SCC clarifies bonus entitlements, no bad faith required

In a unanimous decision, the Supreme Court of Canada in Matthews v Ocean Nutrition Canada (2020-SCC 26) made the following statements of law.

1. The issue of good faith and bad faith in contractual relations is distinct from the issue of calculating damages due to the failure of the employer to provide reasonable notice of termination. There was no need in this case to determine whether or not the employer acted in bad faith as the same outcome can be determined without the need to determine the bad faith issue.

The Court made the following comments about the issue of the duty of good faith in employment contracts:

[84]                         Further, I note that Mr. Matthews and several interveners argue that the general organizing principle of good faith described in Bhasin manifests itself in various ways throughout the whole of the contractual performance. Ocean answers that any extension of good faith would be an unwieldy precedent.

[85]                         Mr. Matthews’ argument is a serious one. Not all mistreatment by an employer will result in a constructive dismissal — some employees, for financial or other reasons, might choose not to leave their job. It might be that, as argued by various parties in this appeal, 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. I recognize, however, that whether the law should recognize this is a matter of fair debate.

[86]                         This is a dismissal case. In light of the comment in Bhasin (at para. 40) that the common law should develop in an incremental fashion, I would decline to decide whether a broader duty exists during the life of the employment contract in the absence of an appropriate factual record.

2. Courts should ask two questions when determining whether the appropriate quantum of damages for breach of an implied term to provide reasonable notice includes bonus payments. First, courts should consider the employee’s common law rights and examine whether, but for the termination, the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period. Second, if so, courts should determine whether the terms of the employment contract or bonus plan unambiguously take away or limit that common law right.

The actual clause purporting to limit the plaintiff’s entitlement to the bonus was as follows:

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.

This is what the Court said about why this limiting clause did not apply:

[65]                         To this end, the provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period (Paquette, at para. 33, citing Schumacher v. Toronto-Dominion Bank (1997), 147 D.L.R. (4th) 128 (Ont. C.J. (Gen. Div.)), at p. 184; see also para. 47; Lin, at para. 89). Indeed, the trial judge and the majority of the Court of Appeal agreed that an “active employment” requirement is not sufficient to limit an employee’s damages (trial reasons, at para. 398; C.A. reasons, at para. 66).

[66]                         Similarly, where a clause purports to remove an employee’s common law right to damages upon termination “with or without cause”, such as clause 2.03, this language will not suffice. Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice. As this Court held in Bauer v. Bank of Montreal, [1980] 2 S.C.R. 102, at p. 108, exclusion clauses “must clearly cover the exact circumstances which have arisen”. So, in Mr. Matthews’ case, the trial judge properly recognized that “[t]ermination without cause does not imply termination without notice” (para. 399; see also Veer v. Dover Corp. (Canada) Ltd. (1999), 120 O.A.C. 394, at para. 14; Lin, at para. 91). Yet, it bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement.

[67]                         I therefore agree with the trial judge that clause 2.03 does not unambiguously limit or remove Mr. Matthews’ common law right. In my respectful view, the majority of the Court of Appeal erred in concluding otherwise.

My Comments :

1. To me this means that bad faith in relation to employment terminations becomes just another way of awarding damages beyond the reasonable notice calculations. This same principle has been called damages for mental distress, moral damages, Wallace damages, aggravated damages, punitive damages and some that I probably have forgotten. I actually watched the oral argument at the SCC and I was immediately struck by how reluctant the Court was to expand or even apply the bad faith analysis.
2. Calculating damages should now be easier. In my first year contracts course at Osgoode Hall Law school (way back in 1975) Professor Larry Taman taught us how to calculate damages in a breach of contract case. You simply put the innocent party in the same position as if the contract had not been breached. (Hadley v Baxendale) In an employment termination the implied term is that to discharge an employee without just cause you must give reasonable WORKING notice. If you fail to give such WORKING notice, then you must pay the employee the same amount that he or she would have earned had they been permitted to work out the notice period. Only then do you look at the bonus or the LTIP plan to see if there is any clear and ambiguous language which would exclude some element of the compensation if the employer fails to give working notice and opts to give pay in lieu of notice.
3. What is clear and unambiguous language sufficient to oust the inclusion of a bonus? There are many ways to approach this issue, but here are my ideas of the most common ones other than the “active employment” clause set out in this case. First of all it cannot breach any statutory requirements like the Employment Standards Act which requires that there can be no change to an employee’s wages (which normally includes bonus) during the termination period, which is a maximum of 8 weeks. Many bonus plans breach this provision by saying “your entitlement to bonus ends on the day you receive notice of termination.” Secondly, an element of clear and unambiguous that has developed recently in the case law is that this limiting cause must not be buried in a long and complex agreement that no one would actually be expected to read. The limitation should be clearly brought to the attention of the employee both at the time he or she is hired, or brought into the plan and, even better, every time they are awarded a bonus. Moreover, now that the Waksdale decision tells us that any defect in the termination provisions of a contract voids the entire termination clause, what if the bonus termination language is found to be illegal, does that mean the termination provision in the main employment contract also bites the dust?
4. By downplaying the importance of bad faith and focussing on the core issue of reasonable notice, the Court is repeating what many experienced employment lawyers (and some mediators) have known all along, which is, that 99% of the money in a wrongful dismissal case is simply figuring out what a month of notice is worth and then figuring out how many months is in the notice period. Add some costs to that number and amazingly, most of these cases settle. Perhaps now lawyers will spend more of their effort on resolving these basic issues rather than focussing on the more exotic issue of extraordinary damages which seems to find its way into almost every lawsuit but rarely results in a meaningful payout in either a settlement or a trial decision.

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Barry B. Fisher LL.B.

Barry B. Fisher, LL.B., is a mediator and arbitrator of both employment and labour relations matters. He offers three forms of ADR based on clients’ needs: Mediation, Arbitration and Med/Arb. Barry is from the evaluative school of mediation and brings his over 30 years' experience as an employment lawyer and legal author to the dispute. In addition to his knowledge of the legal issues involved in these disputes, he also has a deep understanding of the psychological factors that motivate both employees and employers. By combining these two skills, Barry is able to achieve a settlement rate of over 80% of the disputes that he mediates.

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