Matthews v. Ocean Nutrition: Clarity Achieved

A year and a day ago, the Supreme Court of Canada heard the appeal in Matthews v. Ocean Nutrition, where Mr. Matthews sought his entitlements under an LTIP, which would have come due during a notional reasonable notice period, notwithstanding that it was a term of the LTIP that he would only receive the benefit if he was actively employed when it vested (the 'forfeiture clause'). The Nova Scotia Court of Appeal, following an Alberta precedent, Styles, had declined to award Mr. Matthews that benefit.

In a striking coincidence, a couple weeks before the Supreme Court granted leave to appeal (January 2019), I submitted a paper to the Alberta Law Review setting out a first principles analysis of that very question. My paper leaned heavily on certain interprovincial inconsistencies in the law and a lack of clarity from the Supreme Court on the nature of wrongful dismissal damages, and my initial draft included a footnoted prediction that the Supreme Court likely would and should agree to hear such a case at some point.

Following peer review and editing processes - it was published the week before the Matthews hearing.  Howard A. Levitt, counsel for Mr. Matthews, alluded to my paper in his submissions before the court.

The core debate in my article was whether the implied obligation, at common law, to give reasonable notice could be satisfied by giving 'pay in lieu of notice'; or if terminating without notice was inherently a breach of the term, leaving 'pay in lieu of notice' as being in the nature of damages flowing from that breach.  The latter approach, I argued, was correct.  There are a number of consequences of this distinction, but none more manifest that the treatment of LTIPs/bonuses/stock options/etc. that vest during the reasonable notice period.

This, in essence, was one of Levitt's alternative arguments. His primary argument turned on relatively new constructions of good faith obligations in contract law, from Bhasin v. Hrynew, that dishonest performance of the contract by the employer ought to disentitle them from relying upon the forfeiture clause.

In February 2019, shortly after the SCC agreed to hear the appeal, I commented on the case itself, suggesting that the 'bad faith' argument arising from Bhasin is a red herring, and that the matter can be decided - in Matthews' favour - on the basis, per my paper, of a close first principles analysis of what wrongful dismissal damages really are.

Justice Kasirer, writing for a unanimous court, came to a similar conclusion, and allowed Matthews' appeal.

The Supreme Court's Analysis

After outlining the facts and argument, the court started by separating out the 'wrongful dismissal' issues from the 'bad faith' issues, carefully highlighting that a termination of employment, and even a wrongful dismissal, is not necessarily bad faith conduct by the employer. (Para 43.)

This is an important distinction, and one that I felt the need to draw in my own paper, that a wrongful dismissal - despite its language - is not inherently morally blameworthy.

However, the court took the distinction further, noting that "an unhappy employee can allege dishonesty in the performance of the contract by the employer — i.e., a breach of the duty of honest performance, which Cromwell J. in Bhasin described as contractual doctrine — independently of any failure to provide reasonable notice." (Para 44.)  This is significant, for reasons I will explore further.

The central basis for the Supreme Court's decision is summed up concisely at para 48:

The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error.

This distinction is critical: In these cases, on a proper close analysis, the employee isn't (or shouldn't be) suing for breach of the LTIP, but rather for breach of the employment contract itself. In most of these cases, the benefit under the LTIP is ostensibly lost, but it's a loss that flows predictably from the breach of the employment contract.  (In cases where the LTIP is a peripheral agreement to the employment contract between the same parties, it's easy to lose this nuance, but it comes into much better focus when you look at cases like Brito v. Canac Kitchens, where the benefit provided (in that case, LTD) was provided through a third party, and the employer ends up liable for its value by virtue of the wrongful dismissal.)

In recognizing this distinction, the Supreme Court followed the approach developed by the Ontario Court of Appeal in Taggart and Paquette, first evaluating the employee's common law rights, then proceeding to assess whether anything in the plan clearly and unambiguously alters those common law rights.  At para 53, the court expressly endorses this approach, effectively elevating Taggart and Paquette to the level of binding precedent across the country, at least as far as this analysis is concerned.

