Breaking News: Employment Contracts Continue to be Important

A couple employment law truisms:

  1. An employer has the right to dismiss an employee without cause, so long as notice or compensation in lieu of notice is provided to the employee.
  2. An employee is entitled to all compensation due to her during the notice period unless the employment contract stipulates otherwise.

These employment law fundamentals were recently reaffirmed by the Alberta Court of Appeal in Styles v Alberta Investment Management Corporation, 2017 ABCA 1, rev’g 2015 ABQB 621.

The employee in Styles was hired as an Investment Manager by Alberta Investment Management Corporation (“AIMCo”) in June 2010. His compensation package included a substantial salary as well as bonuses and Long Term Incentive Plan (LTIP) grants. The LTIP grants were awarded annually but were only payable to the employee after a period of four years. To receive the payout, employees were required to sign a Participation Agreement and remain actively employed by AIMCo.

Throughout the LTIP documents as well as the Participation Agreement, there were numerous provisions plainly and clearly disentitling the employee from any LTIP grants that were awarded but had not vested at the time of termination of employment or during the notice period following termination.

Styles’ employment was terminated without cause in June 2013. AIMCo paid out severance but did not pay out the LTIP grants since they had not vested at the time of termination of his employment as per the contract. No bad faith was alleged by the employee.

Despite the plain wording of the LTIP documents and Participation Agreement, the trial judge found that the employee was entitled to all of the LTIP grants he was awarded, a value of approximately $444,000. The trial judge found that AIMCo breached its duty to exercise its “contractual discretionary powers” reasonably by dismissing the employee and, at the same time, failing to take into account the employee’s “legitimate contractual interests” in deciding not to pay him the value of his LTIP grants. By terminating Mr. Styles’ employment, the employer unfairly took away his ability to satisfy the condition precedent for receiving payment of the LTIP grants, i.e. they prevented him from continuing to be an active employee (paras 128 and 134).

The trial judge’s decision in effect eroded an employer’s right to terminate an employee’s employment without cause and, at the same time, entitled an employee to compensation clearly not provided for by the contract. We expect that employers throughout Alberta collectively shuddered when this decision was issued.

In January 2017, the Alberta Court of Appeal reversed the trial judge’s decision. It reaffirmed that termination without cause is not a breach of contract and that an explanation is not required to terminate an employee’s employment without cause (para 41). Upon dismissal without cause, employees are entitled to notice or payment in lieu of notice and the employment contract can be structured to disentitle an employee to certain compensation they would otherwise receive if they had continued active employment. An employee’s contractual interests, legitimate or otherwise, which are not provided for by the contract have no bearing on the employee’s entitlement to compensation.

The case is noteworthy not because it forges new legal ground, but rather because it reaffirms foundational principles of employment law. After the recognition by the Supreme Court of Canada of the duty of good faith in contractual performance (Bhasin v Hrynew, 2014 SCC 71), there was uncertainty as to what shape that duty would take. The lower court in Styles is an example of how that duty, if left unchecked, could become the launch pad for all sorts of previously unrecognized obligations for employers.

Just as the Alberta Court of Appeal reaffirmed historical principles, the lessons for employees and employers also harken back to traditional ground. This case is a reminder for both employers and employees to read their employment contracts carefully. A court will rightly look to the employment contract to determine the employee’s entitlement. Stating that “an employee must be an active employee” or that “the benefit terminates upon termination of employment” is likely not sufficient to disentitle an employee from grants or other benefits that may vest after the termination date but within the employee’s notice period. Clearly setting out what an employee is entitled to during the notice period assists the employer by avoiding costly litigation and assists the employee in knowing what risks they might face if they are dismissed without cause.

Contractual Interpretation Attracts Deference: Heritage Capital Corp v Equitable Trust Co, 2016 SCC 19

The Supreme Court of Canada recently confirmed that considerable deference is due to trial judges in the context of contractual interpretation.

This case centres on the Lougheed Building, a downtown landmark familiar to many Calgarians. In 2004, it was designated a “Municipal Historic Resource” under the Historical Resources Act, R.S.A. 2000, c. H-9 (“HRA”). The owner at the time agreed to refurbish the building in exchange for 15 annual incentive payments from the City of Calgary. The agreement was registered by caveat on title to the land pursuant to the HRA. The building was subsequently sold in a judicial sale.

