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Alberta court rules on the limits of good faith in the performance of employment contracts

In a recent decision, the Alberta Court of Appeal strongly affirmed employers’ right to terminate employees without cause, and without giving reasons. Further, the Court ruled that there is no good faith duty on the part of employers to refrain from exercising their discretion to dismiss employees simply because dismissing them will deprive them of bonus payments which have not yet vested.

The Decision

The employee in Styles v Alberta Investment Management Corporation was terminated without cause, and brought a claim that he was entitled to bonuses under the employer’s Long Term Incentive Plan (“LTIP”).

Each year, a “grant” would be calculated under the LTIP. The grants were formula numbers used to calculate the eventual bonus. No rights under the LTIP vested for four years, at which time the adjusted value of the annual “grants” could be calculated and the bonus formula applied.

The LTIP specified that employees had to be “actively employed” on the date of vesting in order to receive the bonus payment, and clarified that any period of reasonable notice did not qualify as active employment. The LTIP further specified that entitlement to an LTIP grant “may be forfeited upon the Date of Termination of Active Employment”.

The trial judge had ruled that the employee was entitled to LTIP bonus payments despite the clear wording of the plan. The judge found that the employer had breached the “common law duty of reasonable exercise of discretional contractual powers” when it terminated the employee without giving reasons, and when it chose to deny him a bonus payment.

The Court of Appeal overturned this ruling. It noted that the right to terminate a contract of employment is an implied term of the contract, and that exercising that right is not a contractual breach so long as the employer provides reasonable notice or payment in lieu thereof.

The Supreme Court of Canada has affirmed the existence of a “common law duty…to act honestly in the performance of contractual obligations”. However, the Alberta Court of Appeal noted that this simply means that parties may not knowingly mislead each other about matters directly linked to the performance of the contract; it does not create a duty of loyalty, disclosure, or forgoing of contractual advantages.

The Court of Appeal clarified that there is no common law duty to give reasons for termination, nor is there a duty for employers to consider the employee’s expectations, for example that they will be employed long enough for their long term bonus entitlements to vest, beyond what the contract explicitly provides for.

The contract made clear that grants were forfeited on the date of termination of active employment. The Court of Appeal noted that this did not create discretion under the contract; the employer could have chosen not to enforce the contract by making the bonus payment out of goodwill, but that any such extra-contractual decision certainly did not attract any sort of common law duty of good faith or reasonableness.

The Takeaway

Employers should take comfort in the Alberta Court of Appeal’s clarification of the limits of the common law duty to act honestly in contractual performance. The appeal court overturned a trial decision which purported to place onerous duties on employers that had not previously been recognized in Canadian employment law.

The case law on post-termination bonus entitlement from Canada’s appeal courts has been mixed in recent months.  We have written in the past about two decisions from the Ontario Court of Appeal wherein clauses requiring “active employment” were found to be insufficient to disentitle employees to bonus payments after termination.

As such, it seems possible that courts in different provinces may interpret the same bonus plan language inconsistently, depending on the circumstances of each case and on the trends in jurisprudence in each province. Employers are best advised to seek advice from an employment lawyer when drafting bonus plan language, and when thinking about terminating employees.

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