The principle of the duty of good faith may apply to both the negotiation of a contract as well as to its performance, says a lawyer who recently acted for the defendant in a Superior Court of Justice case where a judge ruled in her client’s favour.
The principle of the duty of good faith may apply to both the negotiation of a contract as well as to its performance, says a lawyer who recently acted for the defendant in a Superior Court of Justice case where a judge ruled in her client’s favour.
Alicia Tymec says the ruling in Paulus v. Fleury, 2018 ONSC 1188 acknowledges the principle of the duty of good faith. The litigation lawyer, who acted for Michael W. Fleury, says Justice Thomas A. Heeney’s judgment emphasized the importance of good faith and honesty in all representations.
The case stems from a judicial pretrial in which the plaintiff, Bassman Paulus, was rear-ended by the defendant — and offered two independent witnesses who said they had seen the accident and were prepared to testify.
The witnesses’ version of events, however, was the opposite of Fleury’s and tipped the balance in favour of the plaintiff during the judicial pretrial, says Tymec.
In the face of the discrepancy, the defendant agreed to negotiate and the case settled for $850,000, said the decision.
“What often swings that balance is an independent witness, somebody who isn’t connected to the case or the file or the people in any way who saw the accident and who doesn’t have any stake in the outcome,” says Tymec.
However, according to the ruling, the defence later learned that the witnesses had connections to the plaintiff. The plaintiff had prepared the couple’s tax return and their son lived across the street from him, according to the decision.
The court further heard that, although the couple provided and signed a statement in English, they didn’t speak the language well. Tymec says that, when they were later examined by counsel, their account of the accident was not the same as what was led in the judicial pretrial and more closely resembled the version her client presented.
In the ruling, Heeney said that, given the emerging doctrine of honesty and good faith in contractual dealings set out by the Supreme Court of Canada in Bhasin v. Hrynew four years ago, “there is good reason to apply it to the enforcement of a settlement agreement in a civil action.” Heeney also referred to several Ontario Superior Court of Justice cases that applied the principle both to the negotiation of a contract as well as to its performance.
He pointed out in Paulus that the representations were made during a judicial proceeding in which a duty is owed both to the court as well as opposing counsel. The underlying issue in the case, he added, is the issue of good faith and honesty.
In the decision, Heeney wrote that false representations caused counsel for the defendant and the adjuster to act and to largely concede the liability issue and settle the case.
“If lawyers are free to misstate important facts during a pretrial, such that opposing counsel does not know whether to take the lawyer at his word or not, settling a case would become very difficult. This leads me to conclude that this [is] one of those rare circumstances where the discretion to refuse to enforce a settlement should be exercised,” wrote Heeney.
“I am satisfied that enforcement of this settlement would create a real risk of clear injustice to the defendant.”
Bhasin v. Hrynew in 2014 was considered a landmark decision and the first time the Supreme Court of Canada addressed the issue of the duty of good faith in contractual performance by applying the doctrine in the common law provinces.
But Tymec says it had not really been applied to the formation of a contract.
“So this case was one of the first to consider that same duty of good faith and honesty in the negotiation of a contract,” she says. “It begins a really useful discussion. Where settlement negotiations are tainted by dishonesty, any resulting agreement may not be enforced by the court.”
Tymec says the decision in Paulus is a natural follow-through. In it, Heeney applies Bhasin to the negotiations that lead up to and form the contract before it’s actually entered into.
It’s been suggested in the past that the duty of good faith established in Bhasin should be extended to the negotiation of a contract as well, says Jennifer Hunter, an insurance defence lawyer with Lerners LLP in Toronto. But, she adds, those decisions and comments were primarily focused on commercial contracts.
“The decision in Paulus v. Fleury is of note because it arises out of the negotiation of a settlement in a civil lawsuit, which is a very different context,” says Hunter.
“One might argue that the Paulus decision extends the duty of good faith to the negotiation of settlements, but I would argue that this decision does not change the law at all because I think the parties in this case were obligated not to lie or mislead regardless of the principle as set out in Bhasin and subsequent case law.”
Lisa Armstrong, an insurance defence lawyer and managing partner at Strigberger Brown Armstrong LLP in Toronto and Waterloo, points out that settlement negotiations by their nature raise issues of strategy and ethics that don’t coexist easily.
“In this case, the judge found important information was misrepresented and, therefore, the agreement was not enforceable because it was based on false information,” Armstrong says.
The plaintiff has filed an appeal with the Ontario Court of Appeal.
