely termination without reasonable notice as required by the contract of
employment. A termination can be technically wrongful but without malafides on the part of the
employer, simply because the employer has not provided adequate notice.
‘0For a discussion of the role of the individual during the Industrial Revolution, see P.S. Atiyah,
The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979) at 256-91.
“The Common Law (Toronto: General, 1991) (originally, Boston: Little, Brown, 1881) at 1.
Holmes’ progressive approach to the common law is to be contrasted with the concept of form-
alism, the prevalent philosophy during the Industrial Revolution, which held that legal principles
were to be purely based on “logic” and precedent. The courts were not, for example, to interfere
with the written text of contracts to achieve ajust result. The reasons and policies behind legal rules
were irrelevant to those who espoused formalism. See generally Atiyah, ibid. at 388-97.
12A term implied by law is preferable and more honest than an oblique and artificial consider-
ation of what the parties would have considered at the formation of the contract of employment.
It is submitted that the law should, for strong public policy reasons, require employers to act in
good faith since at the formation stage of most contracts of employment the employee does not
specifically contemplate the potential of a bad faith discharge. See generally infra notes 13, 208
and accompanying text; S. Ball, “Social Strata and Wrongful Dismissal Notice: The Decision of
Pelcli v. Hyundai Auto Canada Inc.” (1993) 14 Advocates’ Q. 343. Equally, it not more impor-
tantly, by creating a new term implied by law, the courts will be able to start afresh in an area where
the common law has failed to keep pace with modem social values (see Part II, below).
131n Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, 7 O.R. (3d) 480, 40 C.C.E.L. I
McGILL LAW JOURNAL
[Vol. 39
provide the employee adequate notice of its intention to terminate the relation-
ship. While terminating employment will not necessarily constitute a breach of
contract, should an employee be discharged without adequate notice, his or her
dismissal will be “wrongful” and the employer will have to pay damages result-
ing from the failure to give adequate notice. 14 The common law action for
wrongful dismissal is inadequate to protect employees who are dismissed in bad
faith and for reasons which are not based upon the bonafide business interests
of the employer.’
Although the traditional view as to an employer’s potential liability for
wrongful dismissal has been considerably eroded over the last twenty years in
Canada, it was recently reiterated by McIntyre J. in Vorvis v. Insurance Corpor-
ation of British Columbia:
[T]he employer/employee relationship (in the absence of collective agreements
which involve consideration of the modem labour law r6gime) has always been
one where either party could terminate the contract of employment by due notice,
and therefore the only damage which could arise would result from a failure to
give such notice) 6
Even though a normal employment relationship is one of “indefinite hir-
ing”, the courts really do not treat the contract of employment as truly an indef-
inite term contract given the employer’s right to terminate employment arbitrar-
ily, capriciously and in bad faith. 7
[hereinafter Machtinger cited to S.C.R.], the majority refused to rule on the nature of the implied
term of reasonable notice, characterizing it instead as a “presumption”. It is submitted that it is for
public policy reasons that the term of reasonableness is normally a term implied by law, reasons
which find no application in findings of fact or business efficacy (see generally the reasons of
McLachlin J. in Machtinger). Given that the majority opinion confirmed that many employees are
unaware that they have a right to reasonable notice, and since terms implied by law do not depend
upon the intention of the parties, it is submitted that Madame Justice McLachlin’s view on this
point is correct. See also Pitre v. Gordie’s Auto Sales Ltd. (1976), 16 N.B.R. (2d) 328 at 333, 73
D.L.R. (3d) 559 (C.A.); Ball, ibid.
14
1n Prince v. T. Eaton Co. (1992), 91 D.L.R. (4th) 509, 67 B.C.L.R. (2d) 226, 41 C.C.E.L. 72
(C.A) [hereinafter Prince], the Court re-affirmed the principle that the employer’s obligation is to
give reasonable notice and not merely to pay damages for loss of remuneration which would have
been earned during the notice period. In this case, the employer was held liable for long term dis-
ability benefits due to the employee had the employer given reasonable notice.
15Jung and Harkness found that discharges without cause, coupled with bad faith on the
employer’s part, are very common. Their study found that well over half of the time when a plain-
tiff could prove that he or she was fired without cause, he or she could also prove that the termi-
nation was carried out in bad faith (D. lung & B. Harkness, “Life after Foley: The Bottom Line”
(1989) 5 The Labour Lawyer 667 at 677).
16[1989] I S.C.R. 1085 at 1103, 58 D.L.R. (4th) 193, 25 C.C.E.L. 81 [hereinafter Vorvis cited
to S.C.R.].
17Employers are currently allowed to terminate at will with caprice and malice, as long as they
provide reasonable notice. Swinton (supra note 8 at 373-74) argues that employees could be better
protected by reading in an implied term of “termination only for just cause”. Etherington doubts
whether Swinton’s suggestion is realistic in light of some courts’ commitment to freedom of con-
tract, in particular, the Ontario Court of Appeal (see B. Etherington, “The Enforcement of Harsh
Termination Provisions in Employment Contracts: The Rebirth of Freedom of Contract in Ontario”
(1990) 35 Mc(.iIt U. 4.9). It snould, however, be noted tmat F-therington’s remarks appear in a
case comment on the Court of Appeal decision in Machtinger, which was later reversed by the
Supreme Court of Canada, and some of his comments were actually adopted by the Court (see
Machtinger, supra note 13).
19941
BAD FAITH DISCHARGE
McIntyre J.’s comments beg the questions of why the common law has
fallen so out of touch with the realities of the employment relationship that a
separate but parallel body of jurisprudence (arbitral jurisprudence) has had to
develop; and why common law judges have not attempted to emulate the nor-
mal requirement found in arbitral jurisprudence that a dismissal cannot take
place unless there is just cause or economic redundancy.”
When an employer is acting in good faith and pursuant to legitimate eco-
nomic interests, delimiting the employer’s exposure to liability for a failure to
provide adequate notice is normally reasonable and appropriate. No employer
should have to act as an insurer of its employees when it is not economically
justifiable to continue the employment relationship. An employer who, how-
ever, dismisses an employee in bad faith and not pursuant to a legitimate busi-
ness need or interest warrants different considerations. Except for damages for
mental distress, and in the rare case where there is an award for punitive dam-
ages, employers are currently free to discharge in bad faith with the knowledge
that their potential liability is relatively low compared to the real economic and
non-economic losses suffered by discharged employees. It is submitted that
employers who discharge employees in these circumstances should not neces-
sarily benefit from the inherent deficiencies in the common law action for
wrongful dismissal, which does not allow employees to be made whole from the
consequences of a bad faith discharge. As it will be later argued, society has a
legitimate interest in ensuring that these employers are the subject of special
treatment and consideration by the courts.
Employers who discharge in bad faith, regardless of the actual conse-
quences to the terminated employee’s career, reputation and future ability to
earn a livelihood, benefit from the following deficiencies in the common law
action for wrongful dismissal.
A. Capped Notice Periods
As noted above, in contracts of employment of indeterminate duration
there is a presumption that the employer must give the employee reasonable
notice of the termination of his or her employment. It has been held that the
obligation to provide reasonable notice has been capped, 9 and that employers
8It has been noted that “[m]odern social expectations support the concept of dismissal only for
good reason” (New Zealand Law Commission, Aspects of Damages: Employment Contracts and
the Rule in Addis v. Gramophone Co. (Wellington, N.Z.: New Zealand Law Commission, 1991)
at 8 [hereinafter N.Z. Law Comm.]). See also Swinton, ibid. at 376-77; G. England, “Recent Devel-
opments in Wrongful Dismissal Laws and Some Pointers for Reform” (1978) 16 Alta. L. Rev. 470
at 471-72; C. Summers, “Individual Protection against Unjust Dismissal: Time for a Statute”
(1976) 62 Va. L. Rev. 481; D. Beatty, “Labour is Not a Commodity” in Reiter & Swan, eds., supra
note 8, 313 at 355.
191n Ansari v. British Columbia Hydro & Power Authority, [1986] 4 W.W.R. 123 at 132, 2
B.C.L.R. (2d) 33, 13 C.C.E.L. 238 (S.C.), aff’d (19 November 1986), Vancouver 005827 (C.A.)
[hereinafter Ansari], McEachem CJ.S.C. (as he was then) said that 18 to 24 months is the rough
upper limit for reasonable notice; and other cases should be scaled downward. See also Webster
v. British Columbia Hydro & Power Authority (1992), 91 D.L.R. (4th) 272, 42 C.C.E.L. 105
(B.C.C.A.).
REVUE DE DROIT DE McGILL
[Vol. 39
are not to be considered as insurers against unemployment. 0 The quantum of
notice in a wrongful dismissal case is normally determined by the variables enu-
merated in the well-known decision of Bardal v. Globe and Mail.2′
The problem with the current state of the law is that it will often be deemed
irrelevant that the actual length of unemployment experienced by an employee
victimized by a bad faith dismissal is longer than the normal notice period
accorded to an employee.22 The employer is not responsible to make whole the
real loss to the employee, even when acting in bad faith. The problem is obvious
when a middle manager with few years of service, thus normally entitled to less
than one year’s notice, has his or her entire career ruined because of the manner
of the dismissal.’ The law’s inadequacy is even more apparent when there is a
contract of employment clearly stating what the notice period is.24
B. Loss of Reputation
The inadequacy of an action based in contract is further demonstrated by
the general unavailability of damages for loss of reputation for a wrongfully dis-
missed employee.’ If the common law were to be recreated, given the evolution
of social values, it would not be surprising if damages for loss of reputation in
wrongful dismissal cases were available in appropriate situations.26 The com-
2Notice periods thus may be and are often shorter than the period of unemployment. See Fon-
ceca v. McDonnell Douglas Canada Ltd. (1983), 1 C.C.E.L. 51 (Ont. H.C.J.); Harper v. Bank of
Montreal (1989), 27 C.C.E.L. 54 (Ont. Div. Ct.); Ansari, ibid. The significance of the length of
the notice period is that it forms the basis for damage assessment in wrongful dismissal cases. See
Prince, supra note 14.
21(1960), 24 D.L.R. (2d) 140 at 145, [1960] O.W.N. 253 (H.CJ.). McRuer C.J.H.C. said:
There could be no catalogue laid down as to what was reasonable notice in particular
classes of cases. The reasonableness of the notice must be decided with reference to
each particular case, having regard to the character of the employment, the length of
service of the servant, the age of the servant and the availability of similar employment,
in addition to the experience, training and qualifications of the servant.
22In Gillman v. Saan Stores Ltd. (1992), 6 Alta. L.R. (3d) 72, 45 C.C.E.L. 9 (Q.B.), an employee
took 14 months to find new employment because of unproven fraud allegations and a refusal by
the employer to provide a positive reference, yet was only awarded six months notice.
23In Pilato v. Hamilton Place Convention Centre Inc. (1984), 45 O.R. (2d) 652 at 664, 7 D.L.R.
(4th) 342, 3 C.C.E.L. 241 (H.C.J.) [hereinafter Pilato], Fitzpatrick J. noted that the plaintiff would
probably never get a position in Canada again, in his field, because of the manner and circumstan-
ces of the dismissal. See also Rahemtulla v. Vanfed Credit Union, [1984] 3 W.W.R. 296, 51
B.C.L.R. 200,4 C.C.E.L. 170 (S.C.) [hereinafterRahemtulla cited to W.W.R.]; Ribeiro v. Canadian
Imperial Bank of Commerce (1989),’67 O.R. (2d) 385,24 C.C.E.L. 225 (H.C.J.), rev’d on quantum
(1992), 13 O.R. (3d) 278, 44 C.C.E.L. 165 (C.A.) [hereinafter Ribeiro cited to O.R. (2d)], as other
examples where careers were effectively mined because of the circumstances of the dismissal.
24See e.g. Ribeiro, ibid. at 421.
2This is to be contrasted with the civil law, as applied by the Quebec courts, where damages
for loss of reputation have been recognized. See Carle v. Comiteparitaire du vtement pour dames,
[19871 R.J.Q. 2553,22 C.C.E.L. 281 (Sup. Ct.). In Stewart v. Standard Broadcasting Corp. (1989),
29 C.C.E.L. 290 (Que. Sup. Ct.), $75,000 was awarded for injury caused by publicity surrounding
the plaintiff’s dismissal even though the defendant was not directly responsible for the publicity.
