Summary of Employment Law Restated By Supreme Court of Canada in Matthews v Ocean Nutrition Canada Ltd.

Last updated Jan 4, 2021

The Supreme Court of Canada recently revisited the foundational principles of employment law in the context of constructive dismissal in Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26 [“Matthews”]. Briefly, Mr. Matthews was a very skilled chemist, holding a series of senior management positions with Ocean Nutrition Canada Ltd. (“Ocean”) from 1997 until he resigned from his employment in June 2011. He was noted as being “extremely valuable” to Ocean’s success in the manufacture of Omega-3 products. As an eligible employee, Mr. Matthews was entitled to participate in Ocean’s Long-Term Incentive Plan (“LTIP”), which was triggered upon the sale of Ocean.

In or about 2007, Ocean brought on a new Chief Operating Officer, Mr. Emonds, who clashed significantly with Mr. Matthews. The court noted that frictions developed between the two men almost immediately and Mr. Emonds began a campaign designed to marginalize Mr. Matthews in the company. Towards the tail end of this campaign, Mr. Matthews began to suspect that Ocean was beginning the due diligence process for sale, which would trigger payments under the LTIP.

Although payment under the LTIP was key to Mr. Matthews continuing through the years of marginalizing treatment and alienation, he eventually resigned from employment in June 2011 after unsuccessful attempts to secure an exit package that included payment of the LTIP entitlements. Approximately 13 months after his resignation, Ocean was sold and the LTIP payments were triggered.

Mr. Matthews brought an application before the Nova Scotia Supreme Court seeking a declaration that he was wrongfully terminated, and that Ocean conducted itself in an oppressive and unfair manner in breach of the duty of good faith. He sought payment of damages in lieu of reasonable notice and payments equal to his entitlements under the LTIP. Ocean’s defence to Mr. Matthew’s claims to his entitlements under the LTIP was that he was not entitled to any payments because he was not a full-time employee at the time the LTIP entitlements became due and owing, which was an explicit requirement of the plan.

The trial court, and later the Supreme Court of Canada, ultimately sided with Mr. Matthews, citing, among other things, the ambiguous wording of the LTIP plan which failed to unambiguously limit Mr. Matthew’s entitlement to the LTIP in the event of his without cause termination.

Key Impact and Takeaways for Employers

In the wake of Matthews, employers should ensure that their employment contracts, bonus and benefits policies contain clear and unambiguous language limiting employee entitlements upon termination in order to limit damages in the event a successful wrongful dismissal claim is brought by a former employee.

Key Impact and Takeaways for Employees

In the event of a termination, where the employee has been offered pay in lieu of notice on a without cause termination, employees should ensure that all potential compensation that would come due and owing during the notice period is accounted for. This may mean consulting independent legal counsel for a review of all employment documents to secure all entitlements upon termination.

Procedural History

The Trial Decision of the Supreme Court of Nova Scotia

The trial judge made numerous findings of fact regarding the conduct of Mr. Emonds and Ocean management which constituted constructive dismissal. Of note, the number of people reporting to Mr. Matthews was drastically reduced; his responsibilities were further reduced over the 4 year period following Mr. Emonds coming on as COO; he was excluded from various initiatives by senior management that he normally would have participated in; he was placed under review in 2010 with termination being a possible consequence of said review; and he was excluded from the due diligence process engaged in prior to the sale of Ocean, something the trial judge found he normally would have had a role in. In addition to the above acts, Mr. Matthews was made to fear for the future of his job as a result of significant dishonesty on the part of Mr. Emonds and was left in a prolonged state of anxiety and uncertainty about his future.

The trial judge found that Mr. Matthews had been constructively dismissed; that his reasonable notice period was 15 months; that the LTIP plan did not unambiguously limit Mr. Matthews entitlements to seek damages at common law; and awarded damages accordingly. In total, the trial judge awarded Mr. Matthews $1,086,893.36 for loss of LTIP payments and other benefits, less mitigation income that Mr. Matthews had earned from a subsequent employer.

