Civil Liability Arising from Bad Faith

11th Annual Provincial/Municipal Liability Conference by The Canadian Institute, Toronto

The concept of good faith

"Good faith" has not been given a precise definition by the Canadian courts. The courts have avoided a precise definition of "good faith" primarily because of the recognition that they will employ a contextual approach to the principle, such as the application of statutory immunity or the reasonableness of the public official's conduct in the context of his or her authority.

"Good faith" has been frequently associated with the concept of honest belief in the appropriateness of the impugned conduct, or applying a standard of reasonableness to the conduct. Or to put it simply: a thing is deemed to be done in good faith if it is done honestly, whether or not it is done negligently.1 In government decision making were the conduct does not give rise to a private law duty of care, but could nevertheless be subject to judicial review, good faith requires a degree of fairness, openness and impartiality.2

The concept of bad faith

"Bad faith" also has not been given a precise definition by the Canadian courts. However, it has been frequently associated with actions involving malice, fraud, collusion, illegal conduct, dishonesty, abuse of power, discrimination, unreasonable conduct, ill-motivated conduct or procedural unfairness.

Justice Southin in the case of MacMillan Bloedel Ltd. v. Galiano Island Trust Committee3 articulated the concept of bad faith as follows:

The words bad faith have been used in municipal and administrative case law to cover a wide range of conduct in the exercise of legislatively delegated authority. Bad faith has been held to include dishonesty, fraud, bias, conflict of interest, discrimination, abuse of power, corruption, oppression, unfairness, and conduct that is unreasonable. The words have also been held to include conduct based on an improper motive, or undertaken for an improper, indirect or ulterior purpose. In all these senses, bad faith describes the exercise of delegated authority that is illegal, and renders the consequential act void. And in all these senses bad faith must be proven by evidence of illegal conduct, adequate to support the finding of fact.

The application of good faith and bad faith

There are many ways in which the two concepts are used by the courts. Principally, as they relate to the conduct of public officials, they fall into two categories: judicial review and civil liability for damages.

The law relating to judicial review of municipal by-laws and administrative actions is well settled. Clearly, evidence of bad faith can lead the courts to interfere with such decision making. However, a judicial review decision resulting in a finding of bad faith, does not automatically involve or lead to civil liability and damages. Also it is important to recognize that the concept of bad faith in attacking government decision making by means of judicial review is distinctly different than the type of bad faith that leads to civil damages.

Historically, the courts did not recognize bad faith or a breach of good faith as an independent tort. Accordingly, an allegation of bad faith by itself would not constitute a cause of action. In order to maintain an independent cause of action for damages, the plaintiff must show a breach of a private law duty by the defendant. Hence, evidence of bad faith was frequently used to establish liability in the area of established torts such as negligence, abuse of public office, fraud, or negligent misstatement.

Since Kamloops v. Nielsen 4 the courts have established civil liability for government action on the basis of a distinction between policy and operational decisions. Governments were afforded immunity from civil liability for policy decisions, provided such decisions were made in a conscientious manner, free of corruption, bad faith or extreme lack of care. Liability for bad faith decision making has generally been subsumed in the tort of abuse of public office.5

What appears to be emerging is the court's willingness to find civil liability on the basis of factual findings tantamount to bad faith, without necessarily identifying the independent tort which gives rise to a cause of action.6 This trend may very well lead to an elimination of the distinction between policy and operational decisions, where there is a finding of bad faith, even in the absence of intentional wrongdoing.

Another emerging area is the enactment and application of statutory immunity provisions in provincial legislation applicable to public officials. How are these immunity provisions to be interpreted, and what is the "good faith" standard to be applied to invoke the immunity?

Evidence of bad faith is also one of the tests used in assessing Charter damages under s. 24(1).

Another emerging issue is whether evidence of bad faith leads to an award of punitive damages.