-‘i’he New Zealand Law Commission believes mat common law barriers should be legislatively
overruled, and that employees should be able to recover damages for loss of reputation without
having to resort to separate tort claims or submit to the special delimiting factors associated with
an action for defamation (N.Z. Law Comm., supra note 18 at 8, 51). Swinton (supra note 8 at 364)
19941
BAD FAITH DISCHARGE
mon law has traditionally been reluctant to recognize damages for loss of rep-
utation engendered by a discharge,27 even when the employer has acted in bad
faith.28 The common law’s general refusal to recognize damages for loss of rep-
utation in wrongful dismissal cases is baffling in light of the fact that loss of rep-
utation has long been recognized as a head of damages in commercial cases.29
Several Canadian courts have refused to blindly follow the view of the law
lords, expressed in the nearly century-old decision of Addis v. Gramophone Co.,
on the nature of the employment relationship, and have noted that the Addis bar
against damages for loss of reputation in a wrongful dismissal case has been
eroded. 0
An argument for allowing damages for loss of reputation is illustrated by
Madame Justice McLachlin’s observations in Rahemtulla.3′ In Rahemtulla, an
employee was falsely accused of misappropriating funds, and her employment
was terminated. Concerning the plight of employees who have been dismissed
on alleged grounds which are without merit, McLachlin J. accurately noted:
As the plaintiff’s experience demonstrates, an employee dismissed for cause,
and in particular a cause as serious as the charge of theft which was made against
the plaintiff in the case at bar, may have an extremely difficult time finding new
employment. Mr. Lundhol, the plaintiff’s manager, agreed that it would be doubt-
ful indeed that an employee dismissed from a credit union on grounds of theft
would be hired for a similar position by a bank or credit union. If the plaintiff is
honest with prospective employers, as she should be, she must tell them of the cir-
suggests that damage to existing reputation due to termination should be compensable even if tia-
ditional legal theory fails to acknowledge the legitimacy of this claim. Swan notes that the contrac-
tual model now used by the courts does not protect the employee’s reasonable expectation of pro-
fessional development (J. Swan, “Extended Damages and Vorvis v. Insurance Corporation of
British Columbia” (1990) 16 Can. Bus. L. 213 at 221).
27Addis v. Gramophone Co., [1909] A.C. 908 (H.L.) [hereinafter Addis]; Peso Silver Mines Ltd.
v. Cropper, [19661 S.C.R. 673, 58 D.L.R. (2d) 1 [hereinafter Peso cited to S.C.R.]; McMinn v.
Oakville (Town of) (1978), 19 O.R. (2d) 366, 85 D.L.R. (3d) 131 (H.C.J.).
2’Exceptions are recognized for individuals such as entertainers, performers and professional
athletes. See Herbert Clayton & Jack Waller Ltd. v. Oliver, [1930] A.C. 209 (H.L.); Withers v. Gen-
eral Theatre Corporation (1933), 149 L.T. 487; Marbe v. George Edwardes Ltd., [1928] 1 K.B.
269; Racine v. C.J.R.C. Radio Capitale Lt~e (1977), 17 O.R. (2d) 370, 80 D.LR. (3d) 441
(Co. Ct.). See also D. Harris, Wrongfid Dismissal (Toronto: De Boo, updated to 1994) 4.52,
4.56.
29See generally S.M. Waddams, The Law of Damages, 2d. ed. (Toronto: Canada Law Book,
1991)
4.230-4.310. In Wilson v. United Counties Bank Ltd., [1920] A.C. 102, the House of
Lords upheld a jury’s verdict awarding 7,500 pounds for injury to reputation and credit due to a
bank’s negligent performance of a contract to supervise the plaintiff’s business. Lord Atkinson (a
member of the Addis panel) unconvincingly distinguished Addis on the basis that the damages in
Addis were too remote. It should be apparent at the time of hiring that one’s professional reputation
could be ruined depending upon the manner in which one’s employment is terminated.
3See Ribeiro, supra note 23; Perkins v. Brandon University (1985), 35 Man. R. (2d) 177, [1985]
5 W.W.R. 740, 12 C.C.E.L. 112 (C.A.) [hereinafter Perkins cited to Man. R.]; Ribeiro v. Canadian
Imperial Bank of Conmerce (1986), 11 C.C.E.L. 213 (Ont. H.C.J.). Harris states that the current
judicial trend is to regard Addis as being of dubious value as modem precedent (supra note 28,
4.52). While it has been suggested that the trend to move away from the traditional approach is
wrong given the weight of the authority to the contrary (see Christie, England & Cotter, supra note
7 at 754), it should be noted that the Court of Appeal for Ontario specifically left the issue open
in Ribeiro.
31Supra note 23.
McGILL L4W JOURNAL
[Vol. 39
cumstances of her dismissal. Her accompanying protests of innocence would, not
surprisingly, be received with suspicion.32
A tort action for defamation may not necessarily help an employee who
cannot obtain new employment because of the manner of the termination, and
it may be unhelpful when an employer can hide behind the oblique defence of
qualified privilege. 3
C. Re-Instatement
Unlike the remedy available to unorganized employees found in statutes
such as the Canada Labour Code,’ the practice of labour arbitrators and the
remedy for office holders,35 the common law has eschewed specific perform-
ance of the contract of employment and therefore has normally refused to
re-instate employees. 36 The common law approach has remained essentially
unchanged, even though studies have shown that the majority of re-instatements
ordered by arbitrators actually work out for both the employer and employee. 37
D. Mental Distress
Another failure of the contractual action for wrongful dismissal relates to
the awarding of damages for mental distress. 38 As late as 1966, the Supreme
32Ibid. at 306 [emphasis added].
33Several cases have held that the defence of qualified privilege will be available to the employer
as long as he honestly believes his statement, even if the belief is not based on any reasonable
ground or if the employer is irrational, hasty or credulous in jumping to his conclusion. See G.H.L.
Fridman, The Law of Torts in Canada, vol. 2 (Toronto: Carswell, 1990) at 178. The defence of
qualified privilege allows employers to effectively ruin careers of former employees through reck-
less statements. The current state of the law of defamation, as it affects the employment relation-
ship, is no longer acceptable. Ironically, an employer who negligently makes a positive statement
about an employee, may be liable for negligent misrepresentation.
c. N-1.1, s. 124; Nova Scotia’s Labour Standards Code, R.S.N.S. 1989, c. 246, s. 71.
34R.S.C. 1985, c. L-2, ss. 240-46. See also Quebec’s Act Respecting Labour Standards, R.S.Q.
35See generally Harris, supra note 28, 5.13; Christie, England & Cotter, supra note 7 at 723-28.
36Philp v. Expo 86 Corp. (1987), 45 D.L.R. (4th) 449, 19 B.C.L.R. (2d) 88 (C.A.); Red Deer
College v. Michaels, [1976] 2 S.C.R. 324, 57 D.L.R. (3d) 386; Decro-Wall International SA v.
Practitioners in Marketing Ltd., [1971] 2 All E.R. 216, Salmon L.J. Contrast Hill v. CA. Parsons
& Co., [1971] 3 All E.R. 1345 (C.A.);
ine v. National Dock Labour Board, [1957] A.C. 488
(H.L.).
While the courts have used the contractual paradigm for employment relationships, they do not,
however, allow employees to elect leither to accept the employer’s repudiation of the contract of
employment or to treat the contract as being alive. The employee is only able to sue for wrongful
dismissal damages and not for unpaid wages as a debt. See Prozak v. Bell Telephone Co. of Canada
(1984), 46 O.R. (2d) 385 at 402-403, 10 D.L.R. (4th) 382, 4 C.C.E.L. 202 (C.A.).
37G. Adams, Grievance Arbitration of Discharge Cases: A Study of the Concepts of Industrial
Discipline and Their Results (Kingston, Ont.: Industrial Relations Centre, Queen’s University,
1978); P. Barnacle, Arbitration of Discharge Grievances in Ontario: Outcomes and Reinstatement
Experiences (Kingston: Industrial Relations Centre, Queen’s University, 1991). See also G. de N.
Clark, “Unfair, Dismissal and Reinstatement” (1969) 32 Modem L.R. 532.
” Concemng the reluctance ot judges to award contractual damages for mental distress in
wrongful dismissal cases, see the comments of Saunders J. in Bohemier v. Storwal International
Inc. (1982), 40 O.R. (2d) 264 at 273, 142 D.L.R. (3d) 8 (H.C.J.), rev’d on other grounds (1983),
44 O.R. (2d) 361 (C.A.) [hereinafter Bohemier]. See also Rahemtulla, supra note 23, where the
19941
BAD FAITH DISCHARGE
Court espoused the Addis approach in Peso Silver Mines Ltd. v. Cropper, and
stated:
[Tihe claim being founded on breach of contract the damages cannot be increased
by reason of the circumstances of dismissal whether in respect of the respondent’s
wounded feelings or theprejudicial effect upon his reputation and chances of find-
ing other employment.
Although the decision makes no specific reference to Addis, the Peso court
effectively applied the approach advocated by law lords whose view on employ-
ment law was likely formulated during their younger years at the height of the
Industrial Revolution. Such a view, it will be argued, is thoroughly inconsistent
with modem industrial relations.
In Vorvis, both the majority and minority opinions retreat from the
approach taken in Peso regarding damages for mental distress. McIntyre J.
noted that aggravated damages could be awarded in a wrongful dismissal case,
particularly where the acts complained of were also independently actionable.’
Notwithstanding the particularly brutal manner of the employer’s conduct prior
to the dismissal, it was found that mental distress did not occur as a result of
the dismissal. The majority in Vorvis consequently refused to award damages
for mental distress’
The minority refused to award aggravated damages. Wilson J. felt that
mental distress in this particular case would not have been in the reasonable
contemplation of the parties, at the time the contract was entered into, as flow-
ing from the appellant’s unjust dismissal 2 In other words, the plaintiff could not
meet the remoteness test in Hadley v. Baxendale.43 The minority would have
held that Addis was no longer good law, and that the employer’s conduct need
not be independently actionable.”
The majority and minority opinions have been criticized as being incho-
ate45 and confusing, and are said to have left the law in disarray
Court would not award contract damages for mental distress due to a callous dismissal, but did
allow a tort action for the intentional infliction of mental suffering. Swan (supra note 26 at 230)
suggests that damages for mental suffering are not allowed as often is they should be due to inad-
equate treatment of contract damages in the Anglo tradition.
39Peso, supra note 27 at 684.
4″Supra note 16 at 1103.
41Jbid. at 1104.
421bid. at 1124.
43(1854), 9 Exch. 341, 156 E.R. 145. The Hadley principle presumes that an injured party can
only be compensated for those damages which the parties, at the time of entering the contract, con-
templated as likely to occur as a result of the breach at issue (see Swinton, supra note 8 at 364).
Swan forcefully argues that the courts have incorrectly applied Hadley in treating the contract of
employment as an ordinary commercial contract, and have thereby foreclosed claims of damages
which ought to be recoverable (supra note 26).
“Vorvis, supra note 16 at 1113, 1118.
45See A. Beck, “The Demise of Addis” [1990] N.Z.L.J. 88 at 89.
4’Christie, England & Cotter, supra note 7 at 749-50.
47See R. Schai, “Aggravated Damages and the Employment Contract” (1991) 55 Sask. L. Rev.
346 at 355. For a thorough and, with respect, persuasive criticism of Vorvis, see Swan, supra note
26.
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[Vol. 39
II. The Employment Relationship in Historical Perspective
By concentrating on and applying general contractual principles to the
employment relationship,4″ the courts fail to protect the legitimate interests and
reasonable expectations of employees of the present era.49 The inadequacy of
the modem contract of employment becomes understandable if its antecedents
are examined. Looking at history we see that the courts are applying a paradigm
which reflects outdated societal values. We further discover that the modem
contract of employment enforced by the courts today is only a half-completed
creature.
The genesis of the modem contract of employment is attributed to Edward
III and the two labour statutes passed in 134950 and 1350.”‘ The purpose of this
legislation was to combat the scarcity of labour caused by the Black Death,52
and to serve as a substitute for the disintegrating system of serfdom and villein-
age. 3 The legislation also controlled the mobility and the price of labour in an
attempt to lessen the impact of labour shortages. Labourers had no choice but
to work at set wages.’ Edward III’s legislation was elaborated upon by Eliza-
beth I with the enactment of the Statute of Artificers and Apprentices of 1562.11
The rights and obligations flowing from the employment relationship were thus
created by status imposed by statute, and not by intention and contract.56
Under the Statute of Artificers, hirings were required to be for a duration
of no less than one year. This not only restricted the mobility of labour, but also
shielded the parishes. Local parishes were responsible for relief of paupers
under the Poor Law,57 and year-long employment contracts protected the tax-
payers in parishes from being obligated to provide relief to the poor during win-
ter months.
