Employers already have a duty of good faith when they terminate an employee. This requires the employer to be honest and forthright with employees when they are terminated. The law has also developed to recognize a duty to perform a contract honestly and in good faith.[1] The Supreme Court of Canada is now deciding what happens when an employer breaches that duty. Should a court award an employee money for incentive compensation the employee would have expected to receive if not for the breach?

In Ocean Nutrition Canada Limited v. Matthews,[2] D was employed by the company as a senior chemist and vice-president. D resigned when his boss changed his reporting structure and was dishonest about doing so; refused to discuss major workplace issues with him; recommended his department be dispersed; lied to him about a potential sale of the company; and, significantly reduced his duties. Approximately one year after D resigned, the company was sold.

D sued for constructive dismissal and claimed money for loss of participation in the company's Long-Term Incentive Plan. The Plan read that if the company was sold, currently employed employees would get a portion of the sales proceeds. If an employee was not employed at the time of the sale, he or she would not get a share of the proceeds. This rule applied regardless of whether the employment ended by resignation or dismissal.

D won at trial. The trial judge found D was constructively dismissed and set the notice period at 15 months. The judge also said D was entitled to his share of the sale proceeds under the Plan because he would have been employed at the time of sale if he had not been constructively dismissed by his manager. The company was ordered to pay D approximately $1.085 million dollars.

The company appealed. The appeal court agreed D was constructively dismissed and 15 months was the right notice period. But, two of three judges said D could not be awarded money under the Plan. This was because the Plan language required him to be employed at the time of the sale and he was not. The third judge disagreed. The judge thought the company should have to pay because it breached the duty to perform the contract in good faith and honestly. If it had not, D would likely have been employed at the time of sale and received his share under the Plan.

The decision was appealed to the Supreme Court of Canada. The key issue was what D should get for the breach of the duty of good faith and honest performance. The employee asked for damages equal to what would have occurred "but for" the dishonesty and bad faith. That is, his share under the Plan that he would have collected but for the conduct of his boss. Alternatively, D said the company should be punished by not being able to rely on the Plan language to disentitle him to his share.

The company said breaches of good faith and honesty could be compensated through awards of aggravated and punitive damages. Moving to "expectation" damages (i.e. what the employee would have been entitled to but for the breach) was inconsistent with the current state of the law.

The Supreme Court will likely release its decision sometime next year. Employers should keep a close eye on the outcome of this case. It could have a significant impact on how damages are awarded and calculated in the wrongful dismissal context, especially if the Supreme Court decides that a breach of the duty of good faith and honest performance should result in the award of expectation damages.