Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
It is rare for an employment law case to come before the highest court in Canada. One of 2019’s most significant developments was the Supreme Court of Canada’s decision to consider an employee’s appeal of the Nova Scotia Court of Appeal’s decision in Ocean Nutrition Canada Ltd. v. Matthews, 2018 NSCAS 44. Arguments in this case were heard on October 8, 2019. The court’s decision, expected to be released in 2020, will likely have a profound impact on the relationship between employers and employees in Canada.
Although the case focuses on an exclusion clause in a long-term incentive plan (LTIP) and will shape employment law governing employee incentives, it will also address the extent to which the common law duty of good faith, honesty and trust in the performance of contracts, as established in Bhasin v. Hrynew, 2014 SCC 71, is owed by employers to employees in the performance of employment contracts.
Matthews worked for Ocean Nutrition (ONC) from 1997 to 2011, initially as Operations Manager and most recently as Vice President. ONC manufactured omega 3 fish oil for commercial sale and Matthews is a chemist who has worked in that industry for decades.
In 2007, a new Chief Operating Officer (COO) stepped into the role, who assigned duties to Matthews. Later that same year, Matthews and ONC entered into an LTIP under which 2% of the company’s value created on the sale or public offering of the company in excess of $100 million (a “Realization Event”) would be distributed among the executives who were parties to the LTIP. As Matthews was the longest-term executive subject to the LTIP, he would have received the highest payout on a Realization Event.
The LTIP provided at section 2.03:
ONC shall have no obligation under the 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.
Section 2.05 of the LTIP provided:
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.
Due to purported problems Matthews experienced working under the new COO, he resigned in June 2011 and commenced new employment in August 2011. ONC was sold in July 2012; Matthews did not share in the payout from the Realization Event.
Matthews claimed constructive dismissal and sought damages for loss of the LTIP payout.
Decision of the Lower Court
The trial court made a series of factual findings1 that supported the plaintiff’s case, including that the COO and ONC’s other witnesses were not credible. According to the court’s findings, the COO ostracized Matthews in an attempt to push him out of operations and minimize his influence. Among other allegations, the court determined the COO did not like Matthews or consider him a valuable asset; told others Matthews would not be around much longer and had plans for another employee to take over operations; excluded Matthews from initiatives, removed his responsibilities, and transferred his projects to others; lied to him; and ignored requests to speak with him.
The court concluded that based on these facts, the test for constructive dismissal was satisfied: ONC made a unilateral change amounting to a breach in the employment contract and pursued a course of conduct that demonstrated an intention to no longer be bound by that contract. A reasonable person in the same situation as Matthews would feel the essential terms of the contract had been substantially changed.
Reasonable Notice Period
Taking into consideration case law that sets out the factors to be considered in determining reasonable notice (character of the employment, length of service, employee’s age, and availability of similar employment), the court set Matthew’s notice period at 15 months.
Entitlement to Damages to Compensate for Loss of the Payout under the LTIP
The court concluded that Matthews was entitled to damages in the amount of $1,086,893 to compensate for the loss of the LTIP payout. Its view was that the wording of the LTIP was insufficient to limit Matthews’ common law right to such compensation. Furthermore, if Matthews had not been constructively dismissed, he would have been a full-time employee when the LTIP payouts were made. The LTIP did not contain a general rule that was broad enough to include unlawful termination.
Decision of the Court of Appeal
The Nova Scotia Court of Appeal allowed the appeal in part and set aside the damages awarded under the LTIP. It did not disturb the lower court’s finding of constructive dismissal, or its decision to set the reasonable notice period at 15 months.
In support of its decision to set aside the damages under the LTIP, the court emphasized the LTIP’s language, which it characterized as unambiguously precluding Matthews from being entitled to a payout.
The court noted that this might have been a different case if the lower court judge had concluded that ONC had orchestrated Matthews’ termination to avoid any liability it might have under the LTIP; although Matthews made that argument, it was rejected.
In dissent, Justice Scanlan saw injustice in the majority’s decision to deny damages for loss of the LTIP payout:
…From a moral perspective that result is hard to digest.
The law has traditionally ended up on the fair side of moral dilemmas. Ideally, fairness and justice arrive at the same destination, at the same time. Some might say that as judges we are not entitled to consider the morality of the result. To that I say that a result that is morally unconscionable is usually legally indefensible. (paras. 145 and 146)
Although Justice Scanlan agreed that the terms of the LTIP precluded Matthews from recovering under that agreement, he refused to end his analysis there. Instead, he noted that there is a duty of good faith in the performance of contracts, as established by the Supreme Court of Canada in Bhasin v. Hrynew. He extended this duty to the LTIP and the employment agreement, stating that there was an implied agreement that they would be performed in good faith, with honesty and trust. He said:
I do not accept that the parties intended to agree that a rogue manager such as [the COO] could engineer the dismissal of a valued long-term employee through a series of lies, deceit and manipulation so as to result in that employee not being entitled to share in the value he was so essential in creating. (para. 148)
Justice Scanlan would have maintained the lower court’s damage award to compensate Matthews for his lost payout under the LTIP.
Bottom Line for Employers
The fact that the Supreme Court of Canada granted the employee leave to appeal in Ocean Nutrition signals its desire to explore the merits of Justice Scanlan’s dissenting opinion. When the court’s decision is released in 2020, we will have clarity on two issues of great significance to Canadian employers and employees. Will the duty of employers to treat employees in good faith, with honesty and trust override the strict terms of incentive plans? To what extent will that duty extend to the contractual relationship between employers and employees? The Supreme Court of Canada’s answers to these important questions will have major implications. We will be monitoring these developments closely and when the court releases its precedent-setting decision, we will be sure to report on it.
1 Matthews v. Ocean Nutrition Canada Ltd., 2017 NSSC 16. A supplementary decision, Matthews v. Ocean Nutrition Canada Ltd., 2017 NSSC 123, focused primarily on whether Matthews was entitled to receive damages for Short Term Incentive Plan (STIP) payments made during the reasonable notice period. This issue was considered a moot point at the appeal level because even if Matthews was entitled to damages to compensate for STIP payments, he was not entitled to recover them because his salary at his new job exceeded the combined quantum of his salary at ONC and the bonus payments he would have received under the STIP during the reasonable notice period.