The Supreme Court of Canada will decide if an employee is entitled to payments owed in the event of a corporate acquisition despite the fact that the employee resigned over a year before the triggering event. On January 31, 2019, the SCC granted leave to appeal in Matthews v. Ocean Nutrition Canada Limited. The employee asserts that he is entitled to over $1 million in profits following the acquisition of his former employer – even though he had resigned 13 months before the transaction. If the SCC decides in the employee’s favour, employers may face more challenges (and increased litigation) when seeking to enforce limiting clauses in employment agreements.

Impact of the SCC Appeal

Employers are expected to act in good faith when carrying out their obligations under an employment agreement. In particular, employers must not act in bad faith when terminating the employment relationship. If an employer breaches these duties, the employee may be entitled to aggravated damages, in addition to reasonable notice of termination.

However, Mr. Matthews’ appeal goes one step further. Seizing on recent SCC decisions about the principle of good faith in contractual performance, Mr. Matthews has asked the SCC to expand the remedies available under the common law such that an employer would be unable to rely on a limiting or exclusion clause if the employer had acted in bad faith or constructively dismissed the employee.

Given the prevalence of limiting or exclusion clauses in incentive compensation arrangements, and in termination provisions more generally, if the SCC agrees with Mr. Matthews, it is likely that employees will more readily challenge such clauses under existing agreements, resulting in more litigation and uncertainty. For future compensation arrangements, employers may decide to rethink extending the same incentive options. Further, a favourable decision for Mr. Matthews could limit the instances in which employers could rely on termination provisions at all.

Background

David Matthews worked for Ocean Nutrition and its predecessors from January 1997 to June 2011, when he resigned. He was a vice-president at the time of his resignation. In July 2012, Royal DSM N.V. acquired Ocean Nutrition for $540 million. Mr. Matthews did not receive any profits from the sale because of the terms of Ocean Nutrition’s Long Term Incentive Plan. Specifically, the LTIP required participants to be full-time employees on the date of a “realization event” (i.e., a corporate acquisition) in order to receive any payment. The LTIP stated that it was of “no force and effect if the employee ceases to be an employee … regardless of whether the Employee resigns or is terminated, with or without cause.” Based on this wording, Ocean Nutrition took the position that it was not required to provide Mr. Matthews with any profits.

Following the sale, Mr. Matthews sued Ocean Nutrition for wrongful dismissal and claimed that Ocean Nutrition’s Chief Operating Officer had constructively dismissed him. As part of his claim, Mr. Matthews sought payments under the LTIP.

Lower Court Decisions

The lower court judge agreed that Ocean Nutrition constructively dismissed Mr. Matthews and that 15 months’ notice of termination would have been appropriate. The judge also concluded that the LTIP did not clearly limit Mr. Matthews’ rights upon a “realization” event. Since the sale occurred during the 15-month notice period, the judge awarded Mr. Matthews over $1 million in damages as compensation for his loss under the LTIP.

On appeal, the Nova Scotia Court of Appeal unanimously agreed that Ocean Nutrition constructively dismissed Mr. Matthews and that 15 months’ notice was reasonable. However, the majority of the Court believed that Mr. Matthews was not entitled to payments under the LTIP, because the contractual language was clear. Justice Farrar, writing for the majority, noted that the decision might have been different if Ocean Nutrition had orchestrated Mr. Matthews’ departure to avoid liability under the LTIP; however, Justice Farrar refused to overturn the lower court’s finding that no such conspiracy occurred.

The single dissenting judge on the Court of Appeal, Justice Scanlan, concluded that there was an implied agreement that the LTIP and the employment contract would be performed with honesty and integrity. Justice Scanlan believed that the Chief Operating Officer’s “lies and deception” breached that implied agreement and, therefore, Mr. Matthews was entitled to damages under the LTIP.

We will report on the SCC’s decision as soon as it is released.