A dispute arose between the present owner of the building and a creditor of the former owner regarding questions of both statutory and contractual interpretation, as follows:

  • whether the incentive payments constituted a positive covenant running with the land by virtue of the HRA;
  • whether they were sold in the judicial sale of the building; and
  • the present-day effect of a number of agreements assigning an interest in the incentive payments.

The Supreme Court agreed with the master in chambers that the incentive payments did not run with the land and were not sold as an asset in the judicial sale of the property.

In reaching this decision, the Supreme Court explicitly confirmed that its earlier statement on contractual interpretation in Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53 [Sattva] applies to all appellate review, not just review of arbitral decisions. Sattva established that contractual interpretation involves a finding of mixed law and fact, and the proper standard of review on appeal is therefore one of palpable and overriding error. The only exception is when there is an “extricable question of law”, such as “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” – the standard is then correctness. The policy reasons behind this deferential standard reflect the recent emphasis on judicial efficiency seen in cases such as Hyrniak v Mauldin, 2014 SCC 7: “deference to fact-finders furthers the goals of limiting the number, length and cost of appeals, and of promoting the autonomy and integrity of trial proceedings.”

This case is also notable for the unanimous Court’s clear statement that statutory exceptions to common law rules should be narrowly construed. The Court found that the provisions of the HRA did not entirely displace the common law rule that positive covenants cannot run with land. In so finding, the Court stated that “the legislature is assumed not to have intended to change the common law unless it has done so clearly and unambiguously.”

Being Paid to Stay Home: Constructive Dismissal or a Dream Come True?

Although many employees may not always appreciate the drudgery of their daily grind, work is more than merely getting paid. Canadian courts have long recognized that work is “an essential component of [an employee’s] sense of identity, self-worth and emotional well-being”.[1] So, while an administrative suspension with pay may seem like a dream come true to many people, in some circumstances it may lead to termination of the employment relationship whether intended or not.

In a recent Supreme Court of Canada decision, Potter v New Brunswick Legal Aid Society, 2015 SCC 10, Wagner J. reviewed an employer’s obligations in the context of an administrative suspension with pay, which, if breached, may give rise to a claim for constructive dismissal by the employee.

Mr. Potter was appointed Executive Director of the New Brunswick Legal Aid Society by the Lieutenant-Governor in Council for a 7-year term. The Board of Directors had broad authority to supervise Mr. Potter’s employment and, after 4 years and several issues concerning his performance had arisen, the Board and Mr. Potter entered into negotiations for the Board to buyout Mr. Potter’s remaining employment contract.The second feature is the Keyboard Shortcuts, as you know in every Windows operating Software they have their set of keyboard shortcuts

Some months later, Mr. Potter took sick leave from work and while on leave he received a letter from the Board indicating that he was suspended with pay indefinitely. No reasons for his suspension were provided. On that same day and unbeknownst to him, the board sent a letter to the Lieutenant-Governor in Council requesting that Mr. Potter’s appointment be terminated. Eight weeks later, Mr. Potter started an action for constructive dismissal. The board responded by asserting that Mr. Potter resigned and terminated his salary and benefits.

The trial judge found that Mr. Potter was not constructively dismissed as he did not know about the board’s move to terminate his employment and the board had not done anything that “could be construed by a reasonable person as a repudiation of the contract”.[2] The New Brunswick Court of Appeal also found that an indefinite suspension with full pay, given the surrounding circumstances, did not constitute constructive dismissal.[3]

The SCC disagreed. Wagner J. for the majority noted that while employers have the implicit power to suspend employees with pay for administrative reasons, that power is limited to instances where it is reasonable and justified to do so.[4] Whether such a suspension is reasonable and justified depends upon “the duration of the suspension, whether the suspension is with pay, and good faith on the employer’s part, including the demonstration of legitimate business reasons”.[5]

Legitimate business reasons for a suspension are to be grounded in the reasons actually provided to the employee: it is not an ad hoc exercise to justify the suspension.[6] Failure to provide reasons will typically constitute a breach of the employer’s duty of good faith.[7] Since Mr. Potter was not provided any reasons for the suspension and it was of indefinite duration, the suspension did not meet the standard of being reasonable and justified.

On this basis, Wagner J. found it unlikely that “a reasonable employee would not have felt that [the employer’s] unreasonable and unjustified acts evinced an intention no longer to be bound by the contract”.[8] As a result, Mr. Potter was found to have been constructively dismissed, and was awarded the balance of his salary and benefits owing under the fixed-term employment contract.