Statutory Immunity Based on Good Faith

In Ontario alone there are 249 statutes which make a reference to "good faith", often in relation to providing statutory immunity to an official who acts in good faith in the performance of his or her statutory duty. The following is an example from the (Ontario) Municipal Act, 2001:7

448. (1) No proceeding for damages or otherwise shall be commenced against a member of council or an officer, employee or agent of a municipality or a person acting under the instructions of the officer, employee or agent for any act done in good faith in the performance or intended performance of a duty or authority under this Act or a by-law passed under it or for any alleged neglect or default in the performance in good faith of the duty or authority. 2001, c. 25, s. 448 (1).

(2) Subsection (1) does not relieve a municipality of liability to which it would otherwise be subject in respect of a tort committed by a member of council or an officer, employee or agent of the municipality or a person acting under the instructions of the officer, employee or agent. 2001, c. 25, s. 448 (2).

This section of the Municipal Act, 2001 creates statutory immunity for individual tortious acts committed by members of council, officers, employees, agents of a municipality or persons acting under instructions of the officer, employee or agent on the following conditions:

1.  the act must have been performed in good faith; and
2. it must be done in the performance or intended performance of a duty or authority under the Municipal Act or by-law passed under it, or any neglect or default in the performance of such duty or authority.

This statutory immunity does not relieve the municipality of its vicarious liability, but only protects the individual from suit. Often suits against a municipality also name the individual who is alleged to have committed the tort. This section provides a statutory bar to such a suit for damages, and should result in a successful motion for judgment to have the action dismissed against the individual if the pleading discloses no allegations of bad faith or acting outside the scope of the employee's duties.

Consultants as Agents

The immunity also extends beyond employees to an "agent of a municipality or a person acting under the instructions of the officer, employee or agent". An interesting aspect of this immunity is that consultants are often sued in connection with municipal negligence. Under the law of agency, a principal is liable for the negligence of the agent, if the act was committed within the scope of the agent's authority. Hence, under this immunity provision, a consultant, acting as an agent of the municipality, could claim statutory immunity, which would leave the municipality solely liable for the consultant's negligence. I have yet to see this section pleaded by municipal consultants, but I believe it is just a matter of time. Hence, municipalities in retaining consultants should seek an indemnification clause in their retainer agreements, to avoid this situation. The question remains whether a consultant could then successfully plead the statutory immunity against a suit by the municipality against the consultant when the municipality seeks indemnification.

Indemnification of Employer by Employee

One of the important benefits of being granted immunity from personal liability is the fact that it avoids the seldom used common law principle of indemnification. At common law, a municipality which is vicariously liable for the negligence or other tortious conduct of an employee, has a right of indemnity from the employee by operation of law, even where there is no employment contract calling for indemnification. That right has now been extinguished, provided the employee has acted within the scope of his employment and in good faith.

Contextual Approach

The words "good faith" must be read in the context in which they are found.8 When one speaks of good faith in the performance of a duty or statutory authority, one must look to the nature of the duty or statutory authority to determine what is reasonable and what is not. This contextual approach can lead to very subjective judgments. If there is clear evidence of an intention to act illegally or outside of the scope of authority, dishonestly or with malice, in other words, a blatantly dishonest exercise of power, then you clearly cannot rely on the good faith defence. However, to lose the immunity involves more than negligence or an error in judgment, even if acting illegally or outside the scope of authority. If there is an honest attempt to give effect to the law, the good faith defence should prevail.

The Supreme Court of Canada in Chaput v. Romain 9 described the "honest belief" distinction as follows:

What is required in order to bring the defendant within the terms of such a statute as this is a bona fide belief in the existence of a state of facts which, had they existed, would have justified him in acting as he did.
The contrast is with an act of such a nature that it is wholly wide of any statutory or public duty, i.e., wholly unauthorized and where there exists no colour for supposing that it could have been an authorized one. In such a case there can be no question of good faith or honest motive.

In MacAlpine v. T.H. 10 the court stated:

The words "good faith" must be read in the context in which they are found…The social workers in this case were authorized to place these boys in a home under the terms of the contract in question...There is no question in this case of lack of authority as there was in Chaput v. Romain.

