• Alberta Law Clarified on Scope of Good Faith in Contract And Incentive Pay Eligibility
  • April 20, 2017 | Authors: Geoffrey Hope; Albert Nolette
  • Law Firm: Field Law - Edmonton Office
  • Styles v. Alberta Investment Management Corporation, 2017 ABCA 1 (Styles) was the first decision rendered by the Court of Appeal of Alberta in 2017, and contains some noteworthy ramifications for employers. This case dealt with an employee’s entitlement to bonuses under his employer’s Long Term Incentive Plan (LTIP) in the context of the “without cause” termination of his employment as an investment manager.
     
    In this case, Styles’ employment was governed by a written employment contract, which provided for a base salary plus potential bonuses under both an Annual Incentive Plan and the LTIP. The terms and conditions of the LTIP were set out in a separate document that was incorporated into the employment contract. A key provision in the LTIP provided that in order to be eligible for a bonus, the participant had to be an active employee on the vesting date of the LTIP bonus in question.
     
    The “without cause” termination of Styles’ employment was enacted before the date that the employee’s LTIP bonuses might have vested for that year. Therefore, under the plain language of the LTIP plan, the employee was not entitled to any LTIP bonuses.
     
    However, the trial judge in the Court of Queen’s Bench of Alberta had found that the LTIP bonuses were still payable to the employee because the employer had, in the court’s view, failed to reasonably exercise its discretionary contractual powers in terminating the employee’s employment without cause prior to the vesting date. The trial judge explained it was “only reasonable in the circumstances of this case for the [employee] to have assumed that as long as he performed, he would be compensated as promised, and that the [employer] would not act in an arbitrary manner to unfairly take away that compensation1 by terminating before the LTIP amount had vested for the year. For these reasons, the trial judge found that the termination “flew in the face” of the law that was fairly recently enunciated by the Supreme Court of Canada in the case of Bhasin v. Hyrnew. As previously reported in Workwise2, the Bhasin v. Hyrnew case recognized a general duty of good faith in contract as a general organizing principle of the common law of contract.
     
    The employer appealed the trial judge’s decision. On appeal, the majority of the Court of Appeal rejected the trial judge’s conclusion, stating:
     
    Bhasin does not establish any general principle of “reasonable exercise of discretion” in contractual performance. This radical extension of the law is unsupported by authority, and contrary to the principles of the law of contract.3
     
    The Court of Appeal clarified that while the Bhasin principle relates to the performance of the contract, “[i]t does not relate to the negotiation or terms of the contract.”4 The Court of Appeal also explained that Bhasin does not invite courts to examine the terms of contracts and decide if they are honest, capricious, negotiated in good faith, or fair and reasonable.5
     
    Accordingly, the majority of the Court of Appeal found it was inappropriate for the trial judge to open up the employment contract for examination of whether the terms of the LTIP were fair or reasonable.6 The contract clearly stated that the employee had to be employed on the vesting date to earn the LTIP bonus and it was not improper or unfair for the employer to terminate prior to vesting of that year’s entitlement and then follow the terms of the LTIP plan and withhold the bonus.
     
    This case represents an important clarification of the law in terms of how far Alberta courts are willing to go in applying and interpreting the Bhasin principle of good faith in contractual dealings. Where an employer’s contract has a well-drafted provision that allows them to exercise discretion or otherwise sets out clear parameters for a particular entitlement (for example, LTIP), the court should typically not be using the good faith principle from Bhasin to critique or subvert such terms. In short, the provision in the employer’s contract clearly stated that an employee needed to be actively employed when the LTIP entitlement vested in order to be entitled to it, and it was within the employer’s discretion to terminate at a particular time irrespective of that provision and whether it disentitled the employee to the LTIP or not.
     
    This case represents a good reminder that it is crucial to have well drafted contractual provisions, especially relating to compensation entitlement and termination issues, and represents an important clarification that there are limits to how far the “good faith in contract” principle can be taken before it starts to subvert clear contractual rights. Field Law’s Labour and Employment Group can advise and assist employers in drafting and interpreting employment contracts and help to minimize costs and conflict when planning and making these sorts of organizational changes.
     

    1 Styles v. Alberta Investment Management Corporation, 2015 ABQB 621 (CanLII), para 117.
    2 http://fieldlaw.com/articles/im/le/Commercial&under;Contracts&under;Include&under;an&under;Implied&under;Duty&under;of&under;Good&under;Faith.pdf
    3 Styles v. Alberta Investment Management Corporation, 2017 ABCA 1 (CanLII), para 49.
    4 Ibid, para 51.
    5 Ibid, para 51.
    6 Ibid, para 51.