48Professor M.R. Freedland in his text, The Contract of Emplbyment (Oxford: Clarendon Press,
1976) at 19-21, suggests that the employment contract ought to be studied as a class by itself so
that appropriate attention can be given to its special structure. Beatty and Swinton also argue that
one must focus on the special features of the employment relationship which set it apart from the
mainstream commercial contract (Beatty, supra note 18; Swinton, supra note 8 at 376-77). See also
B. Grossman & S. Marcus, “New Developments in Wrongful Dismissal Litigation” (1982) 60 Can.
Bar Rev. 656 at 660.
49See N.Z. Law Comm., supra note 18; Swan, supra note 26 at 228-29; Summers, supra note
18; Beatty, ibid. at 327-30.
5Statute of Labourers (U.K.), 23 Edw. 3.
51Ordinance of Labourers (U.K.), 23 Edw. 3, Stat. 2.
52S. Jacoby, “The Duration of Indefinite Employment Contracts in the United States and
England: An Historical Analysis” (1982) 5 Comp. Labour L. 85 at 86.
53S. Fitzjames, History of the Criminal Law of England, vol. 3 (London: MacMillan, 1883) at
204, 274.
-4Local justices of the peace set wages annually, and employers who paid more than the max-
imum could be fined. Labourers who refused to work at the maximum rate could be imprisoned
for up to three months. Servants who left their masters employ before the end of their term of
employment could be compelled to continue work.
passed due to a shortage of labour brought about by an epidemic.
55(U.K.), 5 Eliz. I., c. 4 [hereinafter Statute of Artificers]. The Elizabethan statute was also
56F. Batt, The Law of Master and Servant, 5th ed. by G. Webber (London: Sir Isaac Pitmann and
Sons, 1967) at 26; R. Harrison, “Termination of Employment” (1972) 10 Alta. L. Rev. 250 at 251.
57(U.K.), 27 Henry VIII, c. 25.
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BAD FAITH DISCHARGE
While the servant was compelled to work at fixed wages, the master did
owe certain obligations. The servant could not be dismissed without cause.”5
Furthermore, the common law conceived of the master as having an in loco
parentis obligation to his servants, thus being required to provide medical
assistance to servants who were injured, and to provide for their physical and
moral well-being.59 It is therefore not surprising, as Professor Kahn-Freund
notes, that the law of master and servant, until recent times, was derived from
books on the law of domestic relationsY
This status-based notion of employment relations was so pervasive that
when Blackstone completed his famous Commentaries on the Laws of England,
the contractual aspect of the employment relationship was virtually ignored.
The significance of this is enormous since the Commentaries from 1770 to at
least 1845 remained the predominant text and had an immense impact on
English law.6′ As a consequence of the Commentaries, common lawyers could
only draw on a severely outdated legal model to determine rights and obliga-
tions arising from the employment relationship during the heart of the Industrial
Revolution. Since legal reality did not conform to social reality, the common
law’s development was retarded.
The nineteenth century saw the rise of classical liberalism, and the com-
mon law responded to the times by paying homage to the banner of freedom of
contract.’ The gross disparity in bargaining power between masters and ser-
vants was ignored,63 and “agreements” were deemed to reflect expectations,
even though, given the abundance of labour during the Industrial Revolution,
servants often had no real choice in the matter.’ Formalism ruled the day.
Although masters and servants were notionally free to contract as they
wished, the common law implied various terms into the contract of employment
which benefited the master, but not necessarily the servant. The courts in
England imposed an obligation under which the contract could only be termi-
nated with notice, not merely for the purpose of protecting employees, but so
58Statute of Artificers, supra note 55, s. 5. Two justices of the peace had to determine the exis-
tence of cause. A servant could not be dismissed simply because the master was facing poor eco-
nomic conditions, and thus the parishes were not forced to absorb the cost of social assistance.
L.Q. Rev. 508 at 508-509.
591acoby, supra note 52 at 89.
60. Kahn-Freund, “Blackstone’s Neglected Child: The Contract of Employment” (1977) 93
611bid. at 523-24.
62See Atiyah, supra note 10 at 388-97, for a description of the rise of formalism during the
Industrial Revolution. Formalism ignored policy considerations and was not concerned with the
relative justice of the parties’ claims. Atiyah states that the rise of formalism coincided with the
decline of the courts of equity in England, and indeed equity in a broader sense as a form of mercy.
Adherence to principle was paramount, even when the result seemed harsh or unjust. Legal doc-
trine was the crux of formalism and the law of precedent ruled the day. It was ultimately rejected
in the United States by writers such as Holmes (supra note 11).
63Pursuant to formalism, inequality of bargaining power was irrelevant and had to be ignored.
See Atiyah, ibid.
64See also Jacoby, supra note 52 at 95, who notes that there was no shortage of labour in England
during the Industrial Revolution. England was actually regarded as becoming over-populated dur-
ing this period (Atiyah, ibid. at 272).
McGILL LAW JOURNAL
[Vol. 39
that the tort of inducement of breach of contract could be used as a weapon
against trade unions. 5 Other implied obligations created to protect masters
included an obligation of faithful service, to be honest and diligent in the mas-
ter’s service, and not to abuse the master’s confidence in matters pertaining to
his service.’
Interestingly, the aforementioned obligations of the master, with
the exception of the obligation to pay damages for failing to provide reasonable
notice of dismissal, did not materialize as implied terms in the contract of
employment in the nineteenth century. The law’s bias in conceptualizing the
employment relationship is demonstrated by the fact that until 1875 it was a
criminal offence for the servant, but not the master, to break the contract of
employment.67
By creating a legal fiction that servants were free to contract or not contract
with their masters, and at the same time creating a set of implied terms which
were intended to benefit the employer, the common law was simply imposing
the will and values of those who actually ran society during the Industrial Rev-
olution.’ Servants were not an important part of the political process69 and had
generally no economic clout. Victorian society stressed self-reliance’
there
was nothing wrong with looking down upon inferiors, and it was widely thought
that to be weak was to be wretched. The lot of working class people was not
helped by the fact that by the end of the Industrial Revolution some even
regarded them as a “separate race” from their employers.7′ It is not surprising
that common law judges, who were part of the dominant class in society, did not
feel morally compelled to use the common law to protect the servant.
–
Since the courts normally respond to the dominant values in society, as Oli-
ver Wendell Holmes argued,72 it is unremarkable that the rights and obligations
which arose from the nineteenth century paradigm almost totally favoured the
master. By examining the antecedents of the contract of employment, it
becomes very clear that the failure to impose a reciprocal obligation on employ-
ers to act in good faith was not a historical accident. Victorian society merely
paid lip-service to the concept of freedom of contract and to the abolition of the
role of status in private law. In reality, this society prided itself not on its equal-
65Etherington, supra note 17 at 472-73; Jacoby, ibid. at 96-97. Trade unionism would have been
more difficult to curb without the existence of notice periods which assisted in the creation of eco-
nomic tort claims against union officials.
6T7he speech of Lord Tucker in Lister v. Romford Ice and Storage Co., f1957] A.C. 555 at 594,
enumerates some of the servant’s duties implied by law.
67Kahn-Freund, supra note 60 at 525.
6SAtiyah, supra note 10 at 390, observes that while formalism was purported to be value-free,
in reality this new approach to the law of contract was “in the interests of the new commercial and
industrial classes.” Jacoby, supra note 52 at 102, notes that for English courts, their “class bias was
their only form of consistency.”
69Atiyah, ibid. at 262, remarks that England was not a democracy in any true sense during the
Industrial Revolution. Even after the 1832 Reform Act (Representation of the People Act, 1832,
2 & 3 Will. 4, c. 45), the vote was confined to the upper and middle classes.
7Ativah. ibid. at 256-91.
71See S. Novick’s introduction to Holmes, supra note 11 at xvii. Social Darwinism, however,
never had the following in England that it enjoyed in the United States, where it flourished for
many years after its demise in England. See Atiyah, ibid. at 285-86.
72Holmes, ibid.
19941
BAD FAITH DISCHARGE
ity, but on its nuances of social status.73 Thus, the modem contract of employ-
ment, which was developed during the Victorian era, contains a myriad of
implied terms in favour of employers because it is the product of a bizarre com-
bination of formalism and status.
It is trite to say that modem Canada, as an enlightened and compassionate
society, has undergone a social evolution since the end of the Industrial Revo-
lution. This ig evidenced by the nation’s extensive social security system and
legislative schemes designed to ensure a safe and humane work place. Curi-
ously, however, notwithstanding a dramatic change in community values, which
has engendered modem social legislation, the employment relationship is still
primarily based on a model that has changed little over the last hundred years
the contract of employment.74 The common law’s approach to industrial rela-
–
tions is akin to a stock market severely out of tune with the economy. When the
common law is not in sync with prevailing social values, it is, like a market, due
for a correction.’
M. The American Approach
To illustrate that the Canadian courts’ reluctance to impose an obligation
of good faith and fair dealing on employers is not justified, it is useful to exam-
ine developments in several American jurisdictions where employees have tra-
ditionally enjoyed even fewer presumptive rights under the common law than
in Commonwealth jurisdictions.
Unlike the English approach, the employment relationship in the United
States has traditionally been “at will”.76 The employer is allowed to discharge
employees for any reason, without reasonable notice and without cause.’ While
employment at will has prevailed as doctrine in American jurisprudence for
over a hundred years, its genesis is, interestingly, the erroneous statements of
Horace G. Wood, a treatise writer in the nineteenth century.7″ The nineteenth
73Atiyah, supra note 10 at 287. Jacoby, supra note 52 at 102, argues that had English courts not
been so concerned about social status, they probably would have espoused the position which dom-
inated American jurisprudence: employment “at will”.
.
Int’l L. 473 at 474.
74G. Simmons, “Unjust Dismissal of the Unorganized Workers in Canada” (1984) 20 Stanf. J.
75Swan, supra note 26 at 219-20, states that “the most obvious question that is not asked is why
it is assumed that the views of the House of Lords in 1909 in Addis v. Gramophone on what a con-
tract of employment gave or provided to the employee must be accepted as still valid today.”
761n Monge v. Beebe Rubber Company, 316 A.2d 549 at 551 (N.H. 1974) [hereinafter Mongel,
the Court, while noting that the law appeared to be evolving to reflect changing legal, social and
economic conditions, said that “[tihe employer has long ruled the workplace with an iron hand by
reason of the prevailing common-law rule that such a hiring is presumed to be at will and termi-
nable at any time by either party.”
77A. Blumrosen, “Stttlement of Disputes Concerning the Exercise of Employer Disciplinary
Power: United States Report” (1964) 18 Rutgers L. Rev. 428 at 432. For a statutory enactment,
see section 2922 of the California Labour Code, which provides, “An employment, having no
specified term, may be terminated at the will of either party on notice to the other…. (Cal. Labour
Code 2922 (West 1989)).
78See Blumrosen, ibid. at 432-33, citing H.G. Wood, A Treatise on the Law of Master and Ser-
vant, 1st ed. (1877), 134, who espoused freedom of contract in the employment relationship. See
REVUE DE DROIT DE McGILL
[Vol. 39
century American courts were nevertheless quick to approve of a model of
employment relations based on freedom of contract, as opposed to one based on
status and customary duties.79 So cherished was the concept of freedom of con-
tract in the employment sphere that the at-will rule actually achieved constitu-
tional protection between 1908 and 1937.80
A. Exceptions to the At-Will Approach
The at-will approach has been heavily criticized by numerous commenta-
tors.”‘ It has been eroded considerably in almost all American jurisdictions by
developments in the common law and progressive steps taken by at least one
state legislature.” There are at least three recognized common law exceptions
to the employer’s right to discharge employees “at will”: 3 actions based on an
implied-in-fact covenant, violation of public policy and an implied duty of good
faith.
1.
Action Based on an Implied-In-Fact Covenant
The presumption of employment at will may be displaced by an express or
implied contract allowing discharge only for good cause.’ If the court finds a
contractual limitation curtailing the employer’s right to terminate the employ-
also Shapiro & Tune, supra note 8 at 341, where it is noted that Wood “cited only four American
cases as authority for his approach to general hirings, none of which supported him.” Not only did
Wood state American law incorrectly, he offered no analysis to justify his rejection of the English
approach.
79See K. Geariety, “At-Will Employment: Time for Good Faith and Fair Dealing between
Employers and Employees” (1992) 28 Willamette L. Rev. 681; Shapiro & Tune, ibid. at 343.