The "Good Faith" Defence

Acting in good faith presumes exercising a judgment which is either made in good faith or in bad faith. If it is made in good faith, the statutory immunity applies. If it is made in bad faith, the statutory immunity does not apply.

In Burns v. Johnston [2003] O.J. No. 1452 (S.C.J.), the court considered the statutory immunity in the context of a negligence action against a coroner. Section 53 of the Coroners Act11 applies the good faith standard to providing immunity in the performance of the coroner's duties, without defining the standard. In this case the coroner delivered an oral report to the police which led to a murder charge against the plaintiff before receiving a toxicology report which subsequently pointed to an intravenous overdose as the cause of death, and not strangulation. The plaintiff was seeking damages against the coroner for:

1. negligence based on the oral report and an alleged breach of the coroner's statutory obligation to provide a written toxicology report, thereby acting outside the scope of his employment;
   
2. acting in bad faith by giving an oral report before obtaining the toxicology report, thereby resulting in a wrongful arrest.

In a motion for judgment to dismiss the claims against the coroner on the grounds of statutory immunity the court held:

In my view, there is a genuine issue raised that giving this oral opinion in these circumstances and at this time exposes the Defendant Johnston to potential liability which is not protected by s.53 of the Coroners Act. The Plaintiff has demonstrated the existence of facts from which a trial judge could draw the conclusion that the Defendant pathologist was negligent in giving this oral report when he did, that so doing was outside the scope of his duty under statute, and as such, that s.53 does not provide immunity.

With respect to the bad faith pleading the court held:

Starline Entertainment Centre v. Ciccarelli (1995), 25 O.R. (3rd) 765 (Gen. Div.) makes clear that "bad faith is different from negligence because the former involves intent…There are no facts shown that would tend to show that the Defendant…acted for any improper purpose or deliberately, in an improper use of his office, in providing an initial opinion while awaiting the toxicology report…His opinion many have been wrong or negligently formed, but those facts do not go to show bad faith.

The issue in this case was whether there was a triable issue as to whether the Coroner was personally liable without the benefit of statutory immunity for acting in good faith. It would appear that the learned trial judge used a threshold of ordinary negligence coupled with acting outside of the scope his duty, without any evidence that the Coroner acted for any improper purpose or with intent. That threshold may be sufficient to send the case to trial, but I would submit, not sufficient to deprive him of the statutory immunity unless there is additional evidence of wanton or reckless conduct amounting to gross negligence.

Malice or Intent to Injure Not Required

At one time it was thought that proof or malice or intent to injure was required to establish bad faith in the context of statutory immunity. The Supreme Court of Canada in Finney v. Barreau du Quebec12 held that in an action for damages by an injured party as a result of the failure of the governing body of Quebec lawyers to discipline one of its members, a good faith protective clause would not prevent liability for "gross or serious carelessness". The court stated:

An immunity provision such as the one set out in s.193 of the Professional Code is intended to give professional orders the scope to act and the latitude and discretion that they need in order to perform their duties. In the case of duties relating to the management of disciplinary cases, it would e contrary to the fundamental objective of protecting the public…if this immunity were interpreted as requiring evidence of malice or intent to harm in order to rebut the presumption of good faith. Gross or serious carelessness is incompatible with good faith.

Does the "Good Faith" Defence apply to Operational Decisions?

The question arises whether or not the statutory immunity afforded by Section 448 of the new Ontario Municipal Act, 2001 applies to any and all acts, in the absence of bad faith, or whether they only apply to acts to which the principal of "good faith" can apply. In C.H. v. British Columbia 13 the Court considered the good faith defence in the context of statutory immunity provided by Section 101 of the Child, Family and Community Service Act, R.S.B.C. 1996, C 46("CFCSA"). 
Section 101 of the CFCSA provides as follows:

No person is personally liable for anything done or omitted in good faith in the exercise or performance or intended exercise or performance of:

a) A power, duty or function conferred by or under this Act, or

b) A power, duty or function on behalf of or under the direction of a person on whom the power, duty or function conferred by or under this Act.

