Saturday, June 11, 2016

Canada - Balancing Uncertainty and Good Faith when Terminating Employment Contracts

By Theodore Goloff, Robinson Sheppard Shapiro LLP

Introduction – “Ripleys’ Believe it or Not”

Canadians really are different from our American neighbours – not only because of our peculiar way of spelling “labour”!

“At-will employment”, as known in many states of the U.S.A., simply doesn’t exist north of the 48th parallel that defines the international frontier between Quebec, New Brunswick and the border states. All Canadian jurisdictions of which there are at least 11, at the least, require that when terminating employment of indeterminate term otherwise than for “just cause”, employers provide the employee with both “statutory notice”, as provided by governing employment standards legislation and common law notice, or corresponding pay in lieu thereof. Some jurisdictions require the payment of “statutory severance”, in addition. Thus, while in most Canadian jurisdictions an employer is free to terminate such employment at any time even without alleging cause, doing so may give rise to substantial costs. Termination for redundancy is nowhere considered “cause”, and ever since Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, spurious allegations of “cause”, advanced and/or unreasonably pursued will give rise to additional damages, either in the form of substantially increased “notice”, (appropriately termed “Wallace Damages”), as in Canada’s common law provinces, or “moral” damages in Quebec. When the manner in which termination is effected is particularly egregious, that may also attract punitive damages.

Decidedly, the purpose of common law notice, or its equivalent in Quebec, “reasonable notice” pursuant to articles 2091-2092 of the Civil Code of Quebec, is to provide employees with a cushion of expected income while seeking to transition to alternative employment. It allows the perceived weaker party to acclimatize to changed circumstances while safeguarding the right of the employer to determine the size and composition of his work place. Ostensibly, it is to balance and temper competing rights.

Unless contractually otherwise defined, the measure of notice that is due must be individually assessed at the time of termination depending on varying factors whose relative importance may vary from case to case according to context.
While “working notice” is generally an option, employers terminating employees in Canada and deciding to give immediate effect to the termination and “monetize” notice, must ensure that the employee receives the full value of what he/she would have received had “working notice” been provided.

When an employer chooses to provide pay in lieu of working notice, the question then arises what must be taken account of in making the employee whole?

The rule requiring that payment in lieu of notice must include all rights and benefits which the employee would have received had he/she worked the notice period, easy in concept, is difficult in application. When the employment contract or its ancillary agreements provide that a specific benefit, e.g. incentive bonus, share options or warrants, etc. as yet unvested, requires active employment as a condition of vesting, can a termination that is otherwise lawful in some way be viewed as “frustrating” the contract making it open to challenge or allowing recovery of damages? When the specific language of the contract or its ancillary documents restrictively defines the full and final parameters of the notice payment — excluding such benefits — what happens when there is a discrepancy between the two amounts? Can the condition depriving the employee of the benefit, at least for what would have accrued during the notice period be struck or annulled, and, if so, on what basis? Can provisions that cancel unvested rights as at the date of termination be attacked as being in the nature of “adhesion provisions” that are inherently “abusive”, or in breach of good faith/fair dealing and therefore unenforceable? In circumstances where termination without cause involves forfeiture of contingent unvested rights, can such termination be viewed as arbitrary, unreasonable and therefore suspect and/or actionable? Is there a difference between contingent rights which vest during or after the notice period? In one way or another, these questions involve the tension between certainty of contractual outcomes and different perceptions of good faith/fair dealing.

As the reader will see below, the primacy of provincial rather than federal competence in matters of employment and labour relations complicates a “one size fits all” response to these questions.

Good Faith from the Civil Law/Common Law Perspective

The Civil Law of Quebec

Canada enjoys both a bilingual and bijural legal tradition — the common law in nine of its provinces and three territories, and the civil law tradition in Quebec. Contradictory results sometimes obtain regarding similar contractual issues and may result from (i) where the litigation originates, or (ii) is adjudicated, and (iii) under what legal regime. With its judges representing both legal traditions, the Canada Supreme Court adroitly seeks providing harmony between systems by reducing inconsistencies between systems, where possible without jeopardizing each tradition’s individuality.

Adherents of the civil law tradition in Quebec sometimes boast that its methodology of identifying the appropriate “codal” principles and applying them contextually provides decisions made “by authority of reason” and not, as in common law, “by reason of authority”. Codification such as the Civil Code of Quebec, the jus commune in that province “purports to be comprehensive…not in details but in the principles (calling) for a liberal interpretation in order that it may serves the basis of decision for new situations”.