8See Geariety, ibid. Although no reference was made to the American experience, the majority
opinion in Slaight Communications Inc. v. Davidson, [1989] 1 S.C.R. 1038 at 1052, 59 D.L.R.
(4th) 416, 26 C.C.E.L. 85 [hereinafter Slaight Communications cited to S.C.R.], a Charter deci-
sion, noted that “the Courts must be… concerned to avoid constitutionalizing inequalities of power
in the workplace.”
81Note, “Protecting At Will Employees against Wrongful Discharge: The Duty to Terminate
Only in Good Faith” (1980) 93 Harv. L. Rev. 1816 [hereinafter “Protecting At Will Employees”];
Note, “A Common Law Action for the Abusively Discharged Employee” (1975) 26 Hastings L.J.
1435; Shapiro & Tune, supra note 8; Summers, supra note 18; W. Mauk, “Wrongful Discharge:
The Erosion of’100 Years of Employer Privilege” (1985) 21 Idaho L. Rev. 201; M.H. Cohen,
“Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort” (1985)
73 Calif. L. Rev. 1291; Blades, supra note 8; A. Blumrosen, “Workers’ Rights against Employers
and Unions: Justice Francis-A Judge for Our Season” (1970) 24 Rutgers L. Rev. 480; P.J. Levine,
“Towards a Property Right in Empl6yment” (1973) 22 Buffalo L. Rev. 1081. Compare Comment,
“Employment-At-Will – Employers May Not Discharge At-Will Employees for Reasons That
Violate Public Policy” [1986] Ariz. St. L.J. 161 [hereinafter “Employment-At-Will”], which
espouses only a narrow exclusion of the at-will rule carved out by the Arizona Supreme Court, but
acknowledges that “the harshness of the rule should be mitigated” (ibid. at 182); R.A. Epstein, “In
Defense of the Contract At Will” (1984) 51 U. Chicago L. Rev. 947.
82Wrongful Discharge from Employment Act, Mont. Code Ann. 39-2-901 – 39-2-914
83M. Miller & R. Estes, “Recent Judicial Limitations on the Right to Discharge: A California
i6 U.C. Davis L. Rev. 65. See also Shapiro v. Wells Fargo Realty Advisors, 199
iniogy” (982)
Cal. Rptr. 613, 152 Cal. App. 3d 467 (Ct. App. 1984) [hereinafter Shapiro].
(1991).
84Strauss v. A.L. Randall Co., 194 Cal. Rptr. 520, 144 Cal. App. 3d 514 (1983); Drzewiecki v.
H & R Block, Inc., 101 Cal. Rptr. 169, 24 Cal. App. 3d 514 at 517 (1972).
1994]
BAD FAITH DISCHARGE
ment relationship, this limitation need not be supported by additional or inde-
pendent consideration separate from continued service.’
An implied obligation to terminate only for good cause may be found by
the court after an examination of the parties’ entire relationship, 6 and thus rep-
resents a significant modification to the at-will approach. 7 The demise of the
employer’s right to terminate at will is a finding of fact.” Indicia which sup-
port a conclusion that the at-will relationship has been altered include the per-
sonnel policies 9 or practices9″ of the employer, the employee’s longevity of
service, 91 actions or communications by the employer reflecting assurances of
continued employment,92 and practices of the industry in which the employee
is engaged.93
2.
Action Based on Public Policy
One early exception to the employment-at-will doctrine was tortious dis-
charge in contravention of public policy.94 The “public policy” exception occurs
in situations where an employee is dismissed for failing to commit criminal or
illegal acts, to conceal wrongdoing, or to take other action harmful to “the pub-
lic weal”.95 An at-will contractual relationship does not prevent a tort action
which is independent of the terms of employment.96
3.
Action Based on an Implied Duty of Good Faith
In several American jurisdictions there is now a tort or contractual action
based upon breach of the duty of good faith and fair dealing when employment
85Pugh v. See’s Candies, Inc., 171 Cal. Rptr. 917, 116 Cal. App. 3d 311 (Ct. App. 1981) [here-
inafter Pugh cited to Cal. Rptr.].
86See Blumrosen, supra note 77.
87Miller & Estes, supra note 83 at 101.
88Khanna v. Microdata Corp., 215 Cal. Rptr. 860 at 865, 170 Cal. App. 3d 260 (Ct. App. 1985)
[hereinafter Khanna]; Pugh, supra note 85; Crosier v. United Parcel Service, Inc., 198 Cal. Rptr.
361 at 364, 150 Cal. App. 3d 1132 at 1137 (Ct. App. 1983) [hereinafter Crosier]; Shapiro, supra
note 83. See also Miller & Estes, ibid.
89 Toussaint v. Blue Cross & Blue Shield, 292 N.W.2d 880, 408 Mich. 579 (1980).
9Pugh, supra note 85 at 925-26; Cleary v. American Airlines, Inc., 168 Cal. Rptr. 722, 111 Cal.
App. 3d 443 (Ct. App. 1980) [hereinafter Cleary cited to Cal. Rptr.]; Greene v. Howard University,
412 F.2d 1128 (D.C. Cir. 1969) [hereinafter Greene].
91Pugh, ibid.; Cleary, ibid.; Perry v. Sindermann, 408 U.S. 593 at 602, 92 S. Ct. 2694
(1972); Maloney v. EJ. Du Pont de Nemours & Co., 352 F.2d 936 at 939, cert. den. 383 U.S.
948 (1965).
92Greene, supra note 90; Fulton v. Tenn. Walking Horse Breeders’ Ass’n of America, 476 S.W.2d
644 (Tenn. Ct. App. 1971); Zimmer v. Wells Management Corp., 348 F. Supp. 540 (S.D.N.Y. 1972)
[hereinafter Zimmer].
93Pugh, supra note 85.
9’Petermann v. Inter’national Brotherhood of Teamsters, 344 P.2d 25, 174 Cal. App. 2d 184 (Ct.
App. 1959); Tameny v. Atlantic Richfield Co., 164 Cal. Rptr. 839, 610 P.2d 1330 (1980) [herein-
after Tameny].
“‘Foley v. Interactive Data Corp., 765 P.2d 373 at 376, 254 Cal. Rptr. 211 (1988) [hereinafter
Foley cited to P.2d].
96Koehrer v. Superior Court, 226 Cal. Rptr 820, 181 Cal. App. 3d 1155 at 1166 (1986) [here-
inafter Koehrer].
McGILL LAW JOURNAL
[Vol. 39
is improperly terminated.97 Both the Uniform Commercial Code98 and the
Restatement (Second) of Contracts99 import an obligation of good faith into all
contracts. While an action based on bad faith in non-employment cases has
existed for some time,”re its availability in the employment context is a rela-
tively recent development.
In Monge v. Beebe Rubber Company”‘ the New Hampshire Supreme Court
was asked to find that the employment-at-will doctrine did not apply to situa-
tions where the contract of employment was terminated in bad faith. The major-
ity in Monge agreed with the plaintiff and held that terminating employment on
motives based upon bad faith is actionable. In this case, the employee claimed
that she was being harassed by her foreman because she refused to go out with
him, and that his hostility, condoned, if not shared by the employer’s personnel
manager, ultimately resulted in her being fired.
The Monge court recognized that employment law needed to evolve in step
with other areas of the law to conform with modem circumstances associated
with changing legal, social and economic conditions.”c The majority held:
The law governing the relations between employer and employee has similarly
evolved over the years to reflect changing legal, social and economic conditions.
… Although many of these changes have resulted from activity and influence of
labour unions, the courts cannot ignore the new climate prevailing generally in the
relationship of employer and employee …
In all employment contracts, whether at will or for a definite term, the em-
ployer’s interest in running his business as he sees fit must be balanced against the
interest of the employee in maintaining his employment, and the public’s interest in
maintaining a proper balance between the two…. We hold that a termination by the
employer of a contract of employment at will which is motivated by bad faith or
malice or based on retaliation is not [in] the best interest of the economic system
or the public good and constitutes a breach of the employment contract …103
97Foley, supra note 95; Cleary, supra note 90; Court v. Bristol-Myers Co., 431 N.E.2d 908, 385
Mass. 300 (1982); K-Mart Corp. v. Ponseck, 732 P.2d 1364, 103 Nev. 39 (1987); Howard v. Dorr
Woolen Co., 414 A.2d 1273 (N.H. 1980); Hall v. Farmers Insurance Exchange, 713 P.2d 1027
(Okl. 1985); Fortune v. National Cash Register Co., 364 N.E.2d 1251, 373 Mass. 96 (1977) [here-
inafter Fortune cited to N.E.2d]; Magnan v. Anaconda Industries Inc., 479 A.2d 781, 193 Conn.
558 (1984); Wagenseller v. Scottsdale Memorial Hospital, 710 P.2d 1025, 147 Ariz. 370 (1985);
Milford v. de Lasala, 666 P.2d 1000 (Alaska 1933); Zimmer, supra note 92; Monge, supra note 76.
98U.C.C. 1-203 (1990) [hereinafter Uniform Commercial Code] states, “Every contract …
imposes an obligation of good faith in its performance or enforcement.”
“Restatement (Second) of Contracts 205 (1981). The provision provides that “[e]very contract
imposes upon each party a duty of good faith and fair dealing in its performance and its enforce-
ment.”
‘I’Supra note 76.
1021bid. at 551.
1031bid. [emphasis added, references omitted]. See also Fortune, supra note 97 at 1257.
10eSee Murcach v. Mass Bonding. & Ins. Co., 158 N.E.2d 338 (Mass. 1959), where an insurer
had a duty to exercise discretionary power to settle claims in good faith. In Uproar Co. v. National
Broadcasting Co., 81 F.2d 373 at 377 (1st Cir. 1936), petition for writ of certiorari to the Circuit
Court of Appeals for the First Circuit denied in 298 U.S. 670, citing from Kirke La Shelle Co. v.
Paul Armstrong Co., 188 N.E. 163 at 167, 263 N.Y. 79 at 87 (1933), where it was held that “in
every contract there exists an implied covenant of good faith and fair dealing.” See also Clark v.
State Street Truat Co., 169 1,.E. 8097
” o “”
. .- I
ab
1994]
BAD FAITH DISCHARGE
Clearly, the Monge court weighed the economic and social consequences
which would be engendered by a rule that contracts of employment could not,
without actionable repercussions, be terminated in bad faith or with malice. This
required the Court to look at the proposed rule’s effect on both employers and
employees. The majority felt that such an approach affords “the employee a cer-
tain stability of employment and does not interfere with the employer’s normal
exercise of his right to discharge, which is necessary to permit him to operate
his business efficiently and profitably.”” 4
While other American jurisdictions have circumvented the century-old rule
stipulated by Mr. Wood and have found that there is a duty of good faith and
fair dealing in every employment contract, 5 the California appellate courts
have been the most influential in the United States in curtailing bad faith dis-
charges in the American workplace.
B. The California Decisions
A review of California law is useful in light of the extensive.consideration
that this issue has been given by its appellate courts.
In Cleary v. American Airlines, Inc.,” an employee alleged he was wrong-
fully discharged for union organizing, and not for the reasons purported by the
employer, which would have amounted to just cause in law. In determining
whether the plaintiff had pleaded a valid cause of action, the Court of Appeal
noted that there is a “continuing trend toward recognition by the courts and the
Legislature of certain implied contract rights to job security, necessary to ensure
social stability in our society.” “W The Cleary court held that:
Termination of employment without legal cause after … a period of time offends
the implied-in-law covenant of good faith and fair dealing contained in all con-
tracts, including employment contracts. As a result of this covenant, a duty arose
on the part of the employer, American Airlines, to do nothing which would
deprive plaintiff, the employee, of the benefits of the employment bargain …108
After Cleary, it was widely acknowledged in California that there was an
implied-in-law covenant of good faith and fair dealing in contracts of employ-
0’aMonge, ibid. at 552. See also Fortune, ibid. Contrast with the traditional American view
expressed in “Employment-At-Will”, supra note 81 at 181, where the author states that implying
a covenant of good faith and fair dealing in employment-at-will situations would expose the
employer to a lawsuit each time he discharged an at-will employee and would be “improperly cre-
ating a collective bargaining agreement between the parties.”
105See Stevenson v. 1T Harper, Inc., 366 N.E.2d 561, 51111. App. 3d 568 (1977). In Rees v.
Bank Building and Equipment Corporation, 332 F.2d 548 at 551-52 (7th Cir. 1964), the United
States Court of Appeals for the 7th Circuit, applying Missouri law, acknowledged in an employ-
ment case that there is an implied covenant of good faith and fair dealing. See also Zimmer, supra
note 92, which utilizes the concept of good faith in an employment contract dispute. See also Bre-
hany v. Nordstrom, Inc., 812 P.2d 49 (Utah 1991); Murphy v. American Home Products Corp., 448
N.E.2d 86, 58 N.Y.2d 293 (1983).