The Court held that where there is no exercise of discretion in the performance of a statutory duty, the defence of good faith does not apply. If it is purely an operational decision, in the furtherance of a statutory duty, the Court held that the issue of good faith does not arise. I am not aware of any similar restrictive interpretation placed on the "good faith" defence in Ontario.

Conclusion with Respect to Statutory Protection or Immunity Provisions

A contextual approach must be applied to the interpretation of the relevant statutory provision. There is a difference between lack of due care (ordinary negligence) and wanton conduct. To lose the statutory protection something more than mere negligence must be shown to establish lack of good faith. It may be sufficient to establish gross or serious carelessness in the context of the prescribed statutory duty, without having to establish malice or intent to injure.

Bad Faith in Government Decision Making

The concept of bad faith in government decision making can lead to judicial review in an effort to set aside the decision, (such as a by-law or administrative decision), but can also lead to a separate action for damages. It should be noted that the two concepts are distinctly different. For example, to set aside a municipal by-law on the basis of "bad faith", you must show that the council acted unreasonably and arbitrarily and without the degree of fairness, openness, and impartiality required of a municipal government.14 This type of bad faith does not lead to an action for civil damages unless the conduct involves an element of wrongdoing on the part of the members of council, such as fraud, collusion, dishonesty, or illegal conduct. What is confusing however, is that the courts increasingly fail to properly define the concept of bad faith and use similar terminology to describe both concepts.15

Is Bad Faith an Independent Tort?

The Courts have traditionally rejected the argument that a breach of good faith leads to an independent tort of bad faith.16 The question remains however, does evidence of bad faith lead to a finding a breach of a private law duty, resulting in damages? There is no question that a finding of bad faith in the context of negligence, fraud, or the tort of abuse of public office, is the factual basis for a breach of a private law duty leading to damages. What is disturbing however, that the courts are prepared to make findings of bad faith in the context of an action for damages without pigeon holing the tort.

In Pedwell v. Pelham (Town),17 the Ontario Court of Appeal confirmed a trial judgment in which an interim control by-law was declared a nullity for being passed in bad faith, the Chief Building Official was ordered to issue building permits for a "checker board subdivision", and the plaintiffs recovered damages against the town for acting unlawfully in passing the by-law and directing the Chief Building Official to hold off in processing the building permit applications, even though there was no finding of improper motivation.18

The most shocking result of the Pedwell decision is that aside from the fact that the independent tort was not identified in the context of the findings of bad faith, it is doubtful that the findings of fact could substantiate any independent cause of action. This leaves us with the question: Did the Ontario Court of Appeal recognize an independent tort of bad faith in the context of municipal wrongdoing?

Bad Faith and Pecuniary Damages

The ordinary rules with respect to damages apply to bad faith damages. With respect to pecuniary damages, the plaintiff must prove his or her loss. However, the courts are also prepared to award punitive damages in the appropriate cases. In a number of recent cases involving allegations of bad faith by insurance companies, the punitive damages awarded have been significant.19 The principles in these cases can be equally applied to non-insurance cases. In Whiten Justice Binnie held that such damages can be awarded in cases where the defendant's conduct is "high-handed, malicious, arbitrary, or highly reprehensible".

Bad Faith and Charter Damages

When a Charter section is breached, a plaintiff can seek damages from the court. Section 24 of the Charter provides:

(1) Anyone whose rights or freedoms, as guaranteed by this Charter, have been infringed or denied may apply to a court of competent jurisdiction to obtain such remedy as the court considers appropriate and just in the circumstances. 
Exclusion of evidence bringing administration of justice into disrepute 
(2) Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute.

The basis for such damages seems to be grounded in evidence of bad faith. The Supreme Court of Canada in Mackin v. New Brunswick (Minister of Finance) 20 held that to recover Charter damages one must demonstrate "conduct that is clearly wrong, in bad faith, or an abuse of power". Clearly, in the context of a Charterviolation, there is a basis for an independent cause of action for damages for resulting from bad faith.

