Canada: Timberwest Forest Corp. v. Gustavson: Limits On Employer’s Right To Amend Post-Retirement Benefits

As more post-retirement cases actually go to trial, we are starting to get a sense of what factors judges consider relevant in determining whether an employer will be permitted to reduce or eliminate post-retirement benefits. In this British Columbia Supreme Court decision, the personal circumstances of the plaintiff, Mr. Gustavson, appears to have been an important factor in the ultimate result.

Background

In 1992, Mr. Gustavson accepted an offer from Fletcher Challenge Canada Limited (Fletcher) to take early retirement, and was provided with a letter outlining the various components of his early retirement arrangement. Included in the letter was a description of the post-retirement benefits to which he would be entitled, as well as the following "amending" provision:

The arrangement set forth in this letter is binding upon the company's successors and assigns. The Company reserves the right to amend and discontinue any of the benefit plans and programs referred to in this letter and the arrangement in the letter will be, and will be deemed to be subject to such amendments and discontinuance. Notwithstanding the foregoing, the benefits to which you will be entitled shall not be substantially less than those outlined in this letter. [Emphasis added]

In 2008, Fletcher was purchased by TimberWest Forest Corp. (TimberWest), which assumed responsibility for the Fletcher retirees and advised them it was eliminating their out-of-province emergency medical coverage. Mr. Gustavson, who spent the winters in Arizona, took out an individual policy for out-of-province coverage. He then commenced an action against TimberWest, seeking reimbursement of the cost of the policy plus the amount of premiums he would pay for the policy for the next two years.

Decision of the British Columbia Provincial Court

The British Columbia Provincial Court found in favour of Mr. Gustavson, indicating that the out-of-province coverage discussed in the letter "enjoy[s] a degree of conditional vesting and protection from amendment and discontinuance by the Company, by virtue of the Notwithstanding Provision", and that the changes introduced by TimberWest resulted in the benefits being "substantially less" than what was originally agreed upon.

Decision of the British Columbia Supreme Court

On appeal, the British Columbia Supreme Court agreed with the conclusions of the Provincial Court.

The Court noted that out-of-province coverage was intended to be included in part of Mr. Gustavson's retirement arrangement, as was evident by references to "benefit plans and programs" in his retirement letter. In doing so, the Court rejected TimberWest's argument that the plan's specific components had to be expressly referenced in order for the out-of-province coverage be included in the contract.

The British Columbia Supreme Court recognized that Fletcher (and consequently TimberWest as its successor) had reserved the right to amend or terminate benefit plans and programs and that each specific component of the benefit plans consequently could not be viewed as a "lifetime promise or [that they] would be provided in perpetuity." The Court also acknowledged that TimberWest was not prevented "from changing individual components of any particular benefit, as long as the amendment or discontinuance does not result in substantially less benefits for any particular retiree." However, the Court went on to find that, in this case, the elimination of out-of-province emergency medical coverage would result in Mr. Gustavson's benefits being "substantially less", given the cost to Mr. Gustavson of paying for out-of-country medical coverage.

Implications of the Decision

The British Columbia Supreme Court decision highlights the fact that where an employer has a qualified right to amend or terminate post-retirement benefits, the courts may look at the personal circumstances of an applicant in order to determine if the amendments violate the contractual obligations of the employer in respect of that particular applicant. This was the case despite the fact that the Court explicitly acknowledged that "in these difficult economic times the decision to eliminate out-of-province coverage could be considered 'both reasonable and responsible', given the need for Timberwest to manage the plan from a group-wide perspective".

It is possible that this decision will increase the litigation risk for employers seeking to amend their post-retirement benefit plans, particularly where the employer's right to amend these retiree benefits is qualified.

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