Of interest, regarding the questions raised above are inter alia articles 6, 7, 1375, 1379 and 1437 of the Civil Code of Quebec which provide:

6. Every person is bound to exercise his civil rights in good faith.

7. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith.

1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.

1379. A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable. […]

1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.

An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.

The Quebec Court of Appeal has canvassed these provisions to reach what seem well anchored positions with respect some of the questions raised above providing needed direction to the employment bar on these issues.

In IBM Canada Ltée c. D.C., 2014 QCCA 1320, the terminated executive benefited from IBM’s Long-Term Incentive Award Program. The Restricted Stock Units [RSUs] pursuant to the program granted to him contained provisos to the effect that in the event of his ceasing to be an employee (other than because of death or disability) all as yet unvested RSUs would self-cancel and that options that were not exercisable as at the date of termination were forfeit. Had the executive worked the notice period, a number, but not all of those RSUs would have become vested. Plaintiff argued that the clause(s) whereby be forfeited unvested RSUs and/or options were “adhesion clauses”, inherently abusive, unreasonable and offensive to the principle that he was required to be made whole in respect of all benefits he would have enjoyed during the “notice period” had he worked. As he would have then become vested with at least some of those RSUs and options, he was short-changed and claimed judgment in his favour on the basis of “quod erat demonstrandum".

Plaintiff succeeded in Trial Court but saw the judgment reversed in appeal. In particular, Mme Justice St-Pierre, with whom her colleagues on this point agreed, specified:

[102] I am ready to agree that these clauses represent a contract of adhesion. It is however with respect to the claimed abusive character of the provisions that restrict the rights of Mr. C to require or monetize the advantages set out in these agreements where my opinion differs.

[103] IBM and Mr. C concluded an employment contract of indeterminate duration having multiple facets. Many provisions that benefit Mr. C were agreed to firmly and their exigibility was not dependent on anything other than the execution by the latter of the obligations which were his counterpart.

[104] That is not the case with respect to the programs dealing with incentive measures which relate to unilateral decisions of IBM and with respect to which it has reserved discretionary powers. The purpose served is clear. IBM wished to advantage in a very special way certain key employees in order to encourage them to remain with the enterprise. As mentioned earlier, its seems to me a legitimate purpose in context.

[105] Taking into consideration the totality of Mr. C’s working conditions, I cannot see how the reserve by IBM of the discretionary faculty of granting him, from time to time, additional advantages beyond those firmly consented to could be considered abusive. I therefore believe ill-founded Mr. C’s argument drawn from the text of Article 1437 C.C.Q.

[108] I accept the proposition according to which agreements regarding incentive measures form part of Mr. C’s working conditions. Nevertheless, to the extent that they are not abusive, and that is the conclusion to which I have already arrived, they must be applied according to their tenure.

[109] Here, the grant of incentive advantages depends upon the unilateral wish of IBM to encourage or not its employee to remain in its service. In May 2007, even assuming that IBM would have given Mr. C a notice period of two years, it is evident that IBM would have ceased to offer him these types of advantages that are destined to keep him in his position.

While parts of the very substantial judgment that Plaintiff was awarded at trial were upheld, his submissions on the issue of the “abusive” nature of the implicit “forfeiture” provisions were decisively dismissed.

Plaintiff also benefited from IBM’s Supplemental Executive Retention Plan [SERP]. As the Court noted:

[74] … IBM ended the Plan on December 12, 2008, without cancelling the acquired rights of those who had jointed the Plan and who were still in its employ.” (Translation our own)

Plaintiff had ceased to be an employee of IBM in June 2007. Plaintiff’s claims pursuant to the SERP were dismissed by the appellate court, Mme Justice St-Pierre writing:

[75] I note that the Plan was not based upon written accounting documents. During the period of membership in the Plan, neither IBM nor the employee were required to disburse, so that the regime in question was purely virtual (“notional”).

[82] IBM was entitled to end the employment relationship without cause, under reserve, certainly, of its obligation to provide reasonable notice. The argument that the clause was abusive is without merit to the extent that the Plan pursued a legitimate purpose, known and accepted by everyone, that is, to retain executives by incentivizing them to pursue their career with IBM up to the age of 55. I will have occasion to come back to the particular chapter of contractual relations between Mr. C and IBM.

[83] This said, Mr. C might have legitimately been entitled to be indemnified if he had established that his dismissal sought notably to deprive him of the sums virtually accumulated in the SERP. That was not the case. [Translations our own]

The Court in effect noted that actori incumbit probatio — he who alleges must prove — and that the rule entails the inference that the absence of fact duly established is not evidence.