The Appeal to the Nova Scotia Court of Appeal

Ocean appealed to the Nova Scotia Court of Appeal which unanimously upheld the trial judge’s decision that Mr. Matthews was constructively dismissed and the appropriate notice period, but the appeal was allowed with respect to damages. The majority found that clause 2.03 of the LTIP unambiguously terminated Mr. Matthews’ right to recover under the plan as soon as he left his employment. The majority also noted that Clause 2.05 of the LTIP could not be used for severance purposes and found that the trial judge had erred in doing just that. Those clauses read as follows:

2.03 CONDITIONS PRECEDENT

ONC shall have no obligation under this 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 and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

2.05 GENERAL

The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a 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.

The majority relied on Styles v Alberta Investment Management Corp., 2017 ABCA 1 [“Styles”] in concluding that Clause 2.03 precluded Mr. Matthews from recovering under the LTIP as a result of his constructive dismissal.

Arguments on Appeal before the Supreme Court of Canada

Mr. Matthews appealed to the Supreme Court of Canada, arguing that the Court of Appeal failed to recognize that Ocean, through its dishonest actions, breached the duty set forth in Bhasin v Hrynew, 2014 SCC 71, to ensure that the contract was performed in line with the organizing principle of good faith and the duty of honest performance. He relied on the principles of Hadley v Baxendale, [1854] EWHC J70 [“Hadley”], arguing that he was entitled to an amount equivalent to the LTIP payment as a remedy for the breach and urged the Court to recognize good faith as animating the whole of the performance of the contract. Alternatively, Mr. Matthews argued that the majority of the Court of Appeal misdirected itself by failing to consider damages for Ocean’s breach of its obligations to provide reasonable notice, and he invoked the doctrine of estoppel to support an argument that Ocean could not rely on the exclusion clause in the LTIP.

Ocean relied on a line of case law that required interpretation of whether the LTIP payment was “integral” to his compensation, arguing that the LTIP was not integral and therefore should not make up any part of damages for constructive dismissal. Alternatively, Ocean argued that there was no duty of good faith on an employer during the performance of the contract that could serve as a basis for payment of the bonus at law.

The Supreme Court of Canada: Affirming and Clarifying Well-Established Legal Principles

To begin with, the Court noted that there is a distinction between the implied term of pay in lieu of notice, and the implied term of reasonable notice. An employer’s duty to its employees is to provide reasonable notice of termination. In breaching that implied term, the employee becomes entitled to payment of damages in lieu of such reasonable notice. In assessing those damages, the Court must consider what the employee would have earned had the employer not breached the contract of employment and failed to provide reasonable notice.

Justice Kasirer found that the Nova Scotia Court of Appeal erred in not awarding the amount of the LTIP as part of Mr. Matthews’ common law damages for the breach of the implied term to provide reasonable notice. In doing so, he reviewed and confirmed the two-step approach to determining damages in any wrongful dismissal case:

1. The court must first consider the employee’s common law rights – that is, whether, but for the termination, the employee would have been entitled to a bonus or other benefit during the notice period; and
2. If so, the court must then look to the bonus plan or benefits contract and determine whether there is something within the wording of that plan or contract that specifically removes the employee’s common law entitlements. The question is not whether the contract is unambiguous, but whether the words used alter or remove the common law rights.

Kasirer J. noted that proceeding directly to an examination of the contractual term, as the Court of Appeal had done, divorced the question of damages from the underlying breach, which constituted an error in principle. The proper approach recognizes and respects the well-established principle that the contract “remains alive” for the purposes of assessing the employee’s damages to determine what compensation they would have been entitled to but for the dismissal.

With respect to Ocean’s argument that the proper approach was to award damages for all compensation and benefits that were integral to his compensation per Singer v Nordstrong Equipment Limited, 2018 ONCA 364 [“Singer”], Kasirer J. agreed with the trial judge’s finding that this line of reasoning introduced an extra component into the analysis not supported by the jurisprudence. He reaffirmed that the test of whether a benefit or a bonus is “integral” to the employee’s compensation assists in answering the question of what the employee would have been paid during the reasonable notice period. The analysis was required in Singer due to the discretionary nature of the bonus in question. In the case at bar, Kasirer J. found that the analysis was improper, noting that it was uncontested that the Realization Event, as defined in the LTIP, occurred during the reasonable notice period and but for the dismissal, Mr. Matthews would have received an LTIP payment.

