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Update: Damages Awarded for Loss of Incentive Plan Payout in Matthews v Ocean Nutrition Canada Ltd.

The Supreme Court of Canada dealt a blow to employers today in ruling that an employee is entitled to compensation under a Long Term Incentive Plan, despite plan language to the contrary, overturning the decision of the Nova Scotia Court of Appeal in  Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26.

David Matthews was the Vice-President, New and Emerging Technologies of Ocean Nutrition Canada Ltd. (“Ocean”). He had been with the company since its inception; nearly fifteen (15) years. Part of Mr. Matthews compensation package included his enrolment in a Long Term Incentive Plan (“LTIP”). Under the terms of the LTIP, a payout was provided upon the happening of a “realization event”, one of which being the acquisition of Ocean by another company. The LTIP contained provisions regarding termination of employment, including the following:

2.03 CONDITIONS PRECEDENT:

ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

[…]

2.05 GENERAL:

The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of the Realization Event and shall not be calculated as part of the Employee’s compensation for any purpose, including in connection with the Employee’s resignation or in any severance calculation.

Approximately ten (10) years into Mr. Matthews’ tenure with Ocean, Ocean hired a new Chief Operating Officer (“CEO”). Shortly thereafter, tension between Mr. Matthews and the CEO began, resulting in amongst other things, a change in Mr. Matthews’ title; a reduction in his work and responsibilities; a change in reporting structure; and a “campaign” to marginalize Mr. Matthews within the Company. Mr. Matthews concluded that these changes to his employment amounted to a constructive dismissal, and resigned his employment.   Thirteen (13) months later, Ocean was purchased by Royal DSM N.V. Not long after, Mr. Matthews brought an action against Ocean for damages for wrongful dismissal, alleging that he had been constructively dismissed.

At trial, Mr. Matthews sought damages for common law reasonable notice, as well as damages for loss of payout under the LTIP. The trial judge found that Mr. Matthews had been constructively dismissed and awarded damages for common law reasonable notice in the amount of fifteen (15) months. The trial judge also found that there was a common law right to damages for loss of the payout under the LTIP because but for Mr. Matthews’ wrongful dismissal by Ocean, he would have been employed during the notice period and would have been entitled to the payout arising from Ocean’s acquisition. As a result, Mr. Matthews was awarded damages for the loss of the payout in the amount of $1,086,893.36.

Ocean appealed the trial decision to the Nova Scotia Court of Appeal, where a majority of the Court upheld the trial judge decision concluding that that Mr. Matthews had been constructively dismissed and entitled to fifteen (15) months’ common law reasonable notice.  However, the majority of the Court of Appeal disagreed with respect to the LTIP and found that the trial judge erred in finding that entitlement to damages for loss of payout under the LTIP was a common law right, rather than a contractual right derived from the language of the LTIP. The majority found that the LTIP contained clear language disentitling employees to a payout at the end of the employment relationship, and Mr. Matthews was therefore not entitled to damages for loss of payout under the LTIP. The dissenting member of the panel disagreed concluding that Mr. Matthews was entitled to damages for loss of payout under the LTIP based on the implied duty of good faith and honesty in contracting addressed in Bhasin v Hrynew, 2014 SCC 71. For a more in-depth look at the decision of the Nova Scotia Court of Appeal, see the article in the July 2019 edition of the Employer’s Advisor.

Mr. Matthews appealed the Nova Scotia Court of Appeal decision to the Supreme Court of Canada. Justice Kasirer, writing for a unanimous court, found that the majority of the Nova Scotia Court of Appeal erred in not awarding Mr. Matthews the amount of the LTIP as part of his common law damages for breach of the implied term of the employment contract to provide reasonable notice. Justice Kasirer specifically found that the majority incorrectly focused on whether terms of the LTIP were “plain and unambiguous” instead of asking what damages were owed as a result of Ocean’s failing to provide reasonable notice.  Rather, he opined that the issue was not whether Mr. Matthews was entitled to the LTIP itself, but what damages he was entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. He went on to confirm the test set out by the Ontario Court of Appeal in Taggart v Canada Life Assurance Co., 2006 CanLII 53345 (ONCA) and expanded upon in Paquette v TeraGo Networks Inc., 2016 ONCA 618 in order to determine the appropriate damages for breach of the implied term to provide reasonable notice:

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
  2. If so, do the terms of the employment contract or bonus plan unambiguously remove or limit that common law right?

In applying the first step of the test, Justice Kasirer rejected the notion that the bonus must form an integral part of the employee’s compensation in order to be entitled to its benefit.  Rather, the Court determined that but for Mr. Matthew’s dismissal without reasonable notice, he would have been entitled to the LTIP payout, as the “realization event” would have occurred during that period.

With respect to the second step of the test, Justice Kasirer considered the language of the above-noted clauses and found that neither clause was sufficient to unambiguously remove or limit Mr. Matthew’s common law right. Specifically, he determined that:

  • The requirement to be a “full-time” or “active” employee was not sufficient because had proper notice been provided he would have been;
  • The language that purports to remove entitlement upon termination of employment with or without cause was not sufficient because Mr. Matthews suffered an “unlawful” termination and the exclusionary clause must “clearly cover the exact circumstances which have arisen”, and termination without cause is not termination without notice;
  • The language purporting to remove entitlement from compensation and calculation of severance was not sufficient because severance and damages are distinct legal concepts and did not remove Mr. Matthews’ entitlement to LTIP payout amount under damages; and
  • The language regarding “no current or future value” is not sufficient because the “realization event” occurred during the notice period had Mr. Matthews been provided with proper notice so damages representing the amount of the LTIP payout compensate him for the loss.

Justice Kasirer rejected the application of the Alberta Court of Appeal decision in Styles v Alberta Investment Management Corporation, 2017 ABCA 1, considering a similar issue, before going on to suggest that “it may also be appropriate in certain cases” to consider whether clauses limiting or removing common law rights were brought to the employee’s attention and whether the clause is in line with employment standards.

On the topic of good faith, Justice Kasirer commented on Ocean’s mistreatment of Mr. Matthews throughout the decision, but declined to consider whether the duty of good faith had been breached or whether a broader duty exists.  However, Justice Kasirer made clear that a contractual breach of good faith rests on a “wholly distinct” basis from that relating to failure to provide reasonable notice.  The Court further speculated that it may be that “a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee”.

This case highlights the sanctity of the employment relationship and the role employment plays in ones’ life, which is reflected in this Court’s finding that language limiting or removing an employee’s common law rights must be “absolutely clear and unambiguous”. Employers should carefully review employment contract and incentive plan language in light of the guidance from the Court with a view to tightening the language, and may even wish to consider the implications of incentives and bonuses going forward.

For now, employers will have to wait for further guidance on how the duty of good faith and the duty of honesty may impact employment relationships. In the meantime, employers should be thoughtful with respect to those duties throughout the employment relationship, as they may play an important part in the future of Canadian employment law.

If you have any questions regarding this case or any other workplace law developments, please do not hesitate to contact a Mathews Dinsdale lawyer.

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