Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26
On October 9, 2020, a unanimous bench of the Supreme Court of Canada rendered its decision in Matthews. The case is important because it deals with the question of entitlement to incentive plans and clarifies “good faith” in the performance of employment contracts generally and in the context of constructive dismissal.
From the headnote, the facts may briefly be gleaned: Beginning in 1997, M, an experienced chemist, occupied several senior management positions with Ocean. M was part of Ocean’s long-term incentive plan (“LTIP”), a contractual arrangement designed to reward employees for their previous contributions and to provide an incentive to continue contributing to the company’s success. Under the LTIP, the sale of the company, would trigger payments to employees who qualified. In 2007, Ocean hired a new Chief Operating Officer, who began a campaign to marginalize M in the company, limiting M’s responsibilities and lying to M about his status and prospects with Ocean. The LTIP was a key reason why M wanted to stay with Ocean, anticipating Ocean a sale. In June 2011, M left Ocean in June 2011, taking up new employment.
About 13 months after M’s departure, Ocean was sold for $540 million, a “Realization Event” for the purposes of the LTIP. Ocean took the position that M did not satisfy the terms of the plan, no longer being actively employed, and he did not receive a payment. M sued for constructive dismissal, and bad faith termination in breach of Ocean’s duty of good faith. The trial judge found that Ocean constructively dismissed M and entitled to a reasonable notice period of 15 months. The trial judge also held that M would have been a full-time employee when the Realization Event occurred had he not been constructively dismissed, and that, because the terms of the LTIP did not unambiguously limit or remove his common law right to damages, M was entitled to damages equivalent to what he would have received under the LTIP. The Court of Appeal unanimously upheld the decision that M had been constructively dismissed and agreed on the reasonable notice period. However, a majority of the court found that M was not entitled to damages on account of the lost LTIP payment.
With respect to the duty to provide reasonable notice, Kasirer J wrote that the NSCA erred in focusing on the entitlement to the LTIP in itself, under the terms of that, and not on the damages flowing from the failure to give reasonable notice, from the breach of the employment contract.
The Court approved a two-step approach to these questions:
[52] … First, courts should “consider the [employee’s] common law rights” (para. 30). That is, courts should examine whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period. Second, courts should “determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement” (para. 31). “The question”, van Rensburg J.A. explained, “is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights” (para. 31).
The Court noted that but Matthews’ dismissal, “he would have received an LTIP payment during that period. In such circumstances, there is no need to ask whether the LTIP payment was “integral” to his compensation” (para. 59). The Court concluded that he was prima facie entitled to the LTIP (para. 60).
The terms of the LTIP read (para. 63):
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.
The Court found that clause 2.03 did not measure up. The Court’s analysis of the LTIP terms, is instructive (cases generally omitted):
[64] The question is not whether these terms are unambiguous but whether the wording of the plan unambiguously limits or removes the employee’s common law rights (Paquette, at para. 31, citing Taggart, at paras. 12 and 19-22). Importantly, given that the LTIP is a “unilateral contract”, in the sense that the parties did not negotiate its terms, the principle of contractual interpretation that clauses excluding or limiting liability will be strictly construed “applies with particular force ….”
[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 (…). 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 ….
[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, …, 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” (…). 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.
Clause 2.05 was not been considered by the trial judge. It was considered by the NSCA, where the dissenting judge distinguished between severance and damages for wrongful dismissal. The Supreme Court disagreed with the majority of the NSCA:
[69] I respectfully disagree with the majority of the Court of Appeal on this point. The trial judge did not use the LTIP to calculate severance; rather, he determined the quantum of damages that Mr. Matthews was entitled to under the common law following the constructive dismissal. As the dissenting judge explained in detail, severance and damages are distinct legal concepts. The primary purpose of providing reasonable notice (or damages in lieu thereof) is to protect employees by providing them an opportunity to seek alternative employment (see Wallace, at para. 120, per McLachlin J., as she then was, dissenting, but not on this point). Severance pay, by contrast, “acts to compensate long-serving employees for their years of service and investment in the employer’s business and for the special losses they suffer when their employment terminates”, and is often provided for in provincial employment standards legislation (Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at para. 26).
[70] Moreover, clause 2.05 must be read as a whole; it also states that the LTIP “does not have any current or future value other than on the date of a Realization Event”. If Mr. Matthews had been properly given notice of termination, he would have remained a full-time employee on the date of the Realization Event, and thus would have received an LTIP payment. His damages reflect that lost opportunity.
[76] Finally, at this stage of the analysis, it may also be appropriate in certain cases to examine whether the clauses purporting to limit or take away an employee’s common law right were adequately brought to the employee’s attention (Paquette, at para. 18; Taggart, at paras. 20-23; Poole v. Whirlpool Corp., 2011 ONCA 808, 97 C.C.E.L. (3d) 20, at paras. 5- 6). This issue, however, does not arise on these facts. Moreover, as several interveners commented on in this appeal, it may be appropriate to question whether the clause at issue is compatible with minimum employment standards (Machtinger, at p. 1004). This issue was not canvassed by the courts below and, in the present circumstances, it is unnecessary to explore further.
Kasirer J, writing for the Court, took the opportunity to reaffirm the Courts decision in Bhasin and noted:
[40] It is apparent too from the pleadings here that there is a measure of uncertainty as to the impact of Bhasin, not just in Mr. Matthews’ case but on employment law more generally. At a minimum, I believe this is an occasion to re-affirm two important principles stated in Potter. First, given the various submissions in this case, I would recall that the duty of honest performance — which Cromwell J. explained in Bhasin applies to all contracts, and means simply that parties “must not lie [to] or otherwise knowingly mislead” their counterparty “about matters directly linked to the performance of the contract” — is applicable to employment contracts (Bhasin, at para. 33, see also para. 73; Potter, at para. 99). Second, given the four-year period of alleged dishonesty leading up to Mr. Matthews’ dismissal, I would also reiterate that when an employee alleges a breach of the duty to exercise good faith in the manner of dismissal — a phrase introduced by this Court in Wallace, and reinforced in Keays — this means courts are able to examine a period of conduct that is not confined to the exact moment of termination itself. All this reflects, in my view, settled law. [Underlining added]