In both instances, the Court recognized that the litigants were adults and vaccinated when they contracted together, understood that some “benefits” were inherently “precarious” and opted for respect of certainty and purpose in the absence of proof of bad faith.

In Premier Tech ltée c. Dollo, 2015 QCCA 1159, the ex-employee was both an executive and a shareholder. The Share Option Purchase Plan contained provisions (Section 8.01.2) similar to those in the IBM case providing the loss/forfeiture of unvested and/or unexercised warrants or options in the event of cessation of employment, but with an exception: “… unless the Board of directors, in its sole discretion decides otherwise”.

As the Court of Appeal noted, Plaintiff had foregone an opportunity to exercise the options that he had accumulated during an earlier period of corporate reorganization, on the express representations of Defendants’ Board that he would be able to exercise them notwithstanding Section 8.01.2 in the event of a future termination of employment. While the Court recognized the “adhesion” character of that provision, it refused to view the clause as being inherently abusive or unreasonable. On the contrary, it was only because of the promises made to Plaintiff to the effect that his forbearance would not be prejudicial to him in the future that the refusal of the Board of Directors to exercise its reserved discretion became unconscionable. From this author’s perspective, it is the evidence of the Board’s bad faith through its failure to honour previously given specific assurances that marks this case as one based on a form of promissory estoppel — or as its partial complement is known in Quebec — “fin de non-recevoir”.

In this case, certainty of outcome and good faith favoured the executive because no one, as the Court noted, should be allowed to profit from their own misrepresentation. On the other hand, pursuant to the Civil Code, good faith is always presumed in the absence of evidence to the contrary. In the Premier Tech case, the objective evidence of misrepresentation was made crystal clear for the Court and did not require adverse inference.

It is of some note that leave to appeal to the Supreme Court of Canada was recently denied, making this judgment final.

Good Faith And Fair Dealing – An Organizing Principle in the Common Law of Canada

As I wrote elsewhere, (See 49 ABA/SJL YIR (N.S.) 463 (2015) pp. 471-474) in Bhasin v. Hrynew [2014] 3 S.C.R. 494) :
The Supreme Court recognized a duty of good faith, as “a general organizing principle of the common law” requiring that parties perform their contractual duties honestly and reasonably and not capriciously or arbitrarily, bringing Canada’s common law in line with commercial expectations elsewhere in North America, while producing a subtle shift towards a “civilian” approach to legal analysis.

The court left undisturbed the trial judge’s finding that in the period preceding termination of Mr. Bhasin’s “commercial dealership agreement”, the respondents were neither candid nor forthright, indeed misleading him on critical details, all of which led, at the expiry of the contract term, to his losing “the value in his business in his assembled workforce.”

The case turned on whether Canadian common law required the respondents to perform their contractual obligations “honestly” and with due regard for Mr. Bhasin’s legitimate interests. The court wrote that
Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result.

“Determining Canadian common law to be: (i) uncertain, (ii) incoherent, and (iii) “out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law in Canada – Quebec and the United States”, the Court felt obliged to develop the common law in step with societal/commercial expectations, but in an incremental fashion. Good faith as an “organising principle” would not reverse pre-existing rules, but created an over-arching standard of conduct that “states in general terms a requirement of justice from which more specific legal doctrines may be derived [that] may be given different weight in different situations. Applying it to particular situations would allow a coherent way forward “where the development may occur incrementally in a way that is consistent with the structure of the common law of contract [with] due weight [given] to the importance of private ordering and certainty in commercial affairs.”

In Bhasin, the record relied upon disclosed to the Court’s satisfaction absence of candor, a dollop of double-dealing and a healthy serving of material misrepresentation. The originality of the case from our perspective is dual: It borrowed from civilian methodology in putting forward honesty, candor and the obligation to recognize and take account of the effects that one’s behaviour can have on the “other’s” well founded expectations, both in performing and ending contractual relations as an “organizing principle” of the common law as a principle, to be modulated in situ from case to case based on the evidence that the record disclosed.

Respectfully, however elastic these principles, they ought not be divorced from the factual underpinnings that gave rise thereto. Certainly, in Bhasin, there was an expectation based on real and objective misrepresentations by Defendant that led Plaintiff to believe that he would not be prejudiced. Indeed, it was because of such deceptive practices, as the Court saw them, that Plaintiff lost the value of his business. It was such deception and unfair dealing that the organizing principle was affirmed.

