Supreme Court of Canada Rules on Wrongful Termination Damages

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On October 9, 2020, the Supreme Court of Canada released its judgment in Matthews v. Ocean Nutrition Canada Limited.[1] McCarthy Tétrault LLP represented the Canadian Association of Counsel to Employers (“CACE”) as an intervener before the Court. While the Court ultimately decided the case on the basis of the contractual language and not on good faith, it largely accepted CACE’s submission that termination exclusions can prevent an employee from seeking benefits as damages.

The intervener, CACE, was represented by a team led by Tim Lawson that included Brandon Kain, Adam Goldenberg and Bruna Kalinoski.

Background

In 1997, David Matthews commenced employment with Ocean Nutrition Canada Limited (the “Company”) as an experienced chemist. He then went on to occupy several senior management positions with the Company. As a senior executive, part of Mr. Matthews’ compensation package included a long-term incentive plan (“LTIP”). Under the LTIP, a “Realization Event”, such as the sale of the Company, would trigger payments to employees who qualified. Mr. Matthews was one of the qualifying employees.

In 2007, the Company hired a new Chief Operating Officer, who began to marginalize Mr. Matthews by limiting his responsibilities and lying to him about his status and prospects with the Company. Notwithstanding the tensions between Mr. Matthews and the Chief Operating Officer, he stayed in order to collect on his LTIP as he anticipated the Company would soon be sold. He eventually left the Company in June 2011.

Approximately 13 months after Mr. Matthews’ departure, the Company was sold for $540 million. The sale of the Company constituted a “Realization Event” for the purposes of the LTIP. As Mr. Matthews was not actively employed on the date of the sale, the Company took the position that he did not satisfy the terms of the plan. As a result, he did not receive a payment. Mr. Matthews filed an application against the Company alleging that he was constructively dismissed and that the constructive dismissal was carried out in bad faith and in breach of the Company’s duty of good faith.

Lower Court Decisions

The trial judge held that the Company constructively dismissed Mr. Matthews and that he was owed a reasonable notice period of 15 months. The trial judge also held that had Mr. Matthews not been constructively dismissed, he would have been a full-time employee when the Realization Event occurred. On this point, the trial judge also noted that since the terms of the LTIP did not unambiguously limit or remove his common law right to damages, Mr. Matthews was entitled to damages equivalent to what he would have received under the LTIP. Unanimously, the Court of Appeal upheld the decision that Mr. Matthews had been constructively dismissed and that the appropriate reasonable notice period was 15 months. Despite this, however, the majority of the Court of Appeal found that Mr. Matthews was not entitled to damages on account of the lost LTIP payment.

Supreme Court of Canada’s Decision

The Supreme Court of Canada set aside the judgment of the Court of Appeal and restored the trial judgement. It ruled that an employee who has been wrongfully terminated should receive damages that reflect any bonuses or payouts to which they would have been entitled during the reasonable notice period, unless an agreement between the employee and the employer is “absolutely clear and unambiguous” to the contrary. Here, since the employee would have received a payment under the Company’s LTIP during the reasonable notice period, he was entitled to damages that reflected that payment at common law. In this case, the Court found that there was no sufficiently clear and unambiguous agreement to take away or limit that common law right.

Justice Kasirer, writing for the Court, concluded that when calculating a dismissed employee’s common law entitlement to damages in lieu of notice, the appropriate starting point is to consider what compensation – i.e., “income, benefits, and bonuses” – the employee “would have received had the employer not breached the implied term to provide reasonable notice”.[2] From there, an employee’s claim is for an award of damages for breach of the implied term to provide reasonable notice. Such an amount should represent what the employee would have earned – including benefits and bonuses – during the notice period. The Court went on to suggest that it should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits:[3]

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?

In this case, there was no question that the employee would have received an LTIP payment had he remained employed with the Company through the notice period.[4] As a result, he was entitled to damages that reflected that payment at common law. The Company’s argument – since the LTIP was not “integral” to the employee’s compensation, it was not properly part of the damages to which he was entitled – was rejected by the Court.

  1. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The Court held that contractual language must be held to a high standard as “the provisions of the agreement must be absolutely clear and unambiguous.”[5] In this case, the Court found that the terms of the LTIP did not unambiguously take away or limit the employee’s common law right to receive damages in the amount of the LTIP payment he would have received if he had remained employed during the notice period. Additionally, the Court explained that language requiring an employee to be “full-time” or “active” will not be sufficient to remove an employee’s common law right to damages. Neither will language which seeks to remove an employee’s common right to damages upon termination “with or without cause.”[6]

With respect to the organizing principle of good faith in contract, and its application to employment contracts, the Court went on to affirm that, “[s]o long as damages are appropriately made out and causation established, a breach of a duty of good faith could certainly give rise to distinct damages … including damages for mental distress” and, “in certain circumstances”, punitive damages.[7] Here, however, the employee did not seek damages for mental distress and did not press his claim for punitive damages on appeal. The only damages he sought for the employer’s alleged bad faith were in the amount of the LTIP payment to which he was otherwise entitled under the employer’s duty of reasonable notice. The Court therefore declined to decide whether the employer had breached a duty of good faith to the employee. It did, however, leave the door open for future recognition of a “broader duty [of good faith] during the life of the employment contract.”[8]

Takeaway for Employers

For employers, this decision supports the existing legal principle that if damages are to be restricted for denial of reasonable notice, the contract must be clear and unambiguous on the restrictions. This is especially so when written by the employer and not negotiated with the employee. In this case, the Court held that it was not.

For questions about the Supreme Court of Canada’s decision, and its potential impact, please contact Tim Lawson or one of the members of our National Labour & Employment team.

[1]Matthews v. Ocean Nutrition Canada Limited, 2020 SCC 26 (“Ocean Nutrition”).

[2]Ibid., at para. 52.

[3]Ibid., at para. 55.

[4]Ibid., at paras. 58-59.

[5]Ibid., at para. 65.

[6]Ibid., at paras. 65-66.

[7]Ibid., at para. 39.

[8]Ibid., at paras. 85-86.

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