In sum, to avoid the liability for constructive dismissal, an employer who administratively suspends an employee with pay must act in good faith, provide a legitimate business reason to that employee, and minimize the duration of the suspension. For an employee, these conditions will help ensure that time off with pay is closer to a dream come true and less of a blow to their self-worth or emotional well-being.

A Duty to Defend: Interpreting ambiguous insurance policies

Case: Tien Lung Taekwon-Do Club v Lloyd’s Underwriters, 2015 ABCA 46

If the language of an insurance policy is ambiguous, and general rules of contract construction do not aid in its interpretation, the Court must interpret the policy against the insurer.

In the above case, the respondents owned a taekwon-do club. While participating in a match, an individual was injured and filed a statement of claim against the club, alleging it should be held vicariously liable.

The insurer refused to defend the claim on the basis of an exclusion clause. The clause read that the policy does not apply to: Any Bodily Injury caused or contributed by any Insured to any participant and/or any Bodily Injury caused or contributed by any participant in a match or practice in regards to Category 4 Sports unless specified in the Declarations.

The chambers judge ruled that the clause did not apply as the declarations page overrode the exclusions, and reasonably contemplated that matches and practices were to be covered under the policy. The insurer was obliged to defend the action.

The issue on appeal was whether the language of the exclusion clause vitiated the insurer’s duty to defend.

The standard of review to interpret a contract is reasonableness. The Court of Appeal reviewed the exclusion clause and found that it did not appear to be standard form language. Interpretation of the clause required deference per Sattva Capital Corp., however the Court found that the chambers judge had correctly stated and applied the relevant legal principles and correctly interpreted the policy.

The Court stated that if language of the policy is ambiguous, it must be interpreted according to general rules of contract construction (reasonable expectation of parties, avoiding unrealistic results, ensuring similar policies are construed consistently). Failing that, the policy must be interpreted according to the longstanding doctrine of contra proferentem – meaning, against the insurer as the stronger bargaining party and author of the policy in issue.

In the result, the respondents were only required to show that there was an alternative reasonable interpretation of the policy, supported by the text and the parties’ reasonable expectations. The Court upheld the chambers judge’s ruling and affirmed that the insurer was obliged to defend.

Honesty the Best Policy

It may have been news to some people that parties to a contract could cheat and mislead with impunity so long as they performed their contractual obligations. The Supreme Court of Canada now says otherwise in Bhasin v Hrynew, 2014 SCC 71 – importing minimum standards of honesty and good faith to the common law of contract.

Mr. Bhasin’s agency sold investment instruments exclusively for Canadian American Financial Corp (Can‑Am). Their business relationship was governed by a contract with a 3 year term that automatically renewed unless 6 months’ written notice was given stating the contrary. They enjoyed 10 years of business together.

Enter Mr. Hrynew. Mr. Hrynew was Mr. Bhasin’s competitor and sought to merge his agency with Mr. Bhasin’s, first by approaching Mr. Bhasin and then by pressuring Can‑Am to force a merger. During the same period, the Alberta Securities Commission had compliance concerns with agencies selling Can‑Am’s investment instruments and required Can‑Am to appoint someone to oversee compliance. Mr. Hrynew was appointed and sought to review Mr. Bhasin’s confidential business records. Mr. Bhasin refused.

Can‑Am responded by:

  1. lying to Mr. Bhasin about Mr. Hrynew being bound to a confidentiality agreement – no such agreement was in place;
  2. lying to Mr. Bhasin about the Alberta Securities Commission rejecting a proposal to have an outside person to oversee the compliance of agencies; and
  3. equivocally answering Mr. Bhasin’s question as to whether a merger of his and Mr. Hrynew’s agencies was a done deal.

When Mr. Bhasin continued to refuse Mr. Hrynew access to his confidential business records, Can‑Am gave notice not to renew its contract with Mr. Bhasin. As a result, Mr. Bhasin lost the value of his business and his employees joined Mr. Hrynew’s agency.

While Mr. Bhasin was clearly wronged by Can‑Am, it had not breached the terms of their agreement, potentially foreclosing a remedy for Mr. Bhasin.

This prompted the Supreme Court’s review of the doctrine of good faith in the law of contract – typically reserved for established classes of contracts (franchise and insurance contracts, for example).

The Court took two “incremental steps” to find in Mr. Bhasin’s favour and to end the “piecemeal” approach to importing a duty of good faith in contractual performance. The first step was to find that good faith contractual performance is a general organizing principle of the law of contract. Within the rubric of good faith the Court then established a new duty of honest performance applicable to all contracts.