106Supra note 90.
07Ibid. at 729.
103Ibid. In the earlier decision of Tameny, supra note 94, the California Supreme Court suggested
in obiter that there was an obligation of good faith owed by employers. The existence of the
employer’s obligation was alluded to in an even earlier decision of the California Supreme Court,
Coates v. General Motors Corp., 3 Cal. App. 2d 340 at 348, 39 P.2d 838 (1934).
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[Vol. 39
ment. An employer discharging an employee in breach of the implied covenant
could be successfully sued for damages even in at-will employment relation-
ships.” The only question remaining was whether a breach of the implied cov-
enant of good faith and fair dealing gave the employee a tort action or merely
a contractual one. A tort remedy was already available in insurance cases,”‘ but
it was uncertain whether an action sounding in tort was or ought to be available
for employment cases. A tort remedy was obviously superior from an
employee’s perspective since it, inter alia, permitted punitive damages, allowed
damages for mental suffering and was not subject to the limitations of Hadley
v. Baxendale.
C. Tort or Contract?
1.
Rise of Action Ex Delictol”
In the United States, several jurisdictions have allowed a tort action for the
violation of a duty of good faith and fair dealing. The tort action originated in
insurance cases.
In Comunale v. Traders & General Insurance Co.,”2 the California
Supreme Court recognized that the duty of good faith and fair dealing did not
arise from the underlying contract itself, but was implied by law.”3 Comunale
was applied in Crisci v. Security Insurance Co.,”4 where the same court
expressly stated that tort damages could be awarded against an insurer for its
unreasonable and unwarranted refusal to settle a claim when the insurer’s con-
duct could be said to impugn the obligation of good faith and fair dealing.” 5 In
the insurance context, a tort remedy for the infringement of the obligation of
good faith and fair dealing has been widely acknowledged in the United
States.” 6 It has also been recognized that a tort action may extend to contracts
’09Khanna, supra note 88; Seaman’s Direct Buying Service, Inc. v. Standard Oil Co., 686 P.2d
1158, 36 Cal. 3d 752, 206 Cal. Rptr. 354 (1984) [hereinafter Seaman’s cited to P.2d]; Koehrer,
supra note 96; Quigley v. Pet, Inc., 162 Cal. App. 3d 877,208 Cal. Rptr. 394 (Ct. App. 1984); Wal-
lis v. Superior Court (Kroehler Manufacturing Co.), 207 Cal. Rptr. 123, 160 Cal. App. 3d 1109
(Ct. App. 1984) [hereinafter Wallis cited to Cal. Rptr.].
” 0 See text accompanying note 115ff.
“‘Cohen, supra note 8.
112328 P.2d 198, 50 Cal. 2d. 654 (1958) [hereinafter Comunale cited to P.2d].
” 31bid. at 200.
“466 Cal. 2d 425, 58 Cal. Rptr. 13, 426 P.2d 173 (1967) [hereinafter Criscil.
5Gruenberg v. Aetna Insurance Co., 9 Cal. App. 3d 566, 108 Cal. Rptr. 480, 510 P.2d 1032
1
(1973), held that even if an insurance company complied with its contractual obligations, its obli-
gation of good faith and fair dealing was unconditional and independent of its contractual duties,
and an insurer’s unreasonable failure to make payments to the insured constituted a tortious breach
of the obligation. In Neal v. Farmers Insurance Exchange, 21 Cal. 3d 910, 582 P.2d 980, 148 Cal.
Rptr. 389 (1978), punitive damages were awarded against an insurer who denied a claim without
investigating it.
” 6 See Christian v. American Home Assurance Co., 577 P.2d 899 at 903 (Okl. 1977); Escambia
Treating Co. v. Aetna Casualty & Surety Co., 421 P. Supp. 1367 CN.D. Fla. 1976); United Services
Auto Association v. Werley, 526 P.2d 28 (Alaska 1975); Ledingham v. Blue Cross, 29 I11. App. 3d
339, 330 N.E.2d 540 (1975); Anderson v. Continental Ins. Co., 85 Wis. 2d 675 at 691,271 N.W.2d.
368 at 376 (1978); Viles v. Security National Insurance Co., 788 S.W.2d 566 (Tex. 1990). See gen-
1994]
BAD FAITH DISCHARGE
outside of the insurance context, provided they are not of an ordinary commer-
cial nature and share some characteristics with insurance contracts.1 7
2.
Application to the Employment Relationship
a. The California Decisions
In Wallis,”8 the California Court of Appeal held that an employer who vio-
lated the implied covenant of good faith and fair dealing could be liable in tort.
The Court, while noting that an action in tort was found to occur most often in
insurance cases, held that there were enough similar characteristics to allow this
action in employment cases. The Wallis court, following the lead set out in an
earlier decision by the California Supreme Court,”9 stated that for an action
sounding in tort the following characteristics must be present in a non-insurance
contract:
0
(1) mhe contract must be such that the parties are in inherently unequal bar-
gaining positions; (2) the motivation for entering the contract must be a non-profit
motivation, i.e., to secure peace of mind, security, future protection; (3) ordinary
contract damages are not adequate because (a) they do not require the party in the
superior position to account for its actions, and (b) they do not make the inferior
party “whole”; (4) one party is especially vulnerable because of the type of harm
it may suffer and of necessity places trust in the other party to perform; and (5)
the other party is aware of this vulnerability. 12
The Wallis court concluded that the above characteristics could be present
in an employment contract and allowed the plaintiff’s action to prcdeed.12
1 It
specifically stated that “the characteristics of the insurance contract which give
rise to an action sounding in tort are also present in most employer-employee
relationships.”‘” The Court clearly believed that employees are often in inher-
ently weaker bargaining positions than their employers; an employment contract
from an employee’s perspective is not purely commercial and is made to ensure
financial stability and peace of mind; ordinary contract damages do not neces-
sarily offer an incentive for employers not to breach them; a lump sum payment
of damages several years after termination is not adequate when an employee’s
immediate situation after discharge is precarious because of the discharge; and
employers are often aware of the vulnerability of their employees.s
emily J.E. Tankersley, “Good Faith and Fair Dealing” (1991) 22 Texas Tech. L. Rev. 257; Cohen,
supra note 8.
“7Seaman’s, supra note 109.
” 8Supra note 109.
119 1n Seaman’s, supra note 109 at 1166, in discussing the availability of tort remedies for breach
of the covenant of good faith and fair dealing in the employment relationship, the majority noted
that the employment “relationship has some of the same characteristics as the relationship between
insurer and insured.”
12Wallis, supra note 109 at 129.
121Ibid. Bird C.L’s partial dissent in Seaman’s, supra note 109 at 1174-75, is insightful as to why
an action in tort is warranted in employment cases.
‘”Wallis, ibid. at 127.
1I3 bid. The Court noted that “money damages paid pursuant to a judgment years after … do not
remedy the harm suffered … namely the immediate inability to support oneself and its attendant
horrors” (ibid. at 128).
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[Vol. 39
In late 1988, the California Supreme Court ultimately decided in a split
decision (4-3) to abolish a tort cause of action in California for bad faith dis-
charge. In Foley v. Interactive Data Corp.,24 while a tort action for discharge
contrary to public policy was maintained, it was held that only a contractual
action existed for breach of the implied covenant of good faith and fair dealing.
The majority opinion held that although a tort action for breach of the implied
covenant was appropriate in insurance cases, it was not appropriate in employ-
ment cases. While conceding that contractual damages may be inadequate in
bad faith discharge cases,”as the majority concluded that commercial certainty
was more important and that the employment relationship was not special
enough to warrant the additional protection the law affords to victims of insurers
who infringe the implied covenant of good faith and fair dealing. 2′ In coming
to its concltision on the issue of tortious bad faith discharge, the Foley court thus
overruled eight unanimous panels of the California Court of Appeal and obiter
of the California Supreme Court supporting such a cause of action in tort,”n and
disapproved of a unanimous decision of the United States Court of Appeal for
the Ninth Circuit espousing a broader application of tort remedies for bad faith
discharge.” The tort action for bad faith discharge had achieved a very broad
base of support in California.’29
Given the timing of the decision, it is apparent that the Foley court was ideo-
logically different from the court of former Chief Justice Rose Bird, and that the
California Supreme Court reflected the conservative direction of the Bush-
Reagan era.”z Notwithstanding a much more conservative bench, it is noteworthy
that the California Supreme Court refused to abolish the contractual obligation of
good faith and fair dealing in contracts of employment, and continued to permit
a tort action for discharge against public policy. Since social policy issues, such
as universal health care, are now again at the top of the American political
agenda, 3′ one has to wonder how the case would be decided today.
’24Supra note 95.
12lbid. at 401.
1261bid. at 396. In Gateway Realty v. Arton Holdings Ltd. (No. 3) (1991), 106 N.S.R. (2d) 180,
288 A.P.R. 163 (T.D.), aff’d on other grounds (1992), 112 N.S.R. (2d) 180 (C.A.) [hereinafter
Gateway cited to 106 N.S.R. (2d)], Kelly J. rejected the argument that a good faith obligation
should be eschewed because of commercial uncertainty. Clarity and certainty were held not to be
“superior objectives to fair dealing and good faith dealing” (ibid. at 198). It is submitted that Kelly
J.’s reasoning avoids the mischief engendered by formalism.
’27Cleary, supra note 90; Crosier, supra note 88; Shapiro, supra note 83; Rulon-Miller v. Inter-
national Business Machines Corp., 162 Cal. App. 3d 241, 208 Cal. Rptr. 524 (Ct. App. 1984);
Khanna, supra note 88; Koehrer, supra note 96; Wallis, supra note 109; Wayte v. Rollins Intern.,
Inc., 169 Cal. App. 3d 1, 215 Cal. Rptr. 59 (Ct. App. 1985).
128Huber v. Standard Ins. Co., 841 F2d 980 (9th Cir. 1988).
129See H. Klein, Case Comment (1989) 23 Suffolk U.L. Rev. 1155 at 1164.
13″Foley was first argued at the Supreme Court in June of 1986, but the Court did not decide
the case before the ousting of three elected justices, including Chief Justice Rose Bird. The case
was consequently reargued in April of 1987, and the decision released in December of 1988. See
Klein, ibid. at 1157. While the fact that Chief Justice Bird voted to reverse all of the 59 death pen-
alties imposed in California may have been considered popular among progressives, it did, how-
ever, alienate other parts of the California electorate in 1986. See S. Yerton, “’86” The American
Lawyer (March 1994) 76 at 79.
131See e.g. (1992) 10:2 Yale L. & Pol’y Rev., where the entire issue was dedicated to health care.
19941
BAD FAITH DISCHARGE
Of interest to Canadians is that the policy considerations concerning the
employment relationship, which motivated the minority in Foley to support a
tort action for bad faith discharge, are virtually the same as those considered
important in three recent Supreme Court of Canada decisions.’
It is the dissent
in Foley which is helpful to Canadians interested in reforming the common law
so that it reflects modem social conditions.133
b. Outside California
Tort damages for breach of the implied covenant of good faith and fair
dealing in employment contracts have been recognized in at least two other
American jurisdictions at the appellate level.” In Montana, the Supreme Court
held that the duty of good faith and fair dealing in the “employment relation-
ship” (as opposed to the contract of employment) is imposed by operation of
law, and therefore its breach should find a remedy in tort.3 5
IV. Building a Canadian Model
An implied obligation of good faith and fair dealing appears to be evolving
as an accepted part of Canadian contract law.’36 There is considerable evidence
132Reference Re Public Service Employee Relations Act (Alberta), [1987] 1 S.C.R. 313, 38
D.L.R. (4th) 161, 51 Alta. L.R. (2d) 97 [hereinafter Re Public Service Employee Relations Act cited
to S.C.R.]; Machtinger, supra note 13; Slaight Communications, supra note 80. See text accom-
panying notes 176-83 for a discussion of the policy principles of the Supreme Court of Canada in
connection to the employment relationship.
1331t is noteworthy that an empirical study of 326 pre-Foley bad faith discharge actions has
shown that the tort remedy did not create a disproportionately harsh and unpredictable burden on
employers as the media and a majority of the California Supreme Court would lead one to believe.
See Jung & Harkness, supra note 15.