Enter Stage Right, Styles v. Alberta Investment Management Corporation, 2015 ABQB 621

As a Trial Court judgment that is presently in appeal, this judgment might have passed under this writer’s radar, save for the fact that it seems to have expanded on the Bhasin principles in a manner that is far more typical of the civil law tradition than that of the common law. Whether it overshot the mark, I leave for higher Courts to decide.

The Supreme Court in Bhasin drew upon Quebec’s civil law tradition to prescribe an “organizing principle” of the common law, which would allow it to find application organically, and be interpreted and/or modulated by new situations as they arose. From this writer’s perspective, the Styles case seems to apply the Bhasin principles questionably to a factual situation where proof of actual misrepresentations and/or bad faith is absent in the record. It nevertheless is important to consider this case carefully when an employer terminates employment on a without cause basis, but subject to the payment of a specified and contractually agreed amount that excludes unvested and as yet unmatured entitlements to incentive payments. Does this judgment also directly or indirectly properly oblige an employer who terminates the employment of a hitherto exemplary employee on a without cause basis to explain the rationale of the termination so as to negate any possible of inference of unreasonable or arbitrary conduct? Does the right to terminate “without cause” equate with “even for no reason at all” or does such right, at its limit, mean the right to terminate for only some intelligible and palpable reason, that is always reviewable or challengeable on the basis of its alleged arbitrariness or capriciousness? To protect against possible adverse inference, must a prudent employer advance some credible explanation of why the termination, so as to negative an inference that what was done was simply to elude payment of what would otherwise become due, all other things being equal, in the fullness of time? Does that mean that any termination must have some internal and credible logic to it that must in the event of litigation be alleged and proven? In forcing the employer for its self-preservation to “go public” on the rationale, does that always serve the interests of justice, and those of the employee in particular?

Is certainty of outcome of contractually foreseen events a value that has somehow been lost in an eagerness to protect a perceived disadvantaged and weaker party? In Quebec, the employer’s interest in advantaging or incentivizing those whom it decided “in its discretion” to keep in its employ was comparable to the inherently reasonable rationale justifying the forfeiture of such “precarious” unvested” and as yet “unmatured” rights. Is that a position that should be followed elsewhere?

Important questions all they are that are raised here for consideration by the reader, rather than for response.

The Facts and The Judgment in The Styles Case

Plaintiff was hired in 2010 into a senior executive position pursuant to an employment contract which essentially provided:

i. the possibility of termination without cause upon three months’ notice or payment in lieu thereof, such payment being contractually limited to a calculation that takes account only base salary. All contingent unmatured and unvested rights were therefore not to be taken account of;

ii. the possibility, subject to acceptance and signature of Participation Agreements, of being granted Long Term Incentive Plans (LTIPs) which would mature, vest and payout four years after grant, according to a formula whereby they could appreciate up to a maximum of three times the grant or depreciate to zero-based on a number of factors, only some of which the employee himself could influence, if at all;

iii. as active employment as of the date of maturity was a condition of payout, all unvested grants were subject to forfeiture without additional compensation as of the last day of employment;

iv. at its discretion, the Employer could modify, amend or terminate the Plan provided that in the event of “termination of the Plan” a Participant would, subject to the terms of the Plan, continue to be entitled to grants previously awarded.

Plaintiff had been awarded grants on January 1, 2011, again in 2012 and in 2013 with “maturity” or “vesting” dates of December 31, 2014, December 31, 2016 and December 31, 2017, i.e. 48 months following the grant. Plaintiff’s employment was terminated with payment of three months of base salary pursuant to the termination clause of the Employment Contract in June 2013 on a without cause basis. The reader should note that the Plan in question was not terminated. Only Plaintiff’s employment was.

Notwithstanding the provisions regarding the exclusion of anything but base salary, and notwithstanding the forfeiture clause of unvested LTIP grants, the Trial Judge determined that: (i) Plaintiff had exceeded every performance targeted imposed by the employer; (ii) there was no indication that he was not committed to carrying out his employment in the most diligent and professional manner; and as the case came up for decision on summary judgment, (iii) notwithstanding an affidavit from one of the employer’s executives, Defendant provided no evidence to explain how the termination came about or the reasons therefor.

From this writer’s perspective however, how can the absence of evidence imply bad faith? Does it necessarily lead to a conclusion that the basis of the termination was or is somehow suspect? If good faith is presumed or to be presumed in the absence of proof to the contrary, can the absence of evidence explaining the termination allow an adverse inference as to its reasonability or legitimacy? Isn’t the whole idea of termination based on the absence of any necessity to provide justification?

