Contract Negotiation: Honesty Not Required
By the time employees realize the unfavourable changes to their employment, the contracts have already been executed
In recent years, the job market has experienced instability across numerous industries. In response, employers have increasingly transitioned regular employees to casual employment statuses through written contracts, creating a reduction of working hours for hourly employees. Oftentimes, employees, hesitant to lose their jobs before securing alternative opportunities, sign these restructured contracts without fully considering the implications. By the time they realize the unfavourable changes to their employment, the contracts have already been executed, leaving them with limited recourse.
In light of this trend, a crucial question arises: does deceptive conduct during negotiations for new contracts, which transition regular employees to casual employees, amount to a breach of the contractual duty of honest performance in relation to the new contracts? A recent Court of Appeal decision in British Columbia, Ocean Pacific Hotels Ltd. v Lee (2025 BCCA 57), provides insight into this issue. The Court concluded that the contractual duty of honest performance does not extend to negotiating in good faith and declined to expand this duty to pre-contractual negotiations.
The case in question involved employees who agreed to change their statuses from regular to casual employment by executing new contracts. One of the terms of these contracts stipulated that the employees would continue to receive extended benefits coverage, subject to the terms of the applicable plans and the continued approval of the employer's insurer. However, after the contracts were executed, the employer terminated the extended benefits coverage for most of the newly transitioned casual employees. The affected employees commenced a class action, alleging, among other things, that the employer breached its duty of honest performance in relation to the new contracts by intentionally and dishonestly misleading them regarding the continuation of extended benefits coverage prior to entering into the new contracts.
The Court of Appeal ruled that expanding the contractual duty of honest performance to encompass conduct during pre-contractual negotiations is unwarranted. Stated differently, dishonesty that induces a party to enter into a contract falls outside the scope of the duty of honest performance, which governs contractual performance rather than pre-contractual inducement. The Court’s rationale was that such an expansion would lead to a redundant and potentially perplexing overlap between tort and contract remedies.
The Court further determined that a pre-existing employment relationship does not, in itself, establish a breach of the duty of honest performance in contractual negotiations for transitioning regular employees to casual employment, absent a direct link between the alleged breach and the existing contract. This means a breach of the duty of honest performance must be tied to a specific contract. Extending the duty of honest performance to prospective contracts would introduce ambiguity and operational challenges due to the inherent uncertainty surrounding such contracts, specifically the difficulty in determining what constitutes a breach of this duty when the contractual terms are not yet finalized. Since the parties may not have a clear understanding of their obligations under a prospective contract, it may be difficult to determine whether a party has fulfilled its duty of honest performance.
Having clarified this point, the Court allowed the employees to amend their pleadings to allege a breach of the duty of honest performance in relation to their pre-existing employment contracts, rather than dismissing their claim, which had initially alleged such a breach in connection with the agreements transitioning them to casual employment.
The Court’s decision offers a nuanced and detailed examination of the duty of honest performance within the context of contract negotiations, underscoring the intricacies of employment law and the importance of clarity and consistency in its application. By affirming the limitations of the duty of honest performance in contract negotiations, the Court’s ruling establishes a precedent that may have implications for employees’ rights in analogous circumstances.
Some may argue that the Court's decision is a setback for employees, as employers may feel emboldened to engage in more aggressive tactics during contract negotiations without the fear of reprisal. This may result in potentially allowing employers to further exploit the power imbalance between them and employees. This could lead to a rise in disputes and litigation, as employees seek to protect their rights and interests. By ruling that the duty of honest performance does not extend to negotiating in good faith, the decision reinforces the importance of employees’ diligence in reviewing contracts before signing and seeking legal advice when necessary to ensure they fully understand all terms and implications of the agreements.
Although the Court’s decision may be seen as a victory for employers, the decision also encourages employers to be forthcoming and transparent during contract negotiations, allowing them to structure their employment relationships in a more efficient and effective manner. Maintaining transparency during contract negotiations likely reduces the risk of disputes or litigation, while also fostering positive relationships with employees.
Ultimately, the duty of honest performance is intended to govern the performance of contracts, not the negotiation of contracts, and the Court's decision is consistent with this principle. Nevertheless, employers should be aware of the potential risks and consequences of engaging in misleading conduct during contract negotiations, even if the duty of honest performance does not apply. While the Court ruled that negotiating in good faith is not part of the contractual duty of honest performance, good faith is an essential component of developing and maintaining employment relationships.
While this significant development in employment law may be seen as limiting employees' rights and protections, it also provides clarity on the scope of the duty of honest performance. Employers and employees should be aware of the implications of this decision and take steps to ensure that contract negotiations are transparent, fair, and compliant with applicable legislation. Ultimately, the decision highlights the complexities of employment law and the need for ongoing analysis and development to protect the rights and interests of all parties involved. Since the Court’s decision raises questions about the role of good faith and the potential consequences for employees and employers, it warrants careful consideration of its potential implications for future contract negotiations.