Procedural and Practical Issues

The Ontario Rules of Civil Procedure requires allegations involving malice or intent to be pleaded with particularity. The rule states:

25.06(8) Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleading shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

Although the rule does not specifically mention "bad faith", clearly where the allegation of bad faith involves a willful act or malice, the particulars must be pleaded. Failing to do so can result in the pleading being struck. Since the onus is on the plaintiff to prove bad faith, a mere allegation of bad faith is not enough. Plaintiffs should not be allowed to go on a fishing expedition, hoping to find evidence of bad faith as a result. Unfortunately, the rule does not go far enough. If the allegation of bad faith is based on a breach of duty amounting to gross negligence, the rule may not be applicable. However, every pleading is still subject to the general rule of a pleading that it shall contain a concise statement of the material facts on which the party relies.

Since it is necessary to show evidence of malice, intent to harm, gross negligence or serious carelessness to rebut the presumption of good faith where statutory immunity is claimed, potential plaintiffs should consider putting the potential defendant on notice while the bad faith conduct is ongoing. If, as a result, the offending party does not change his or her course of conduct, he or she would have more difficulty overcoming the presumption of bad faith. If you act for a party who is put on notice with allegations of bad faith, you may want to consider the conduct complained of and the context in which the allegations are made. Often, it is the appearance of the conduct that is the most condemning. If there is a way to alleviate or avoid the factual basis for the allegation, public authorities and public officials should take steps to do so.

Increasingly, allegations of bad faith are pleaded in civil actions for damages against governments and government officials. It is important to look at the pleadings to determine whether an independent cause of action exists based on allegations of bad faith. Defence lawyers should be vigilant in ensuring that the cause of action is based on some breach of a recognized private law duty. Once the duty is identified, the elements of the tort can vary and should be properly evaluated. Judges should be discouraged from applying the "smell test" to an action founded on allegations of bad faith: i.e. if it smells bad, there must be liability. Rather, judges should carefully examine the cause of action and the elements of the tort to determine liability, if any.

Statutory immunity provisions should be carefully considered and pleaded whenever possible. In the case of a personal defendant, if the pleading does not disclose allegations of bad faith or acting outside the scope of the public official's duties, a pre-emptive motion to dismiss the action should be considered in the appropriate cases. If you can eliminate the personal defendant from the action, the public purse is on trial, rather than the wrongdoer. In my experience it is more difficult to succeed against a government on the basis of vicarious liability, (except in the most egregious cases), than against an individual who is primarily responsible for the damages suffered by the plaintiff.

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1. Jowitt's Dictionary of English Law (2d)
2. Re H.G. Winton Ltd. and Borough of North York, 20 O.R. (2d) 737
3. [1995] B.C.J. 1763
4. [1984] 2 S.C.R. 2
5. Odhavji Estate v. Woodhouse, [2003] 3 S.C.R. 263
6. Pedwell v. Pelham (Town), [1998] O.J. No. 346 (Gen. Div.); [2003] O.J. No. 1774 (C.A.)
7. S.O. 2001, c.25
8. MacAlpine v T.H. , [1991] 5 W.W.R. 699 (B.C.C.A.)
9. [1955] S.C.R. 834
10. MacAlpine, supra
11. R.S.O. 1990, c. 
12. [2004] 2 S.C.R. 17
13. [2000] B.C.J. No. 1706
14. Re H.G. Winton Ltd. and Borough of North York, (1978) 20 O.R. (2d) 737
15. Whistler Service Park Ltd v. Whistler (Resort Municipality), [1990] B.C.J. No. 1546
16. Whistler, supra
17. Pedwell, supra
18. For a detailed analysis of the trial and appeal decisions see: "Bad Faith by the Administration" - A New Municipal Tort? by George H. Rust-D'Eye in Municipal Liability Risk Management, January 2004, Volume 5, Number 2
19. Whiten v. Pilot Insurance Company, [2002] S.C.R. 595; Clairfield v. Crown Life InsuranceCo. , (2002) 50 O.R. (3d) 696
20. [2002] 1 S.C.R. 405 at paras. 78-84