In an era that has been marked by an economic downturn and several very lengthy notice period awards in favour of employees, the Alberta Court of Appeal has granted a win to employers. In its much anticipated and first decision of 2017, on Jan. 4, 2017, the Court of Appeal overturned a trial decision under which a dismissed employee had been awarded an incentive bonus even though the contractual preconditions had not been met. The Court of Appeal also firmly rejected the notion that when an employer dismisses an employee, it is exercising a discretionary power that it must exercise in good faith. Lastly, the Court of Appeal dismissed the holding that an employer must provide reasons or a business justification for dismissing an employee.

David Styles was an investment manager with AIMCo. He was dismissed without cause after three years of employment. The issue in the case was whether he was entitled to a bonus under the company’s Long Term Incentive Plan (the “Plan”). The Plan documents made it clear that no rights vested under the Plan for four years. They also expressly stated that an individual had to be an active employee on the vesting date in order to be eligible for a bonus.

The trial judge interpreted the Plan as giving AIMCo a “discretion” to “forfeit” the bonus entitlement of an employee who was not actively employed on the vesting date. She also considered that AIMCo was exercising a discretionary power when it decided to terminate Mr. Styles without cause. Purporting to follow the Supreme Court of Canada’s decision in Bhasin,2 she reasoned that such discretion had to be exercised in good faith, and that the actions of AIMCo fell short of this standard, since it could not “justify” the decision to terminate Mr. Styles.

Court of Appeal's decision

The Court of Appeal unanimously agreed that the employer’s appeal had to be allowed. The majority wrote detailed reasons which included an extensive review of some of the leading case law. They held that the trial judge had misinterpreted the Plan documents as giving the employer a discretion to forfeit an employee’s bonus entitlement. Rather, the Plan made it clear that continued active employment on the vesting date was a condition precedent to the bonus entitlement.3 There was no discretionary power involved.

The majority issued a reminder that, contrary to the approach taken by the trial judge, “termination without cause does not involve a breach of the contract”,4 and that an employer does not have to show “good faith” or “legitimate business reasons” for dismissal.5 The decision to terminate is not an exercise of a “discretionary power”. The Court of Appeal also confirmed an employer does not have to provide reasons for the termination to the departing employee. The trial judge had therefore taken the wrong approach in holding against the employer for failing to provide reasons for the termination and the consequent denial of “grants” under the Plan.6

The majority took the opportunity to engage in a detailed review of what the Supreme Court of Canada had, and had not, held in the Bhasin case. It emphasized that Bhasin only applies to contractual performance and not to the negotiation of a contract.7 Further, it reaffirmed that that the parties to a contract are entitled to act in their own best interests – though at some point they cannot perform certain contracts in a way that seeks to “undermine [legitimate contractual] interests in bad faith”.8 In the Styles case, there was no room to apply the “good faith” doctrine because the contract made it perfectly clear there was no bonus entitlement in the circumstances. Essentially, the court will not rewrite a bad deal for one of the parties.

Finally, the majority rejected alternative arguments advanced by Mr. Styles based on “relief from forfeiture”, the doctrine of “unconscionable transactions” and the Employment Standards Code.9 The Plan documents were quite convoluted and, “use[d] some unfortunate wording”. The draftspersons had caused some unnecessary confusion by using inapt words such as “grant” (to describe what was in fact only a notional yearly allocation to each employee for purposes of calculating future possible bonus entitlements) and “forfeiture” (as a clumsy way of conveying the point that that the bonuses were not to vest merely on the allocation of the “grant” but only in four years’ time).

The third member of the panel wrote succinct concurring reasons which are consistent with the reasons of the majority. Justice Berger’s reasons rested on the central point that, as a matter of interpretation, the trial judge had erred in law in holding that the employee had an “earned entitlement” to compensation under the Plan at the time he was dismissed.10

Lessons to be learned

The Court of Appeal has provided guidance and removed the uncertainty and confusion that was created by the trial decision in the Styles case. First, if the documents governing employee compensation plans are clearly worded, in normal circumstances they can be relied upon as governing the question of what an employee is entitled to receive on termination.

Second, bonus plans can be limited to employees who are “actively employed”, though such limitations much be clearly defined and spell out what “active employment” means for the plan. With appropriate drafting, therefore, it is possible to define the compensation payable on termination of employment in a way that excludes bonuses that would have become payable after the date of termination had the employee not been dismissed.

Third, where an employee is being dismissed without cause, the employer is not under a duty to justify the decision or to provide the employee with reasons for his or her dismissal.

Fourth, absent evidence from the employee to the contrary, an employer is not acting in “bad faith” by applying the blackletter provisions of compensation plans merely because the application of such provisions works in a way that is detrimental to the employee.

Lastly, the decision acts as a salutary lesson on the benefits of avoiding repetition and complexity in drafting contractual documents. The document governing the Plan was 19 pages long and at least in some respects was poorly drafted. Words such as “grant” and “forfeit” have important legal connotations in many contexts. It is not surprising that their inappropriate use in the Plan documents in this case caused the trial court to attach an importance to them which the parties never intended.