The Relevance of Whether a Bonus is "Integral"

At para 59, however, the court distinguishes Paquette on another part of the test:  Much of the case law requires any bonus to be 'integral' to compensation in order to be compensable through the reasonable notice period.  The court here determined that this was not an appropriate analysis for Mr. Matthews; there's no question that he would have received the benefit under the LTIP, and so there's no place for an 'integral' analysis in determining that this is a loss flowing from the breach of contract.

By and large, I laud this decision as a positive step in the clarity and certainty of employment law.  This particular aspect of the decision (with which I agree) leaves a bit of a question-mark beside the 'integral' test. Under what circumstances would it be appropriate for courts to decline to award damages for loss of a bonus because it was not 'integral'?

This is likely something calling for a much more detailed discussion, but I would briefly suggest that the nature of the 'integral' test is nothing more than a way of asking whether or not the bonus entitlement formed part of the employment contract at all.

Clear and Unambiguous

The court went on to assess whether or not Matthews' "common law right" was unambiguously modified by language in the LTIP, and concluded that it wasn't. While it spoke to termination of the employment contract 'with or without cause', that didn't necessarily speak to a wrongful dismissal scenario.  Citing a 1980 decision, the court noted that exclusion clauses "must clearly cover the exact circumstances which have arisen".

This calls for a step back, because while endorsing and following the decision in Taggart in finding that the language must use "absolutely clear and unambiguous" language (para 65) to displace the "common law right", the court also concluded that the Nova Scotia Court of Appeal erred by unduly focusing on the question of whether the language in the LTIP is "plain and unambiguous".

Properly understood, this isn't really a conflict. Other lawyers have interpreted this as being a matter of degree - that the Nova Scotia Court of Appeal found the language to be clear, but SCC said it still "wasn't clear enough", but I disagree with that interpretation. It's less a matter of the degree of clarity, and more a matter of what is clear.  The NSCA was looking to whether or not the LTIP created an enforceable entitlement, despite the fact that he was no longer working, and found that it didn't.  The SCC, having found that a prima facie entitlement to damages for the loss of the LTIP was created by virtue of the breach of the employment contract, went on to ask if the LTIP expressly disclaimed any such damages.

However, it does leave open a question as to what language, precisely, would allow the employer to deny a benefit that vests during the reasonable notice period.

I've explored this on a couple of occasions, but I think that the hypothetical exception left open by Taggart and the court here, that the decision might go another way with different language in the LTIP, is necessarily so arcane and narrow as to leave me wondering why any lawyer would even attempt it.  (I mean, I could probably draft such a clause...but there are so many easier and more conventional ways to protect an employer client's interest that I just can't imagine a scenario where I'd pick this one.)

Side Comment - How Could Ocean Nutrition Have Fixed This?

Doctrinally, there are essentially three different ways of getting there: The first is waiver, where the employee expressly waives some portion of the damages that would flow from a particular breach. I think this is the closest to what the court is looking for here; it would require some really express language about waiving damages to which the employee would otherwise be entitled.  However, even if you added language to this LTIP that did expressly speak to a wrongful dismissal scenario and excluded any corresponding benefit...this would still likely run into a statutory compliance issue, contracting out of employment standards legislation.  (In this case, the court acknowledged that this raised a live issue, but didn't find it necessary to explore it.)

The second and third options effectively amend the employment contract, being a contractual pre-estimate of damages, or a substantive change to the employment contract to define an employee's termination entitlements with reference to something other than common law reasonable notice.

These second and third options (particularly the last) are real options used in various contexts, but never actually in the context of an LTIP, because if you actually want to amend the employment contract itself, burying that amendment in the LTIP would be a pretty weird way of doing it.

But really, that's the solve here for employers. Rather than trying to craft pigeonhole waivers for damages representing specific components of a remuneration package over a reasonable notice period, change the employment contract itself to one that clarifies what the employee will receive, in a way that carefully accounts for all minimum entitlements under employment standards legislation.

