Oct 27, 2020 | For Employers

Court Refuses to Enforce Contractual Language Limiting Termination Pay

I have written several blogs on whether wrongful dismissal damages include compensation for the variable compensation the employee would have earned during the applicable notice period. 

Most cases consider whether the language in a variable compensation plan which purports to limit or eliminate the employee’s entitlement to variable compensation during the notice period is enforceable. The test is generally whether the exclusionary language is clear and unambiguous.

A recent Supreme Court of Canada decision suggests that it is very difficult for an employer to draft sufficiently clear and unambiguous language. 

The Facts

Mr. Matthews was employed by Ocean Nutrition Canada Ltd. (the “Company”). As a senior executive, he was part of the Company’s long term incentive plan (“LTIP”) which was a contractual arrangement designed to reward employees for their previous contributions and to provide an incentive to continue contributing to the company’s success. Under the LTIP, a “Realization Event”, such as the sale of the company, would trigger payments to employees who were part of the plan. 

After 14 years service, Mr. Matthews left the Company. About 13 months later the Company was sold. The sale constituted a Realization Event for the purposes of the LTIP which triggered a payment to people who were part of the LTIP plan. The trial judge concluded Mr. Matthews should have received 15 months notice of termination. 

The Legal Issue

Mr. Matthews claimed he was entitled to a payment under the LTIP for the Realization Event because the Company was sold during the common law reasonable notice period. The Company claimed that provisions in the LTIP clearly stated that he was not entitled to this payment. 

The Contractual Language Under Consideration

The applicable contractual provisions stated:

2.03 CONDITIONS PRECEDENT:

ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

2.05 GENERAL:

The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a Realization Event and shall not be calculated as part of the Employee’s compensation for any purpose, including in connection with the Employee’s resignation or in any severance calculation.

The Trial and Nova Scotia Court of Appeal (NSCA) decisions

The trial judge agreed with Mr. Matthews. The NSCA agreed with the Company.

The Supreme Court of Canada decision

The NSCA decision was appealed to the Supreme Court of Canada who overturned this decision and upheld the trial judge’s decision. In doing so, it wrote:

… the provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages … where a clause purports to remove an employee’s common law right to damages upon termination “with or without cause”, such as clause 2.03, this language will not suffice….I therefore agree with the trial judge that clause 2.03 does not unambiguously limit or remove Mr. Matthews’ common law right. 

Lessons to be Learned:

  1. If an employer wants to preclude an employee from receiving variable compensation during the employee’s notice period then the language must be “absolutely clear and unambiguous.” Accordingly, any such language should be reviewed regularly and should take into account recent court cases.

  2. There is currently much legal uncertainty as to whether specific language is sufficiently clear and unambiguous. In this case, the trial judge said it wasn’t, the NSCA said it was, and the Supreme Court of Canada said it wasn’t.

  3. Legal uncertainty translates into significant time and costs. In this case, Mr. Matthews left his employment in June 2011 and the case was concluded over nine years later in October 2020. The Company was required to pay its own legal costs and Mr. Matthews legal costs for the three court cases. 

For over 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416-317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

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