Supreme Court of Canada Finds Termination Language in Long Term Incentive Plan Insufficient to Preclude Damages for Wrongful Dismissal

Name: Rae Christen Jeffries LLP
Price range: $

Wednesday, October 14, 2020

On October 9, 2020, the Supreme Court of Canada issued its long-awaited decision in Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26 (“Matthews”), finding that the Plaintiff was entitled to Long Term Incentive Plan (“LTIP”) compensation during the reasonable notice period despite plan language to the contrary.

The decision in Matthews makes it clear that employers will not be able to rely on clauses limiting employee’s common law rights unless they are “clear and unambiguous”. Employers should review their current and existing bonus and incentive plans to ensure that they clearly cover the circumstances in which the question of an employee’s entitlement may arise.

A more detailed overview of the Matthews decision is set out below. For advice specific to your situation, consider contacting your regular lawyer at Rae Christen Jeffries LLP.

Background

The plaintiff, Mr. Matthews, was the Vice President, New and Emerging Technologies of the defendant company, Ocean Nutrition Canada Limited (“Ocean Nutrition”). The plaintiff commenced his employment with Ocean Nutrition in 1997 and was recognized as one of a handful of individuals in the world with the skills to run a large-scale omega-3 facility.

As a senior executive, the plaintiff participated in Ocean Nutrition’s LTIP, which is a contractual arrangement designed to reward employees for their work and to provide an incentive to continue contributing to the company’s success. Under the terms of the LTIP, a “Realization Event”, such as the sale of the company, would trigger payments to employees who qualified under the plan. Those payments were subject to the following termination provisions of the LTIP:

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 and 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 a 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.

In 2007, Ocean Nutrition hired a new Chief Operating Officer, who began a campaign to marginalize the plaintiff in the company by limiting the plaintiff’s responsibilities and lying about the status of his position going forward. The plaintiff eventually resigned from his employment in June of 2011. Approximately 13 months later, Ocean Nutrition was sold for $540 million. The defendant took the position that the plaintiff was not entitled to the LTIP payout because he was not actively employed on the date of the sale. The plaintiff filed an application against the defendant seeking damages for constructive dismissal.

At trial, Justice Leblanc found that Ocean Nutrition constructively dismissed the plaintiff by unilaterally reducing his responsibilities in a substantial manner and engaging in a course of conduct aimed at pushing the plaintiff out of operations. The trial judge determined that the plaintiff was owed common law notice in the amount of 15 months, inclusive of damages for the loss of the LTIP payout. The trial judge reasoned that the plaintiff would have been a full-time employee when the Realization Event occurred had he not been constructively dismissed, and since the LTIP did not unambiguously limit or remove his right to common law damages, he was entitled to damages equivalent to what he would have received under the LTIP. Ocean Nutrition appealed this decision to the Nova Scotia Court of Appeal.

On appeal, the majority of the Court of Appeal upheld the trial judge’s decision that the plaintiff had been constructively dismissed and was entitled to a 15-month common law notice period. However, the Court disagreed that the plaintiff was entitled to damages in respect of the LTIP. In their view, clause 2.03 unambiguously removed the plaintiff’s right to recover damages under the LTIP the moment he resigned his employment, while clause 2.05 clearly stated that the LTIP could not be used for severance purposes. Taken together, the Court held that the plain and unambiguous language of the LTIP removed the plaintiff’s right to recover damages under the LTIP. The Plaintiff appealed this decision to the Supreme Court of Canada.

Decision

The Supreme Court of Canada overturned the Court of Appeal’s decision with respect to the LTIP and concluded that the Court of Appeal erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were owed for the failure to provide the plaintiff with reasonable notice.

Writing for the majority, Justice Kasirer confirmed that the issue is not whether the plaintiff was entitled to the LTIP itself, but whether he is entitled to damages, and if so, whether those damages include compensation for bonuses that he would have earned had Ocean Nutrition not breached the employment contract.

Justice Kasirer then set out the two-part test articulated in Paquette v TeraGo Networks Inc., 2016 ONCA 618 for determining whether damages for the failure to provide reasonable notice includes bonus payments:

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

Applying the first step of the test, Justice Kasirer held that the Realization Event was triggered within the 15-month reasonable notice period and therefore the plaintiff was prima facie entitled to damages for the lost LTIP payment as part of his common law damages.

On the second step, Justice Kasirer considered the language of clauses 2.03 and 2.05 and determined that neither clause unambiguously removed or limited the plaintiff’s common law right to damages, as follows:

The requirement in clause 2.03 that the plaintiff be a “full-time” or “active” employee was not sufficient to limit the plaintiff’s common law rights because had the plaintiff received proper notice, he would have been actively employed throughout the notice period.
The language of clause 2.03 which seeks to remove the employee’s common law right to damages upon termination “with or without cause” is not sufficient to limit an employee’s common law rights where that employee suffers an unlawful termination (e.g. constructive dismissal). Termination without cause does not imply termination without notice, and exclusionary clauses “must clearly cover the exact circumstances which have arisen”.
The requirement in clause 2.05 that the LTIP shall not be used in any severance calculation is not sufficient to limit the plaintiff’s common law right to damages because severance and damages are distinct legal concepts. The LTIP does not expressly preclude common law damages for the loss of a payout.
The reference in clause 2.05 that the LTIP “does not have current or future value other than on the date of a Realization Event” is not sufficient to limit the plaintiff’s common law rights because had he received proper notice, he would have been a full-time employee on the date of the realization event and been entitled to the LTIP payment in question.

Although the parties advanced arguments regarding good faith and the duty of honest performance of contractual obligations, Justice Kasirer declined to consider their application to this case. He simply noted that a contractual breach of good faith rests on a wholly distinct basis from that relating to the failure to provide reasonable notice, and if a broader duty of good faith exists, then that should be decided in a future case where there is an appropriate factual record.