Styles

Because the Nova Scotia Court of Appeal's analysis was primarily based on Styles, the court paid some attention to the issues in Alberta.  Referencing my paper, and relying heavily (as did I) upon the BCCA's decision in Dunlop, the court found at para 74 that there is no implied contractual term providing for pay in lieu of notice, but rather that pay in lieu of notice is in the nature of damages for a failure to provide required actual notice.

While the Alberta Court of Appeal (in Styles) suggested that the Ontario Court of Appeal (in Paquette) had misinterpreted prior jurisprudence of the Supreme Court in Sylvester, the court here confirmed that the ONCA got it right.

After explaining the rationale underlying Dunlop, the court highlighted the importance that this distinction is properly understood:

Ensuring that courts and litigants properly understand this distinction is thus important as it can profoundly affect employees’ financial lives. To the extent that some cases suggest otherwise, I respectfully disagree.

On a personal note, I recognize distinctive elements of the court's decision here as echoing the arguments in my paper, and to the extent that my paper was itself a plea for clarity, I feel that Justice Kasirer answered that plea. To whatever extent my paper may have been of assistance to the court, I am very happy to have been of that assistance.

Bhasin

The 'good faith' question, while attracting a lot of attention from Justice Rowe during the hearing, was left mostly undecided. The court struggled to see any doctrinal connection between the alleged bad faith conduct (which the Supreme Court was satisfied had occurred) and the remedy being sought (relief against the forfeiture clause in the LTIP).

I, too, struggle with that. In a scenario where Matthews' dismissal had been engineered with the purpose of depriving him of his entitlements under the LTIP, there might be a stronger argument for relief from forfeiture...but the trial judge found that not to be the case here.

However, the commentary on the duty of good faith performance is interesting. Firstly, at paras 81 and 82, the court notes both that the Wallace duty of good faith and fair dealing is no longer strictly limited to conduct at the point of termination, but allows for "a more flexible measure of conduct over the period leading up to the moment of termination of the employment contract", and also that it would be open to a judge to tie 'dishonest performance', per Bhasin, to bad faith in the manner of dismissal, per Wallace.

The court then went on to essentially float a concept of the law recognizing a mutual and reciprocal duty of good faith and loyalty (in a "non-fiduciary sense"), binding equally upon the employee and the employer, while declining to go there in the context of this decision.  (I'll have to come back to this another day. In short, I think, in the Bhasin contractual milieu, it's actually not that great an expansion of the law at this point: Employees already owe duties of loyalty and fidelity, and employers already owe various duties of good faith and honest performance. However, I have a backburner project that has led me to question whether or not the employee's duty of loyalty is not truly fiduciary in character, and I'm not sure about what, practically, a duty of loyalty owed by the employer would entail.)

In both the reasons and in the hearing itself, Justice Kasirer highlighted the importance of incremental development in the common law.  I think there's a reasonable expectation that Bhasin may actually subsume the Wallace duty of good faith and fair dealing, but the SCC doesn't want to do that all at once.

Impact

In Ontario and BC, this will do very little; it mostly reinforces the existing law there. In Alberta, it turns certain aspects of the law upside down.  I think it's fair to say that, as of this morning, Styles is no longer good law here.

We now have welcome clarity on the nature of the implied term of reasonable notice, and damages for its breach.

But there are always questions about what comes next.  As noted above, where we go on the 'integral' analysis isn't entirely clear, nor is it entirely plain as to what language in the LTIP would change the result.  This signals a direction for good faith obligations in employment law, without creating a revolutionary new precedent.  Consider it an invitation for parties to raise such issues.

Coming back to a note I mentioned earlier, about the breach of the duty of honest performance generating remedies independently of any other contractual breach...while it's probably a logical extension of Bhasin, it's a significant shift from the Wallace construction of the duty of good faith; historically, that is not a breach of duty that has been capable of generating remedies on its own.  In theory, an employer that complies with its contractual obligations would presumably not be exposed to any potential for 'manner of dismissal' damages; but such an employer may now be exposed to a claim rooted in the duty of good faith performance.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.