Moving to the second step of the analysis, Kasirer J. agreed with the trial judge’s interpretation of Clause 2.03, finding that the “active employment” requirement was not sufficient to limit Mr. Matthews’ damages. The use of the clause “with or without cause” in Section 2.03 did not contemplate the situation of an unlawful termination as in Mr. Matthew’s case. He relied on Bauer v Bank of Montreal, [1980] 2 SCR 102 at p. 108 for the proposition that exclusion clauses “must clearly cover the exact circumstances which have arisen”, finding that termination without cause did not imply termination without notice. Kasirer J. took this opportunity to repeat that the employment contract was not treated as terminated until after the reasonable notice period expired. He even went so far as to find that even if an exclusion clause contemplated unlawful termination, the principle that the contract is not terminated until after the reasonable notice period would not unambiguously alter the employee’s common law entitlements.

Good Faith in Employment Contracts

At the outset, Kasirer J. reaffirmed the principles arising in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10:

1. The duty of honest performance is applicable to employment contracts; and
2. When an employee alleges a breach of the duty to exercise good faith in the manner of dismissal, courts are able to examine conduct during a period of time which is not confined to the exact moment of termination itself.

However, due to not only deficiencies in the original pleadings, but also Mr. Matthew’s failure to pursue his claim for punitive damages initially dismissed at trial, he declined to decide whether a broader duty existed during the life of the employment contract in absence of an appropriate factual record. In doing so, he urged plaintiffs to ensure all causes of action were pleaded properly, noting that a breach of the duty of good faith could give rise to distinct damages based on principles in Hadley, and approved in Honda Canada Inc v Keays, 2008 SCC 39, including damages for mental distress which were not plead.

Commentary on Styles

Paragraphs 71-75 of the judgment are of particular interest to employment lawyers practicing in Alberta, as Kasirer J., in obiter, undergoes a review of Styles and indicates his disagreement with the law as it was stated in that case.

In short, Styles dealt with a similar issue of whether an employee was entitled to receive payment under an LTIP following termination. In that case, the employer paid a lump sum equal to three months’ salary per the employment contract. The bonus that the employee sought to recover would not have vested until several years after the employee’s termination and the court, unsurprisingly, found that the employee could not recover damages for payment under the bonus in connection with the reasonable notice period. The Alberta Court of Appeal also noted that the common law implies a term of reasonable notice, or pay in lieu thereof, finding that payment in lieu was one component of the compensation provided for in the contract as opposed to “damages” for a breach of the contract. If the employer failed to give property notice or pay in lieu, the breach was in the failure to pay, not in the termination.

Kasirer J. commented that this premise was based on an erroneous reading of Sylvester v British Columbia, [1997] 2 SCR 315, and that the correct interpretation of that case was that damages for wrongful dismissal are designed to compensate the employee for the breach of by the employer of the implied term in the employment contract to provide reasonable notice and stated that there is no implied term to provide payment in lieu of such reasonable notice.

Relying on Dunlop v BC Hydro & Power Authority (1988), 32 BCLR (2d) 334 at pp. 338-39, Kasirer J. noted three principal reasons why there is no implied term to provide payment in lieu of reasonable notice:

1. There are issues surrounding the complexity of the term and whether such a term can readily be implied into an employment contract;
2. Implying a term to provide pay in lieu of notice would mean that an employer would not be breaking the contract by electing to give pay in lieu of notice and thereby requiring the employer to make full payment immediately; and
3. If the employer invoked such an implied term, there would be no obligation on the part of the employee to mitigate damages by seeking other employment.

He concluded this commentary by noting that to the extent that some cases suggest otherwise, he respectfully disagrees with those judgments.

Conclusion

The Supreme Court of Canada allowed the appeal and restored the trial judge’s decision awarding damages equivalent to 15 months’ pay in lieu of notice, the loss of opportunity to participate in the LTIP, and other benefits.

These are only some of the recent changes and affirmations in employment law in Canada. Particularly in 2020, provincial and federal courts and legislation is changing at a rapid pace. For more information on these topics or any other matters please contact one of the below lawyers from Bryan & Company LLP or access our Employment Law group here and it would be our pleasure to assist.