In Styles, the Alberta Court of Queen’s Bench wrote:

[65] In affirming this common law duty of reasonable exercise of discretionary contractual powers, I have recognized the fact that “[t] the duty of good faith performance of contractual obligations recently affirmed by the Supreme Court of Canada in Bhasin [is not a license] to invent obligations out of whole cloth divorced from the actual terms of the contract between the parties” : […]

[66] This duty of reasonable exercise of discretionary contractual power is not a limitation on “the right of an employer to determine the composition of its workforce”; Bhasin at paras 53-54. It is designed to deal with both the unfair manner of termination and the consequence that flow from unduly insensitive conduct of an employer when dismissing an employee. In some situations, where the termination deprives an employee of the right to receive earned performance bonuses, grants, or awards, then the exercise of the discretion to terminate without cause becomes arbitrary or capricious when the employer creates circumstances under which the employee would be unable to receive the bonuses or other benefits and provides no reasonable or meaningful explanation for such deprivation.

Given the exemplary conduct and singular contributions that Plaintiff Styles apparently made, coupled with the absence of any explanation as to why termination arose, the Court noted:

“[121] In my opinion, the right to terminate without cause, whether in general or pursuant to a term in a contract, is a clear indicator of the power imbalance between employer and employee. As such, I believe that the historical recognition by the Supreme Court of Canada of the unique nature of employer/employee relationship and its recognition of an implied term of good faith governing the manner of termination, informs the application of the Bhasin principles to the employment contract generally.

[122] In this context, I note that the LTIP document states, inter alia:

Unless otherwise stipulated, participants must be actively employed by AIMCo, without regard to whether the Participant is receiving, or will receive, any compensatory payments or salary in lieu of notice or termination on the date of payout, in order to be eligible to receive any payment.

[123] When an employment contract includes a condition for the receipt by an employee of a benefit under the contract and the employer has the discretion, pursuant to the terms of the contract, to frustrate the satisfaction of that condition, it becomes even more important for that discretion to be exercised fairly, reasonably and not arbitrarily. When one focuses on the unique nature of the relationship here, and the reality that there has accrued to the Plaintiff some earned entitlements from the subject LTIP, then the unfair or arbitrary exercise of discretion in a manner that takes away those earned entitlements is more serious.

The Court ended by stating

[133] Given my conclusion that there is a common law duty that discretionary contractual powers granted under a contract must not be exercised in a manner that is unreasonable, unfair, “capricious” or “arbitrary” – conceived as a general doctrine of contract law imposing, as a contractual duty, a minimum standard of reasonable exercise of discretionary contractual power – I conclude that the entire agreement clause in Clause 4 (o) of AIMCo’s Long Term Incentive Plan Participation Agreement does not assist the Defendant AIMCo in the circumstances of this matter: see, Bhasin at para 74.

[134] I find that the Defendant AIMCo breached the employment contract and the incorporated LTIP Agreement when it failed to exercise its contractual discretionary powers reasonably in dismissing the Plaintiff while at the same time refusing to pay the Plaintiff any of his earned, awarded and approved LTIP grants. I also find that the Plaintiff suffered damages as a result of that breach.

It is one thing to find that particular conduct or representations preclude an employer from relying upon the express provisions of the contract. On the other hand, when both parties to a contract are sophisticated business folks who, one would imagine, would have read and re-read their contractual rights and responsibilities many times, it is a stretch, however, to apply the Bhasin principles where no active and objective misrepresentation can be attributed to Defendant.

Indeed, the Court recognized that in writing as it did:

[135] It may be possible to debate whether the unreasonable exercise of discretionary contractual powers would constitute a breach of the duty of honest performance in the context of the Supreme Court’s prescription in Bhasin. However, it is not necessary for me to debate this issue because the exercise of contractual discretionary powers in this case clearly constitutes a breach of a common law duty that requires discretionary powers granted under a contract to be exercised fairly and reasonably and not in a manner that is “capricious” or “arbitrary”.

Lessons to be Learned

It remains to be seen whether the Trial Court judgment will be maintained, varied or quashed in appeal. Indeed, given that it runs to the heart of what are the parameters of an employer’s right to terminate “with notice but without cause”, it may be viewed, possibly, as material for eventual review by the Supreme Court of Canada. Whatever the case, an employer, at least in the common law provinces of Canada should always consider whether there is some value to providing a rationale for the termination, not for the purpose of establishing performance based or disciplinary cause, but so as to negative any inference of bad faith, and thereby secure some degree of certainty of contractual outcome. The flip side to that, of course, is that such allegations become just one more item that may become litigious. Great for lawyers – perhaps not so great for clients! Where the balance lies between the two, I leave to others to determine.