David Matthews v Ocean Nutrition Canada Ltd: Can terminated employees reel in big bonuses during their notice period?

David Matthews was a skilled food scientist who, the courts have found, was forced out of his job at Ocean Nutrition and entitled to 15-months notice. During that notice period, Matthews’ million-dollar-plus incentive vested. Is Matthews entitled to that bonus amount? That’s a question the Supreme Court of Canada (“SCC”) will answer soon following an October 2019 hearing. In the meantime, we have the Nova Scotia Court of Appeal’s (“NSCA” or “the Court”) 2-1 finding against Matthews in Ocean Nutrition Canada Ltd v Matthews, 2018 NSCA 44 [Matthews], to reflect on from which to project possible outcomes.

Factual and Procedural Background

Matthews started work as a food scientist and senior executive at Ocean Nutrition’s predecessor company in 1997, and his work in developing methods for processing Omega-3 oils made Ocean Nutrition (“the Company” or “ONC”) a leader in that industry. In 2005, a new investor acquired a minority stake in the company, with an eye to eventually selling the company. In 2007, under the influence of the new investor, Ocean Nutrition hired a new Chief Operating Officer (“COO”) to whom Matthews eventually became a direct report.

Under the new COO and over the following five years, Matthews’ job description and duties were changed five different times. Matthews’ job duties were progressively reduced over that time, and he was gradually sidelined from significant involvement in projects that were relevant to his job descriptions and expertise, in some cases to the detriment of the Company.

Also in 2007, the Company put in place a Long Term Incentive Program (“LTIP”) for the senior management team, Matthews included, that would grant the recipients a specified share of the proceeds if the company were to be sold during their tenure with the Company. In June 2011, Matthews left the Company and filed suit alleging wrongful dismissal. In July 2012, Ocean Nutrition was sold to a competitor which would have triggered a $1,086,893.36 payout to Matthews under the terms of the LTIP were he to be deemed an employee at the time.

In a series of rulings – Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 16 and Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 123 – LeBlanc J of the Nova Scotia Superior Court (“the Trial Judge” and “the Trial Court” respectively) found that the ongoing diminishment of Matthews’ role within the company constituted constructive, and therefore wrongful dismissal, awarding Matthews 15-months notice of termination – a period overlapping with the sale of the Company. The Trial Court further found that the COO had repeatedly lied to Matthews about Matthews’ status with the company and repeatedly lied to the Company’s senior management and Board about Matthews’ job performance. Finally, the Trial Judge awarded Matthews the $1,086,893.36 based on the LTIP amount.

On appeal, the Court unanimously concurred with the Trial Court that Matthews had been constructively and wrongfully dismissed and that he was entitled to the 15-months notice. The Court, however, split on the question of whether Matthews was entitled to the million-dollar payout. It is this question that the Supreme Court is currently contemplating.

Legal Background

Ocean Nutrition’s LTIP was subject to a contractual limitation that the “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.” (Matthews para 67).

In Kieran v Ingram Micro Inc, 2004 CanLII 4852 (ONCA) [Ingram Micro], the Ontario appeals court ruled that an employee who was wrongfully dismissed was nonetheless ineligible for stock options pursuant to an employment contract that said that the employee would cease to be eligible if their employment was “terminated for any reason” (emphasis added). Meanwhile, in Alberta the appellate court ruled in Styles v Alberta Investment Management Corp, 2017 ABCA 1 [Styles], that an LTIP that was potentially payable to “employees” meant “active employees” and that a paid notice period in lieu of working notice did not entitle the employee to the LTIP payment during that notice period.

In Honda Canada Inc v Keays, 2008 SCC 39 [Keays] Canada’s highest court ruled that a duty of good faith is an implicit term of employment contracts. Later, the SCC in Bhasin v Hrynew, 2014 SCC 71 [Bhasin], quoted from Keays and found that not only is there a general duty of good faith in performance of a contract but that there is a specific duty of honesty in that performance. Bhasin was not, however, an employment law case.

