The organizing principle of good faith has been permeating with high frequency in contract law in the last few years. Good faith, which at some time was downplayed by the courts, now is in front and centre in the interpretation of contracts.
As we know, the decision in Bhasin v Hrynew and more recently Collen v Zollinger, set out that there is indeed an organizing principle called the duty of good faith in our contract laws. One duty that can be drawn out from that organizing principle is the duty of honest performance.
There have been questions raised around the good faith in the employment context. Namely, in the context of the wrongful and constructive dismissals. Some of these questions were answered in Keays v Honda[1] and Wallace v United Grain Growers Ltd.[2]However, these cases were decided before Bhasin.
In this Supreme Court of Canada decision, the court had an opportunity to further delve on the duty of performance in the employment context. But it appears they advertently side stepped the question stating that the case before it can be settled on the duty of reasonable notice. The court went on to clarify the duty of reasonable notice.
The court did, however, make some comments in obiter around the issue of the duty of honest of performance that deserves some mentioning.
Background:
The employee and a senior manager’s relationship had soured. The employer had gradually excluded the employee from various initiatives the employee would have been a part of. There were also some dishonest statements around the sale of the company and whether the employee will remain an employee up to the sale.
Soon after such statements, the employee had a meeting with the company’s vice president of human resources wherein there was a negotiation of terms on the employee’s departure. One key point that was discussed that the employee would forgo his severance to keep his entitlement to the long-term incentive plan (“Plan”).
The Plan was a contribution plan that the employee signed up for at the outset of the employment. The Plan was designed to award employees for past contributions and incentivize employees to stay with the company for the long-term. The triggering payout event of the payout of the Plan was a sale of the business.
The employee’s relationship with the employer ended and he went on to a new employer fairly quickly.
Ultimately, the employer was sold and at this point the Plan was triggered to payout the employees who were a part of the Plan. One of which being the employee that had moved on.
The employer took the position that the terms of the plan precluded the employee from receiving any monies from the plan.
The employee sued on two grounds: (1) that he was constructively dismissed; and (2) that his dismissal was oppressive, unfairly prejudicial and unfairly disregarded “his interests.”
Supreme Court of Nova Scotia
The case came before the court of first instance in Nova Scotia. LeBlanc J. concluded that the employer had constructively dismissed the employee and owed him a reasonable notice period of 15 months.
LeBlanc J. applying the SCC’s decision in Potter[3] found that both tests that Wagner J (as he then was) set out in that decision were met. And on those bases, the employee was, at law, constructively dismissed.
LeBlanc J. held since the trigger date of the Plan was within the reasonable notice period and since the terms of the Plan did not unambiguously limit or remove the employee’s common law right to damages, the employee was entitled to damages equivalent to what he would have received under the Plan.
LeBlanc J. felt it was unnecessary to address the oppression argument.
Court of Appeal of Nova Scotia
At the Court of Appeal, the majority reasons were written by Farrar JA and Bryson JA. The decision attracted a dissent from Scanlan JA.
(1) Majority
The majority disagreed with the LeBlanc J that the employee was entitled to damages under the plan.
The majority concluded that the terms of the plan unambiguously deprived the employee of the opportunity to recover under the plan. The majority LeBlanc J confused an employee’s right to reasonable notice with an employee’s ability to recover under an incentive plan.
The majority also commented on the dissenting reasons of Bryson JA. They viewed that Bryson JA failed to account the fact that LeBlanc J did not make a finding that the employer orchestrated a dismissal to avoid paying out the plan to the employee.
The majority commented that the LeBlanc J did not make a finding of bath faith by the employer.
(2) Minority
The dissenting judge Scanlan JA was of the view that the parties to the employment agreement did not “intended to agree that a rogue manager such as Emond 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.”
