The Styles decision provides sound precedent that employers in Alberta will be able to limit employee entitlements to bonuses and severance pay with clearly articulated language in the employment contract.
In Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada recognized a new common law duty to perform contractual obligations in good faith. The principle behind the duty of good faith as it relates to contractual obligations is that parties must perform their duties honestly and not capriciously or arbitrarily.
Following the SCC’s decision in Bhasin, there was uncertainty regarding the application of the common law duty to perform contractual obligations in good faith to the employment law context. The Court of Appeal of Alberta’s decision in Styles clarifies the application of Bhasin regarding both termination and entitlement to bonuses in the employment law context.
David Styles was party to a written employment contract that provided for a base salary plus participation in Alberta Investment Management Corporation’s (AIM Corp) long-term incentive plan (LTIP), participation that could render Styles’ total compensation significantly higher than his base salary.
In the plain language of the LTIP, no bonus became payable for at least four years as no rights vested prior to the four-year mark. Styles was employed for less than four years between 2010 and 2013, and was not actively employed by AIM Corp on the date the bonus might have vested. AIM Corp terminated Styles’ employment without cause. The issue was whether Styles was entitled to bonus payments under the LTIP.
Decision from the Court of Queen’s Bench of Alberta1
The trial decision turned largely on the issue of discretion, which the trial judge held was exercised by AIM Corp in two ways:
- there was a perceived discretion involved in denying Styles bonus credit when his employment ended before the vesting date; and
- perceived discretion to terminate the respondent without cause.
The perceived discretion with regard to the bonus payments arose from what the trial judge held was discretionary language within the LTIP:
As per the guidelines above, entitlement to an LTIP grant, vested or unvested, may be forfeited upon the Date of Termination of Active Employment without regard to whether the participant is receiving, or will receive, any compensatory payment or salary in lieu of notice of termination.2
The trial judge held that both the decision to disqualify Styles from receiving any part of the bonus under the LTIP, and the decision to terminate Styles’ employment were subject to review under the common law duty of reasonable exercise of discretionary contractual powers, established in Bhasin.
Styles was allowed to assert expectations and interests notwithstanding the terms of the contract to which he had agreed. In other words, the trial judge extended Bhasin to provide courts with the ability to review contractual terms for fairness to both parties, despite the clear intentions of the parties to otherwise limit their rights. The language was held by the trial judge not to sufficiently limit the employee’s entitlement to bonus payments under the LTIP.
Decision from the Court of Appeal of Alberta3
The Court of Appeal allowed the appeal, holding that the respondent did not qualify for a bonus under the LTIP as he was terminated after three years of employment, and before any four-year bonus cycle was completed. The LTIP was a complex program, but the key aspects were set out by the Court of Appeal as follows:
- bonuses are only paid when they vest under the four-year cycle;
- to be eligible a participant must be actively employed on the vesting date; and
- "actively employed" does not include a period of notice or payment in lieu of notice generated by termination without cause.4
The Court of Appeal did not share the trial judge’s view that there was discretion involved in the provision of bonuses under the text of the LTIP, holding that the four-year vesting period was a condition precedent and Styles had not satisfied that condition. The LTIP’s wording was sufficient to limit the employee’s bonus to the terms established within, and Styles could not show any legal reason as to why he should otherwise be entitled to bonus payments under the LTIP.
Further, the Court of Appeal held that a termination without cause is not a breach of the contract by the employer, but instead constitutes compensation that is expressly provided for in the contract. Any breach arises from a failure to pay, and not from the termination of employment itself. Terminating employment without cause does not mean the termination was capricious, arbitrary, dishonest, and the employer need not justify the decision to terminate employment without cause.
The Court of Appeal held that Bhasin does not establish any general principle requiring the reasonable exercise of discretion in contractual performance, either resulting from bonus payments or the decision to terminate employment. The court stated that such a radical extension of the law set out in Bhasin was held to be unsupported by the relevant authorities, and contrary to the law of contract. Absent dishonesty, fraud or deliberately misleading conduct, courts will not be empowered to review or assess a party’s exercise of discretion under a contract.
The Court of Appeal held that the trial judge incorrectly extended the Supreme Court’s direction in Bhasin. From the Court of Appeal decision we now know that contracting parties have a duty to perform contracts honestly, but that Bhasin does not give courts a license to assess the fairness of contractual provisions, which is the essence of the trial judge’s decision. The case provides sound precedent that employers in Alberta can properly limit employee entitlements where there is a clear and reasonably written termination provision in an employment contract.
The author would like to thank Tyler Raymond, articling student, for his assistance in preparing this legal update.
1 Styles v Alberta Investment Management Corporation, 2015 ABQB 621.
2 Styles (ABQB) at para 85.
3 Styles v Alberta Investment Management Corporation, 2017 ABCA 1.
4 Styles (ABCA) at para 22.
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