131See K Mart Corp. v. Ponsock, 732 P.2d 1364 (Nev. 1987); Gates v. Life of Montana Insurance
Co. (Gates I), 638 P.2d 1063 (Mont. 1983); Gates v. Life of Montana Insurance Co. (Gates II), 668
P.2d 213 (Mont. 1983) [hereinafter Gates Il. In Gates 11, the Montana Supreme Court held (ibid.
at 214) that the duty existed apart from, and in addition to, any terms agreed to by the parties. See
also G.L. Graham & BJ. Luck, “The Continuing Development of the Tort of Bad Faith in Mon-
tana” (1984) 45 Mont. L. Rev. 43.
In 1987, Montana’s legislature passed the Wrongful Discharge from Employment Act, supra note
82. Under the Montana statute, unorganized non-probationary employees may recover punitive
damages and up to four years of lost wages and fringe benefits when dismissed without “good
cause”. See generally L.H. Schramm, “Montana Employment Law and the 1987 Wrongful Dis-
charge from Employment Act: A New Order Begins” (1990) 51 Montana L. Rev. 94; L. Bierman
& S.A. Youngblood, “Interpreting Montana’s Pathbreaking Wrongful Discharge from Employment
Act: A Preliminary Analysis” (1992) 53 Montana L. Rev. 53.
135Gates II, ibid. at 215.
136There is a growing movement to create an obligation of good faith and fair dealing in all con-
tracts. See D. Clark, “Some Recent Developments in the Canadian Law of Contracts” (1993) 14
Advocates’ Q. 435; Belobaba, supra note 9; B. Reiter, “Good Faith in Contracts” (1983) 17 Val-
pataiso U.L. Rev. 208.’See also Gateway, supra note 126; LeMesurier v. Andrus (1986), 54 O.R.
(2d) 1, 25 D.L.R. (4th) 424 (C.A.); McKinlay Motors Ltd. v. Honda Canada Inc. (1989), 80 Nfld.
& P.E.I.R. 200,249 A.P.R. 200,46 B.L.R. 62 (Nfld. S.C.). The obligation is now firmly entrenched
in Quebec law. See National Bank of Canada v. Houle, 11990] 3 S.C.R. 122, /4 D.L.R. t4tn) 3 t/,
35 Q.A.C. 161 [hereinafter Houle]. Concerning the duty to bargain in good faith, see J. Cassels,
“Good Faith in Contract Bargaining: General Principles and Recent Developments” (1993) 15
Advocates’ Q. 56.
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suggesting that this type of duty will eventually be imposed on Canadian
employers. Furthermore, it will be argued that such an evolution would not nec-
essarily constitute a drastic change. The notion of good faith and fair dealing has
recently emerged in several aspects of the employment relationship, and the
judicial trend to impute such obligations is evidenced in the following ways.
A. Judicial Controls on Expressed Contractual Discretion
In Greenberg v. Meffert,’37 the Ontario Court of Appeal held that an
employer had an obligation to act reasonably, honestly and in good faith when
exercising a discretionary power to remunerate a sales agent under a contract of
employment. Robins J.A., speaking for the Court, stated that “[this] proposition
is so fundamental as to require no elaboration. … Fair dealing is implicit in the
contract.”’38
In the recently released decision of Truckers Garage Inc. v. Krell,’
the
Ontario Court of Appeal considered an employer’s right to exercise a termina-
tion provision in a written employment contract. The contract in question was
a fixed term contract of two years duration, but allowed the employer to termi-
nate it before the end of the term on the grounds of “incompatability”. Osbome
J.A., speaking for the Court, stated:
The termination clause in issue imposed an obligation of good faith and fair deal-
ing on both Temperman and Krell. See Lac Minerals v. International Corona
Resources Ltd., [1989] 2 S.C.R. 574. The existence of such a duty is consistent
with the parties’ reasonable expectation. 14
The courts are now clearly willing to control discretion found in written
employment contracts, including the discretion to terminate employment,
through an implied obligation of good faith and fair dealing. There is no longer
a logical reason for the courts not to recognize an implied obligation to termi-
nate in good faith in all employment relationships.
0
B. Common Law Procedural Fairness
Traditionally, the common law has not required the master to inform the
nor has it afforded an opportunity for the
servant of alleged misconduct,’
137(1985), 50 O.R. (2d) 755, 7 C.C.E.L. 15 (C.A.), leave to appeal refused 56 O.R. (2d) 320
(S.C.C.) [cited to 50 O.R. (2d)].
138Ibid. at 764. As early as Hurley v. Roy (1921), 50 O.L.R. 281, 64 D.L.R. 374 (C.A.), it was
recognized that a “sole discretion” clause had to be exercised “honestly and in good faith”. See
also Moir v. J.P. Porter Co. (1979), 33 N.S.R. (2d) 685, 57 A.P.R. 685 (S.C.).
139(24 December 1993), Toronto C10757 (Ont. C.A.) [hereinafter Truckers Garage].
14Ibid. at 9 [emphasis added].
141Lake Ontario Portland Cement Co. v. Groner, [1961] S.C.R. 553, 28 D.L.R. (2d) 589. See
also Lord Hailsham of St. Marylebone, ed., Halsbury’s Laws of England, 4th ed. (London: Butter-
worths, 1992) at 307, para. 299, where the traditional common law approach is contrasted with the
statutory obligation in the United Kingdom ot an employer to give reasons to employees with two
years of service. The British statute is another example of unjust dismissal legislation being pro-
mulgated by a Commonwealth legislature to ameliorate one of many deficiencies in the common
law.
1994]
BAD FAITH DISCHARGE
employee to rebut the allegations.’42 The employer who dismisses an employee
has no obligation to state the grounds for dismissal, and may dismiss With impu-
nity even if there are no known grounds for dismissal at the time of termination,
so long as subsequently discovered facts amounting to cause can be produced
at the time of trial. 43 The traditional common law approach to the duty of fair-
ness contrasts sharply with that used in employment relationships which are not
purely master and servant. An example of the application of the duty of fairness
is the decision of Nicholson v. Haldimond-Norfolk Regional Board of Commis-
sioners of Police,'” where the employer was held to have an obligation to give
a probationary police constable the reasons for his dismissal and an opportunity
to respond. It is submitted that there is no policy reason why the common law’s
approach to the rights implied into the contract of employment should differ
from those employment relationships which are not purely master and servant
(i.e. not based on the contract of employment), and which impose upon the
employer a duty of fairness.
There is, however, a developing principle that all employers have a com-
mon law obligation to give employees an opportunity to respond when faced
with allegations amounting to cause for dismissal.’45 In two cases involving par-
ticularly ruthless terminations by the same employer, it was further held that
there was an onus on an employer conducting an investigation to conduct a
fair’4 and full one.’47
C. Canada Labour Code as Evidence of Modern Social Policy
In 1978 the federal government amended the Canada Labour Code’
to
provide non-organized employees under federal regulation new protection
against unjust dismissal. 49 Similar statutory protection has been enacted in
Quebec 5 and Nova Scotia.’ 5′ It was the federal government’s belief that the
common law was severely deficient’52 and that non-organized employees
142See e.g. Ridge v. Baldwin, [1964] A.C. 40 at 65 (H.L.), Lord Reid. See also GTE Sylvania
Canada Ltd. v. Pulsifer (1983), 51 N.S.R. (2d) 298, 1 C.C.E.L. 62 (C.A.), rev’g (1982), 1 C.C.E.L.
62 (N.S.S.C.).
143Tracey v. Swansea Construction Co. (1965), 1 O.R. 203, 47 D.L.R. (2d) 295 (H.C.J.), aff’d
(1965), 2 Q.R. 182n, 50 D.L.R. (2d) 130n (C.A.).
’44(1978), [1979] 1 S.C.R. 311, 88 D.L.R. (3d) 671.
145Pilato, supra note 23; Francis v. Canadian Imperial Bank of Commerce (1992), 41 C.C.E.L.
37, 92 C.L.L.C. 14,014 (Ont. Ct. (Gen. Div.)) [hereinafter Francis]; Robarts v. Canadian Railways
Company (1980), 2 C.C.E.L 168 (Ont. H.C.J.); Reilly v. Steelcase Canada Ltd. (1979), 26 O.R.
(2d) 725, 103 D.L.R. (3d) 704 (H.C.J.).
’46Ribeiro, supra note 23.
147Francis, supra note 145.
14SAn Act to Amend the Canada Labour Code, S.C. 1977-78, c. 27. The current provisions relat-
ing to unjust dismissal are found at Division XIV of the Canada Labour Code, supra note 34.
14’England, supra note 18; G. England, “Unjust Dismissal in the Federal Jurisdiction: The First
Three Years” (1982) 12 Man. L.J 9.
‘5″Act Respecting Labour Standards, supra note 34, as am. by S.Q. 1990, c. 73, ss. 59ff.
“‘Labour Standards Code, supra note 34.
152See generally England, supra note 149; G. Simmons, “Unjust Dismissal of Unorganized
Workers in Canada” (1984) 20 Stanf. J. Int’l L. 473; R. Heenan, “Mandatory Arbitration of Dis-
missals in Employment Law: The Canadian Experience” in Southwestern Legal Foundation,
McGILL LAW JOURNAL
[Vol. 39
should be given the protection and remedies afforded to unionized employ-
ees.15 3
When an adjudicator appointed by the Minister of Labour finds a dismissal
“unjust”, he or she may re-instate the employee with complete back-pay and
fashion a supplementary remedy to help counteract any consequence of the dis-
missal.’ The adjudicator also has the power to award flexible remedies such as
requiring the employer to write a letter of reference 55 and to amend its person-
nel files to show that a re-instated employee was unjustly dismissed.’56
The federal legislation assists Parliament in meeting its obligations under
international law. In Slaight Communications Inc. v. Davidson, Dickson C.J.C.
referred to Canada’s international obligations while expounding on the impor-
tance of the objectives reflected in the Canada Labour Code.”57 After noting that
the right to work in its various dimensions was sanctioned by the International
Covenant on Economic, Social and Cultural Rights,15 Dickson C.J.C. stated
that
the fact that a value has the status of an international human right, either in cus-
tomary international law or under a treaty to which Canada is a State Party, should
generally be indicative of a high degree of importance attached to that objective.
This is consistent with the importance that this Court has placed on the protection
of employees as a vulnerable group in society.1 9
The Court in Slaight Communications held that an order by an adjudicator
requiring an employer to write a letter of reference infringed an employer’s con-
stitutional rights under subsection 2(b) of the Canadian Charter of Rights and
Freedoms.'” However, the legislative aim of protecting employees as a vulner-
able group was an objective of such great importance that the remedial powers
of the adjudicator were justified under section 1 of the Charter.
In Sobeys Stores Ltd. v. Yeomans, La Forest J. examined and compared the
policy behind Nova Scotia’s unjust dismissal statute with the traditional
approach of the common law:
The underlying social and economic philosophy of this legislation could not
be in sharper contrast to that which existed at Confederation. At that time, the phi-
losophy of laissez-faire was at its zenith. This was reflected in a legal environment
that promoted strict individual equality and freedom of contract. Legislative con-
Labour Law Developments (New York: Matthew Bender, 1992) 51; N. Grossman, Federal
Employment Law (Toronto: Carswell, 1990) at 87-204; Christie, England & Cotter, supra note 7
at 669-723; Harris, Wrongful Dismissal (Toronto: Carswell, 1992) c. 6.
153House of Commons Debates (13 December 1977) at 1831.
54Canada Labour Code, supra note 34, s. 242.
155Slaight Communications, supra note 80.
156Purolator Courier Ltd. v. Lalach (25 March 1993), No. 1924-Ont. (Marentette, Adjudicator).
157Supra note 80 at 1056-57.
15816 December 1966, Can. T.S. 1976 No. 46, 993 U.N.T.S. 3. Canada acceded to the Covenant
on 19 May 1976, and it came into effect 19 August 1976. See Dickson C.J.C’s comments in Re
Public Service Employee Relations Act, supra note iiz at isU-5i.
159Supra note 80 at 1057.
160Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.). 1982,
c. 11 [hereinafter Charter].
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BAD FAITH DISCHARGE
trol of economic activity was minimal. In the field of labour relations, then, what
the courts enforced were individual contracts (governing what was then appropri-
ately called a “master-servant” relationship). 161
D. Labour Relations
In the collective bargaining regime it is becoming recognized that manage-
ment must use its powers and discretion in good faith, reasonably and fairly. 62
As stated earlier, there is no reason why the common law is not as progressive
as arbitral jurisprudence, and one must seriously question whether lawyers and
judges have until recently been abdicating their responsibility of ensuring that
the common law progresses with modem community values.