Using Bhasin, Scanlan JA held there was an implied agreement that the plan and the employment agreement would be performed with honesty and integrity. Scanlan JA viewed the employer benefited financially from its deceit as it did not have to pay out the employee under plan. He held that the plan as a measure of damages for the constructive dismissal. This, as Scanlan JA held, was the opportunity loss that the employee as a result of the dismissal.
Supreme Court of Canada
The SCC observationally commented that parties were at some stages arguing past each other. There was a principal disagreement on the basis for the damage award: whether it derived from the duty of reasonable notice or the duty of good faith.
Employee’s Arguments
The employee argued that there was a breach of the duty of good faith and honest performance which should amount to damages equivalent to what is owed to the employee from the plan.
The employee also asserts that the employer should have been barred from relying on exclusionary clause. The employee further relies on the doctrine of estoppel to support his argument that the employer cannot rely upon exclusion clause.
Employer’s Arguments
As expected, the employer defends the exclusionary clause. It views the bonus was not integral to compensation and that the trial judge misinterpreted plan. Given its plain and unambiguous language, bonus should have been excluded.
The employer on the point of duty of good faith argued that the common law does not recognize any duties of good faith on the employer during the performance of the contract that could serve as the basis for the payment of the bonus.
Further the employer argued that there was no finding of bad faith by the trial judge.
SCC’s Discussion
The SCC found that the Court of Appeal erred in not awarding employee plan damages for the breach of the implied term of reasonable notice. Bad faith can attract distinct damages based on the principles of Hadley. Bhasin does apply to employment law. Duty of good faith in the manner of dismissal: Wallace, reinforced in Keays means courts are able to examine the period of conduct that is not confined to the exact moment of the termination itself.
Correct Methodology: Duty to Provide Reasonable Notice
Kasirer J. for the majority reasoned that the law of reasonable notice was sufficient to dispense with the main issue – which was whether the employee was entitled to receive compensation for the damages that derived out of the fact that the employee’s right to be given a reasonable notice was breached. Put another way, the analytical lens should zone in on had the employee been given the reasonable notice, what quantum would he had received?
Kasirer J found that the Court of Appeal erred in principle as it dove into the terms of the contract without fully considering the employee’s common law right to reasonable notice.
Kasirer J. took the approach taken in the line of cases Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163, and Paquette v. TeraGo Networks Inc., 2016 ONCA 618. In these decisions and in many other decisions approving its approach hold that there are two questions that must be asked:
· Courts should examine whether, but for the termination, the employee would have been entitled to the, in this case being, the bonus during the reasonable notice period.
· Then the courts “determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement” (para. 31).
A court should not look at whether the wording of the plan was ambiguous but rather whether the plan removes the employee’s common law rights.
It is critical to mention Kasirer J’s rationale behind this approach, which is that it “anchors” the analysis around reasonable notice. The analysis should hone in on what the quantum the employee would have received had they worked through the reasonable notice period. That quantum would be the reasonable notice damages.
Application
Following the methodology Kasirer J set out, he first asked whether the employee was entitled to the plan payment as a part of his compensation during the reasonable notice period. He concluded in the affirmative.
The employer arguments pushed back on this point and viewed that the payment deriving out of the plan was not integral to the employee’s compensation plan.
Kasirer J held that the test of whether the benefit or bonus was integral to the employee’s compensation assists when there is doubt as to if the employee would receive the benefit or bonus during the reasonable notice period. This was the case in Singer v. Nordstrong Equipment Limited, 2018 ONCA 364. In that case, the bonus was discretionary.
Kasirer J distinguished the facts in this case as the payment of the plan proceeds were not discretionary rather, they would have, in fact, been paid out had the employee remained an employee during the reasonable notice period. Therefore, the need to consider whether the compensation was integral is not necessary.
Closing Comment
In this decision the SCC side stepped the glaring and permeating principle of the duty of good faith in contract law. A subsequent case will have to address question of whether the duty will expand. What is clear is that the SCC affirms this duty does apply to employment contracts. It is also a signal to litigants to not jump to duty of good faith when reasonable notice can do the job.