Finally, going all the way back to Hadley v Baxendale, [1854] EWHC J70, it has been established law in common law jurisdictions that damages arising from a breach of contract are limited both by the earlier doctrine of expectation damages – the value that would accrue to a plaintiff but for the breach – and by the damages that are reasonably foreseeable or explicitly contemplated by the parties.

The Majority’s Position

Writing for the majority, Farrar JA (with Bryson JA concurring) focussed almost entirely on the plain language of the contract itself, concentrating on the meaning of the phrase “the 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.” The Majority, here, relied on the Alberta court’s ruling in Styles to determine that an employee is someone who is actively engaged in the employment activity and that it does not include a person who is receiving pay in lieu of working notice. They further looked to both Ingram Micro and Styles in determining that the clause stipulating termination “with or without cause” would give rise to LTIP ineligibility fully captured the circumstances of Matthews’ termination.

The majority also relied heavily on the Trial Court’s finding that there was no specific intention on the part of the employer to deprive Matthews of the LTIP payment in their decision to terminate Matthews’ employment. It was on these three bases that they found Matthews ineligible for the million-dollar payout, either as a direct contractual entitlement or in damages for the breach, reasoning that where there was no direct entitlement there could be no damages.

The majority did not give consideration to the notion that there may have been implicit contract terms that were breached by the employer.

The Dissent

Writing in dissent, Scanlan JA side-stepped the issue of the text of the LTIP agreement entirely. Instead, he focussed exclusively on the employer’s implicit duties of good faith and honesty coming from Keays and Bhasin in performance of the contract. Scanlan JA reasoned that the constructive dismissal of Matthews was in itself an act of bad faith in breach of the contract. He went further, however, in saying that the SCC in Bhasin, by quoting approvingly from Keays, intended for the duty of honesty to apply to employment contracts as well as other sorts of agreements. From there, he reasoned that the COO’s ongoing dishonest conduct breached this duty as well.

From that platform, Scanlan JA went on to reason that, but for the bad faith and dishonesty of the employer – or at least the COO – Matthews would have continued to be an employee at the time that the LTIP vested, and that a sale and a consequent payout were reasonably foreseeable by the parties.

Scanlan JA then turned to the question of whether the employer should be found liable for the bad faith and dishonesty that was grounded exclusively in the conduct of the COO. On this issue he found that either a) the COO was acting in the course of his employment, which would make the employer vicariously liable as a matter of black letter law; and b) that if the COO was “on a frolic of his own” the employer should not be entitled to benefit from that misconduct by retaining the $1 million.

Pursuant to the rule in Hadley v Baxendale, then, the dissenting Justice would have awarded the $1,086,893.36 to Matthews as damages.

Analysis

The Supreme Court of Canada has been asked to weigh in on five issues related to the LTIP payments: 1) Did the Court of Appeal err in failing to provide a remedy on the basis of a breach of the organizing principle of good faith and duty of honesty in contractual performance? 2) Did the Court of Appeal err in treating the employee as suing for the Long Term Incentive Plan (LTIP), rather than for damages? 3) Did the Court of Appeal err in treating the employee as suing for the LTIP rather than for damages? 4) Would equity entitle the employee to the LTIP? and 5) What standard of review is applicable under the circumstances?

The Court’s majority reasoning, to this writer’s mind, has two significant and potentially fatal omissions. The majority’s failure to even address the notion of breach based on the duties of good faith and honesty is problematic – it suggests that there is an argument that they simply preferred not to confront. Further, the majority’s conflation of reasonably foreseeable damages with a specific contractual entitlement seemed, to their minds, to merit little discussion, again giving rise to a possible inference that the underlying arguments are not especially strong.

At the same time, it is not established law in Canada that there is a duty of honesty in employment contracts. It does seem plausible, however, that the SCC will be willing to apply Bhasin to cases of employment contracts, especially given that in Bhasin the SCC overruled the Alberta Court of Appeal on which the majority in this case relied so heavily.