V. Bad Faith as a Tort in Canada
As in the United States, Canadian jurisdictions have now acknowledged
bad faith claims against insurers.’63 The law in this area is, however, nowhere
near as developed as it is in the United States, and it is unclear whether lia-
bility in Canada originates in contract, tort or equity.’ Given that the devel-
opment of bad faith claims against insurers is relatively embryonic in Can-
ada, in building a model for the tort of bad faith discharge we should not rely
on Canadian insurance cases alone. Since we do not have a domestic tort
model for bad faith discharge, it is useful to go back to fundamental princi-
ples germane to tort law.
A. Policies and Goals of Tort Law
It is said that the purpose of modem tort law is to adjust and redistribute
losses, and to compensate for injuries sustained by an individual due to the con-
duct of another.”6 Liability in tort arises from socially unreasonable behaviour
161[1989] 1 S.C.R. 238 at 283, 57 D.L.R. (4th) 1, 25 C.C.E.L. 162 [hereinafter Sobeys].
162See generally D. Brown & D. Beatty, Canadian Labour Arbitration, 3d ed. (Aurora, Ont.:
Canada Law Book, 1993) at 4:2320.
163See Pelky v. Hudson Bay Insurance (1981), 35 O.R. (2d) 97 (H.CJ.), which quoted from the
Supreme Court of California’s decision in Crisci, supra note 114.
164In Shea v. Manitoba Public Insurance Corporation (1991), 55 B.C.L.R. (2d) 15, [1991] I.L.R.
1-2721 (S.C.) [hereinafter Shea], Finch J. held that the insurer-insured relationship is a commercial
one without fiduciary obligations, but there is nonetheless a duty of good faittl and fair dealing
because of the insured’s vulnerability. In Fredrikson v. I.C.B.C. (1990), 44 B.C.L.R. (2d) 303, 69
D.L.R. (4th) 399, 42 C.C.L.I. 250 (S.C.), Esson C.J. rejecteil a fiduciary theory of liability and re-
fused to wholly import the American approach into British Columbian law. He noted, however, that
there is a duty on the insurer to settle in appropriate circumstances because of the potential vul-
nerability of the insured, but decided that the case at bar did not require the formation of the appro-
priate test for British Columbia. In Plaza Fiberglass Manufacturing Ltd. v. Cardinal Insurance Co.
(1990), 68 D.L.R. (4th) 586, [1990] I.L.R. 1-2658 (Ont. H.C.J.), rev’d (12 May 1994), Toronto
C8505 (Ont. C.A.), a theory of liability based on fiduciary obligations flowing from the excess
insurer to the primary insurer succeeded. In Maschke v. Gleeson (1986), 54 O.R. (2d) 753, 18
C.C.L.I. 129 (Div. Ct.), a claim for punitive damages was allowed to stand notwithstanding that
it was found that a claim for bad faith arises out of contract. In Labelle v. Guardian Insurance Co.
of Canada (1989), 38 C.C.L.I. 274, I.L.R. 1-2465 (Ont. H.C.J.), the duty of the insurer to act fairly
was held to have arisen out of a fiduciary obligation, and punitive damages were allowed.
16C.A. Wright, “Introduction to the Law of Torts” (1944) 8 Cambridge L.J. 238 at 238; W.B.
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which engenders injury.”6 Whether conduct is socially unreasonable must be
viewed from the perspective of the community as a whole.”
Another goal of tort law, especially when punitive damages are involved,
is deterrence and punishment.’ Although being required to pay compensation
may not be considered punishment, deeming certain conduct as actionable
which was previously held not to be certainly serves as a deterrent. Once a
member of society knows that certain behaviour constitutes a wrong for which
he or she will have to pay, there is a strong incentive for that person not to
engage in the forbidden conduct. Linden aptly notes that “it is a mark of nobility
when a society directs its members to conduct themselves reasonably in their
relations with fellow citizens or pay the consequences.”‘ 69 Tort law emphasizes
respect for others and the exercise of individual restraint. By re-enforcing public
disapproval of certain types of conduct, tort law thus acts as a method of social
reform. Unlike the law of contract, tort law implicitly attaches a moral stigma
to liability. 70
The fact that there is not yet a nominate tort of bad faith discharge in Can-
ada does not prevent the courts from creating one. Outside of existing nominate
torts, there may be additional wrongs which are tortious, but whose existence
has not yet been “discovered” by the courts.’
Duties sounding in tort are primarily fixed by law, while contractual obli-
gations are normally fixed by the parties themselves. 2 It was based on this dis-
tinction that the Montana Supreme Court held that bad faith discharge can be
an action sounding in tort. 73
B. Application of Tort Goals to Bad Faith Discharge
There should be a duty of good faith and fair dealing owed by employers
to employees with regard to dismissals ordered in bad faith in violation of this
obligation. Such an obligation should be imposed as a matter of policy, and
should not necessarily be imposed as the result of the intention or will of the
parties to a contract of employment. Our society as a whole now believes abu-
sive discharges constitute socially unreasonable behaviour.
The special nature of the employment relationship and the reason why tort
liability should be imposed in appropriate situations have been alluded to by the
Supreme Court of Canada. The Supreme Court clearly considers that “employ-
Keeton, ed., Prosser & Keeton on Torts, 5th ed. (St. Paul, Minn.: West, 1984) at 6 [hereinafter
Prosser & Keeton].
166Prosser & Keeton, ibid.
1671Ibid.
168See A. Linden, Canadian Tort Law, 5th ed. (Toronto: Butterworths, 1993) at 58.
169Ibid. at 14.
170 Cohen, supra note 8 at 1290.
17 1W.V.H. Rogers, Winfield and Jolowicz on Tort, 13th ed. (London: Sweet & Maxwell, 1989)
172R.F.V. Heuston & R.A. Buckley, Salmond and Heuston on the Law of Torts, 20th ed. (London:
at 50.
Sweet & Maxwell, 1992) at 11.
173Gates II, supra note 134.
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BAD FAITH DISCHARGE
ment is of central importance to our society”; 74 the manner in which employ-
ment can be terminated is fundamentally important; 75 and “the protection of
employees as a vulnerable group in society” is an objective with a high degree
of importance attached to it. 76 Dickson C.J.C. noted in Slaight Communications
that the protection of the right to work represents a” value which has the status
of an international human right.”7 The Court recognizes that the law governing
the termination of employment significantly affects the economic and psycho-
logical welfare of employees. 17 A person’s employment is regarded as an essen-
tial component of his or her sense of identity, self-worth and emotional well-
being.’79 Work is one of the most fundamental aspects of a person’s life,
providing the individual with a means of financial support, and as importantly,
a contributory role in society.8 The Supreme Court refuses to view labour as
a commodity.’8′
There is arguably no relationship in which one party places more reliance
upon the other and is more vulnerable to the abuse of the other than the relation-
ship between an employer and an employee.1 2 Ironically, the longer the rela-
tionship, the more likely the employee will lose whatever strength he or she had
when it was formed.8 3 Economic reality dictates that there is rarely a market for
individuals like a middle-aged executive or a factory worker, employed by the
same employer for a long time, who is then purportedly dismissed for cause
when there is no cause.'”
By endorsing the tort of bad faith discharge it will be possible for the courts
to re-enforce values of modem society. Modem community values are reflected
in the body of arbitral jurisprudence and statutes such the Canada Labour Code,
which have developed alongside the common law because of its deficiencies.
The creation of a bad faith discharge tort would reform labour relations in non-
union operations by making some types of dismissals more expensive than oth-
ers. If employers who choose to terminate employment in improper ways were
subjected to additional damages it would “perhaps surprise only a few and be
accepted by most.”‘ 5 With tort law designed to protect society’s members from
nonconsensual conduct, and in view of the special features of the employment
relationship acknowledged by the Supreme Court, the creation of a tort action
for bad faith discharge could assist the courts in doing more than simply paying
lip-service to community values that have already been judicially recognized as
important and worth protecting.
‘ 74Machtinger, supra note 13 at 1002.
1751bid.
176Slaight Communications, supra note 80 at 1057.
177’bid.
178Machtinger, supra note 13 at 990.
179Re Public Service Employee Relations Act, supra note 132 at 368.
180Ibid.
’81Slaight Communications, supra note 80 at 1054, citing with approval, Beatty, supra note 18
at 323-24.
‘Foley, supra note 95 at 415, Kaufman J. dissenting in part.
1831bid.
1’41bid. at 407, Broussard J. dissenting in part.
185See Perkins, supra note 30 at 178.
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In determining the nature of the obligation not to discharge in bad faith,
Canadian courts should look at the remedy they want to afford discharged
employees.’ 86 The common law of wrongful dismissal is severely deficient in
making whole the real loss suffered by many employees, and it is unclear why
someone discharging an employee in bad faith should benefit from these limi-
tations. When an employer acts in a manner which devastates an employee’s
career in his or her chosen field, there is no apparent reason why the former
employer should not be required to make whole the real loss incurred by the dis-
missed employee.
Canadian judges have demonstrated a preference for tort remedies over a
contractual wrongful dismissal action to make whole and to remedy intangible
losses suffered by employees.’ 7 By resorting to tort law to compensate victims
of bad faith discharges, not only would socially unreasonable behaviour be
deterred, but employees would be more likely to be made whole in appropriate
cases.
Tort law also functions to adjust losses. Viewed from a macro-economic
perspective, the tort of bad faith discharge could play an important role. By per-
mitting terminations pursuant to a legal model created during the Industrial
Revolution, society is paying a high price. Individuals unnecessarily terminated
in Canada often become a burden on the nation’s extensive social system –
a
system which is already taxed to its limit, leaving in doubt the nation’s ability
to adequately fund it in the future.s A victim of a bad faith discharge may
require counselling and medical treatment, services the State will normally pay
for in Canada. In addition, these individuals must often be retrained at consid-
erable cost, especially when their careers have been destroyed by the manner of
their dismissal. In Canada, it is the State that pays the lion’s share of these costs.
From a macro-economic perspective, an argument can be made that there is
greater need for a tort of bad faith discharge in Canada than in American at-will
jurisdictions with less extensive social systems.
The State also has a direct economic interest in preventing discharges
contrary to public policy, as for example, when employees are dismissed for
“whistle blowing”.” 9 Given the spending restraints governments are now fac-
ing, and will continue to face in the foreseeable future, tort law could assist
badly underfunded enforcement agencies by protecting employees who try to
ensure that their employers comply with the law. If employers know that they
cannot retaliate against employees who attempt to compel them to operate law-
186Swan, supra note 26.
’87See Bohemier, supra note 38; Rahemtulla, supra note 23. American experience appears to be
similar to Canadian experience in this regard, and it has thus been argued that “there may be strong
reasons for preferring a tort theory over a contract theory of recovery” (“Protecting At Will
Employees”, supra note 81 at 1844).
’88The front page of the 29 May 1993 edition of the Financial Post reports that Canada’s public.
debt is approaching $700 billion and, “[t]o their credit, most of the provinces are trying to cut
spendng.'”
189See generally J.H. Conway, “Protecting the Private Sector At Will Employee Who ‘Blows the
Whistle’: A Cause of Action Based upon Determinants of Public Policy” [1977] Wisconsin L. Rev.
777.
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BAD FAITH DISCHARGE
fully, employers will be more likely to comply with statutes which are germane
to their operations. Fewer public dollars would have to be spent on monitoring
and enforcement.
If tort law were used to prevent and remedy bad faith discharges, it would
serve many of the same purposes served by vicarious liability when it is used
to render employers liable.”tg It would force employers to pay attention to their
operations and ensure that human resource decisions are made responsibly.9
Employers would be compelled to absorb the costs of bad faith discharges.
While employers may pass some of these costs on to consumers, at least it
would not be the employee, normally in the weaker economic position, wha is
paying for the costs of a bad faith discharge.”9 Rather than the State absorbing
the costs of antisocial conduct, these costs would ultimately be passed on to the
consumers.”9 Employers who commit bad faith discharges in excess of the
industry standard would be uncompetitive and less profitable.
Our nation must be competitive in the global economy where, interestingly,
the experience of other countries suggests that job security tends to increase
productivity and cooperation in the work place.” It is therefore not surprising
that employees within many nations which are Canada’s trading partners benefit
from legal and effective informal protection ensuring job security. 9 ‘
VI. Bad Faith Discharge as a Contractual Action
An alternative approach would be to restrict the implied obligation of good
faith and fair dealing to a mere contractual term, with the remedy being limited
to damages for breach of contract.