Can‑Am failed to meet that minimum standard when it lied to Mr. Bhasin about Mr. Hrynew’s appointment. The Court found Can‑Am to have breached the agreement and awarded Mr. Bhasin the lost value of his business had Can‑Am fulfilled its duty.

Somewhat unusually, these incremental developments made the front page of the national news (Globe and Mail, November 14, 2014). Why does a commercial case verifying contractual principles garner such attention?

First, businesses will have to be more mindful in how and what they communicate to contracting parties. While there may be no express duty to disclose information affecting one party’s performance, equivocally answering direct questions affecting performance may constitute a breach of contract (Bhasin, paras 86 and 100). Savvy parties will seek to inform themselves knowing they are entitled to an honest answer.

Second, the organizing principle of good faith contractual performance provides fertile ground for new duties of contractual performance. Claims of good faith are no longer limited to discrete situations and relationships. Litigators will certainly test the principle’s fecundity in all manner of contexts. Justice Cromwell forestalls some potential proliferation of new duties when he states:

The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs (para 66).

Specific new duties of good faith contractual performance may not spring up overnight without warning. However, cautious parties may think twice in making representations affecting performance, in a way that does not take unfair advantage of their contractual partners. Enterprising lawyers will be on the lookout.

And, finally, the decision is newsworthy because most non‑lawyers are incredulous to learn that honest performance is in fact something new. Most would agree that honesty is, or should be, expected from every party to a contract.

Sattva Capital Corp v. Creston Moly Corp 2014 SCC 53

In this case the Supreme Court of Canada decides that contractual interpretation is a question of mixed fact and law – not simply a question of law.

Practically, the result is that contracts cannot be interpreted on their face alone, and decisions by trial courts regarding the meaning of a contract are not likely to be readily overturned on appeal.

A question of law deals with the correct legal test to determine an issue. A question of mixed fact and law considers what facts are necessary to satisfy a legal test. Questions of law may be overturned on appeal if incorrect. Questions of mixed fact and law are not to be overturned on appeal absent a legal or palpable and overriding error.

This case regards a dispute over the date to evaluate a share price in determining a finder’s fee. The parties agreed on the value of the finder’s fee, but could not agree on the evaluation date and so disagreed on the number of shares to be distributed in payment.

An arbitrator agreed with the claimant’s interpretation of the contract. The Court of Appeal overturned that decision, saying the issue was legal and not correctly decided.

The Supreme Court determined otherwise – stating that contractual interpretation is not simply a matter of law, but one of mixed fact and law. In so doing, the Supreme Court has largely settled the question, as there were two lines of judicial authority on the point.

Historically, the question of contract interpretation was considered a legal one, as members of a jury were considered incapable of understanding a contract. More recently, some courts abandoned that approach and treated contractual interpretation as an exercise in determining a question of mixed fact and law.

In Sattva, the Supreme Court recognized contractual interpretation is inherently fact specific, and also is often limited to the obligations between the parties. Interpretation was recognized as requiring consideration of each term in the contract, surrounding circumstances, the purpose of the agreement, the nature of the relationship, and the ordinary meaning of each word.

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

Therefore, courts have an obligation to consider the “intent of the parties and the scope of their understanding”. However, the Supreme Court cautioned that those considerations cannot “overwhelm the words of [the] agreement”.

The parole evidence rule – which precludes evidence of subjective intent – does not prohibit evidence of surrounding circumstances.

In the result, the words of a contract alone should not determine a case, the context must be considered. And because that is a factual inquiry, absent an extricable question of law, appeal courts should give deference to the trial judge.

More recently, the Alberta Court of Appeal considered the application of Sattva in Vallieres v Vozniak, 2014 ABCA 290, limiting its restrictive application in circumstances involving a standard form contract. Distinguishing Sattva, the Alberta Court of Appeal held that the interpretation of a standard form contract, in this case an agreement to purchase real estate, is a question of law as its interpretation goes beyond the dispute at hand and requires consistency.

In the case of a pro forma standard real estate purchase contract, the court found that it must interpret the intention of the drafting committee that adopted the form, rather than the intention of the individual parties or the surrounding circumstances relevant to the contract’s formation.

This reasoning is consistent with the Alberta Court of Appeal’s decision in Access Mortgage Corporation (2004) Limited v Arres Capital Inc., 2014 ABCA 280, which draws a distinction between bilateral and unilateral commercial instruments. In this decision, the court utilizes the reasoning of Sattva to interpret a bilateral commercial instrument, which the court held requires an objective interpretation to ascertain the intent of independent parties to the contract.