The obligation would be a term implied by law, and not an issue of fact or
business efficacy, since terms implied by law do not depend upon the intentions
of the parties to a contract.’96 They are imposed because of a legal incident of
19For the policy reasons behind the principle of vicarious liability, see generally P.S. Atiyah,
Vicarious Liability in the Law of Torts (London: Butterworths, 1967) at 22-28; R. Flannigan,
“Enterprise Control” (1987) 37 U.T.L.J. 25.
191This is analogous to the control justification for vicarious liability. See Fridman, supra note
33 at 315.
192The employer normally has much greater resources than the employee, and the deeper pockets
of the employer have been another reason used to justify vicarious liability of employers. See gen-
erally Limpus v. London Omnibus Co. (1862), 1 H. & C. 526 at 539, 158 E.R. 993 at 998; J.E.
Magnet, “Vicarious Liability and the Professional Employee” (1978) 6 C.C.L.T. 208 at 212.
193For the view that there should be a social distribution of tort losses by making the employer
responsible, see generally H. Laski, “The Basis of Vicarious Liability” (1916) 26 Yale L.J. 105 at
106-12; Y.B. Smith, “Frolic and Detour” (1923) 23 Colum. L. Rev. 444 at 456; W.O. Douglas,
“Vicarious Liability and the Administration of Risk” (1928-29) 38 Yale L.J. 584 at 585-86. These
articles were a partial response to writers such as Oliver Wendell Holmes Jr., who believed that
the doctrine of vicarious liability was an affront to common sense. See O.W. Holmes Jr., “Agency”
(1891) 5 Harv. L. Rev. 1.
The principle that injuries should be borne by an industry was an important idea behind the cre-
ation of workers’ compensation legislation. See Atiyah, supra note 190 at 24.
194See “Protecting At Will Employees”, supra note 81 at 1836.
195See ibid. at 1835-36, where German and Japanese protections are discussed.
196See Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711, 40 D.L.R. (4th)
711 [hereinafter C.P. Hotels]; Machtinger, supra note 13 at 1008, McLachlin J.
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[Vol. 39
a particular kind of contractual relationship 97 and flow from general policy con-
siderations affecting the type of contract in question. 98
Finding such an implied term would not necessarily be a drastic step for
Canadian courts to take. In the United States, both the Restatement (Second) of
Contracts’99 and the Uniform Commercial Code’ endorse an implied obligation
of good faith and fair dealing for all contracts. It appears that Canadian common
law, by accepting the civilian approach20 of implying a good faith obligation for
all contracts, is moving in a similar direction.’
It would be perverse for Cana-
dian courts to create an implied contractual term of good faith and fair dealing
for ordinary commercial contracts, but fail to imply such a term for unwritten
employment contracts where one party is inherently in a weaker position to ade-
quately protect itself from acts done in bad faith.
An implied contractual term of good faith and fair dealing in all employ-
ment contracts would protect an employee’s reasonable expectation of contin-
ued employment when job performance is satisfactory.0 3 It is because of this
normal expectation that individuals take out mortgages, purchase houses, plan
and raise families and plan their retirement. ” The economy, and indeed society,
could not function as it does without this expectation being held by the vast
majority of Canadians.
An action based on an implied term of good faith and fair dealing would
serve to circumvent some inherent deficiencies, such as capped notice periods
and inability to claim for loss of reputation, since the action would not be insti-
tuted because of the employer’s failure to give reasonable notice, but for having
terminated employment in circumstances amounting to bad faith. 5
Finally, a requirement that employers terminate in good faith would effec-
tively reduce potential transaction costs and information barriers which exist
during negotiations between employers and employees.2″
The danger of having an action for bad faith discharge based only in con-
tract is alluded to by Professor Swan.’ There is simply no guarantee that the
’97Le Dain J. in C.P. Hotels, ibid., expressly recognized the existence of a third category, terms
implied by law, separate from the business efficacy and “officious bystander” tests. Treitel
describes terms implied by law as “legal duties”. See G. Treitel, The Law of Contract, 8th ed. (Lon-
don: Sweet & Maxwell, 1991) at 190.
195Treitel, ibid. at 193.
‘”Supra note 99.
20Supra note 98.
20 See Houle, supra note 136. See Belobaba, supra note 9 at 74, for a discussion of the approach
2
02See Gateway, supra note 126; Shea, supra note 164; Truckers Garage, supra note 139. See
of numerous European civil codes in imposing an obligation of good faith and fair dealing.
also Clark, supra note 136.
23See England, supra note 18 at 501-502; “Protecting At Will Employees”, supra note 81 at
1841.204Foley, supra note 95 at 405-406.
05Schai, supra note 4/, argues mat an implied obligation of good faith in employment contracts
would allow the courts to more readily award aggravated damages.
26See “Protecting At Will Employees”, supra note 81 at 1830-33.
207Supra note 26.
1994]
BAD FAITH DISCHARGE
courts are going to recognize the special features of the contract of employ-
ment.20 While many intangible losses due to abusive discharges are easily fore-
seeable in light of our society’s better understanding of industrial relations, the
courts have improperly used and interpreted the remoteness doctrine in Hadley
v. Baxendale to foreclose these losses by treating the contract of employment
as an ordinary commercial contract.
Conclusion
It is not a recent occurrence that commentators, and occasionally the
courts, have suggested that the model we are still using to determine the rights
and obligations which are imputed into every employment relationship is out of
date. 10 Sadly, neither the individual suffering caused by bad faith discharges nor
the accompanying social consequences are recently discovered phenomena.211
There is some encouragement. In at least two recent cases, Canadian
judges have allowed tortious actions for retaliatory discharge (discharge con-
trary to public policy) to proceed to trial.2 2 At least one judge has allowed an
action for bad faith discharge to proceed to trial. 23 As noted above, the Ontario
Court of Appeal held in Truckers Garage that a written termination clause could
only be used when the employer was acting fairly and in good faith. 214 These
decisions implicitly recognize that the common law is not inflexible, but rather
is capable of evolving in step -with society’s values.
The law must evolve. We now live in a society which is very different from
the society that raised and socialized the law lords who decided Addis. Individ-
203Both Freedland (supra note 48) and Swinton (supra note 8) refer to this problem in the courts.
See also the concerns of Broussard J. in Foley on the inadequacy of contract damages based on
a commercial contractual model when the court is considering a bad faith discharge (supra note
95). These concerns are also shared by Grossman & Marcus (supra note 48).
209Swan argues that the error of the courts is to focus on foreseeability of mental distress and
other intangible losses, rather than the employee’s legitimate expectations, such as security and
peace of mind. A factual inquiry usually cannot support a conclusion of an allocation of risk
between the parties (supra note 26 at 223-24).
Several decisions have confronted this issue in the context of the calculation of reasonable
notice, and have recognized the special features of the contract of employment. Osboume J., as he
then was, in Thomson v. Bechtel Canada Ltd. (1983), 3 C.C.E.L. 16 at 19 (Ont. H.C.J.), aff’d
(1985), 6 C.C.E.L. XXXV (Ont. C.A.), stated there are two possible approaches to justifying a term
of reasonable notice: to justify it by public policy considerations or to found it on an oblique con-
sideration of what the parties would have agreed to had they considered the issue at the time of
hiring. Osbourne J. noted that the policy approach seemed to be more realistic than an artificial
determination of what the parties would have considered at the time of hiring. See also McBride
v. W.P. London & Associates Ltd. (1984), 47 O.R. (2d) 333, 5 C.C.E.L. 314 (H.C.J.); McLachlin
J. in Machtinger, supra note 13.
210R. Harrison, “Termination of Employment” (1972) 10 Alta. L. Rev. 250 at 251.
211AS early is 1862, Victor Hugo, in Les Misirables (London: Penguin, 1976), described with
considerable detail the plight and suffering of the character Fantine after she was arguably the vic-
tim of a bad faith discharge.
Ruggeiro v. Emco Limited (4 May 1993), 92-CQ-28566 (Ont. Ct. (Gen. Div.)).
212Duplessis v. Walwyn Stodgell Cochran Murray Ltd. (1988), 20 C.C.E.L. 245 (B.C.S.C.);
213Ruggeiro, ibid.
214Supra note 139.
McGILL LAW JOURNAL
[Vol. 39
ual rights are now perceived very differently, and the degree of protection the
State provides to its citizenry, as well as the role individuals are expected and
permitted to play in society, have also changed. In Canada, there is near univer-
sal literacy, publicly funded mass post-secondary education and full political
participation even without ownership of real property –
phenomena probably
unimaginable during the height of the Industrial Revolution. The State now
invests considerable sums developing the skills of its citizens and has passed
extensive legislation to render the work place humane. In the unionized context,
a substantive body of arbitral jurisprudence has developed to ameliorate the
deficiencies of the common law of wrongful dismissal. It is intolerable that the
common law is still premised upon a view of individual rights and of industrial
relations which for many decades now has been considered unacceptable.
Compared to the effective political clout of employers’ organizations, non-
organized employees do not have adequate political force to convince provincial
legislatures to pass unjust dismissal legislation.15 Moreover, unions are unlikely
to lobby in favour of unorganized employees.” 6 There is presently little political
incentive for provincial legislatures to pass a comprehensive scheme of protec-
tion such as the Canada Labour Code.21 7 This does not, however, mean that
most Canadians believe that bad faith discharges are socially acceptable; rather
the better view is that most believe that employers who act in this manner
should be held both financially21 and publicly accountable.219
215See the comments of Kaufman J. in Foley, supra note 95 at 413. Beatty expresses the same
concern (supra note 18 at 330). Even if provincial legislatures were to enact legislation, it is prob-
able that at least some managerial employees would be exempted from protection against unjust
dismissal and would have to rely upon common law remedies. Subsection 167(3) of the Canada
Labour Code, for example, specifically excludes “managers” from unjust dismissal protection. It
is quite likely that new provincial legislation would resemble the Canada Labour Code. For a dis-
cussion of the managerial exemption under the Canada Labour Code, see S. Ball, “Case Comment:
Island Telephone Co. v. Canada” (1993) 44 C.C.E.L. 169. The common law will probably have
to continue to evolve, even if the provinces were to promulgate statutory protection.
216It is significant that neither the Ontario, Saskatchewan nor British Columbia New Democratic
governments have passed unjust dismissal legislation to protect unorganized employees. Prior to
the federal unjust dismissal legislation being passed, the Honourable John Munro, then Minister
of Labour, noted that organized labour opposed the proposed legislation. The bias of the Canadian
Labour Congress is demonstrated by its stated position that unjust dismissal legislation would not
help non-organized employees and would be “potentially destructive” to organizing drives. See
Submission by the Canadian Labour Congress to the Standing Committee on Labour, Manpower
and Immigration of the House of Commons on Bill C-8, An Act to Amend the Canadian Labour
Code, Minutes of Proceedings and Evidence of the Standing Committee on Labour, Manpower and
Immigration (9 March 1978) App. LMI-6 at 8A:35-36. It is submitted that this position is suspect,
and practical experience under the Canada Labour Code unjust dismissal provisions suggests that
privately retained litigators with the appropriate experience are at the very least as effective, if not
more so, in prosecuting unjust dismissal complaints under the Code, as are lay union representa-
tives (who are not selected by the employee) at arbitration hearings.
217In Foley, supra note 95 at 412-13, Broussard J., noting that the courts have an obligation to
protect unorganized employees, said that unorganized employees would not be an effective force
in causing legislative change, whereas employers who are well-financed and organized could do
so with much greater ease.
21sSee e.g. Hall J.A.’s comments in Perkins, supra note 30 at 178.
219The fact that the Ontario Court of Appeal increased the punitive damages against an employer
for a particularly brutal discharge in Ribeiro, supra note 23, was considered of such public impor-
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BAD FAITH DISCHARGE
Iacobucci J., in London Drugs Limited v. Kuehne & Nagel International
Ltd., re-affirmed that in appropriate circumstances the courts have not only the
power but the duty to modify the common law to reflect emerging needs and
In this light, and for the above stated reasons, it is sub-
values in our society.’
mitted that the courts have an obligation to recognize the tort action of bad faith
discharge, to supplement the existing contractual action for wrongful dismissal,
when presented with an appropriate opportunity to do so. Should the courts for
some unfortunate reason not permit a tort action, it is very difficult to see how
the proposed contractual action would also fail given the numerous develop-
ments in society and the common law discussed in this article.
tance to Canada’s largest daily paper that the story was placed on the front page (T. Tyler, “Fired
Loan Officer Awarded $70,000” The Toronto Star (26 November 1992) Al).
220[1992] 3 S.C.R. 299 at 438, [1993] 1 W.W.R. 1, 43 C.C.E.L. 1.
