Canada: Have You Been Naughty Or Nice? When Is The Exercise Of "Discretion" Required To Be Reasonable?

Last Updated: December 2 2015
Article by Laurie Robson

Most Read Contributor in Canada, September 2016

David Styles was the Vice President of Relationship Investments for the Alberta Investment Management Corporation (AIMCo) from June 15, 2010 to June 11, 2013, when his employment was terminated without just cause. The position was a highly specialized one, with limited opportunities for similar roles, the majority of which were in Toronto. An important consideration for Mr. Styles, in making the move from his home in Toronto to Edmonton, was the compensation package, in particular, participation in AIMCo's Long Term Incentive Plan (LTIP) which offered annual grants vesting over a 4 year period. During his employment, Mr. Styles proved to be an excellent employee and exceeded every performance target set for him by AIMCo. For this, as part of its "pay for performance" philosophy, AIMCo awarded him LTIP grants in 2011, 2012 and 2013. To accept the LTIP grant, Mr. Styles agreed to the terms of the Participation Agreement, which included both a forfeiture clause and an entire agreement clause.

At termination, AIMCo made no payment to Mr. Styles for any of his unvested LTIP grants as none had reached their respective maturity dates. Mr. Styles sued AIMCo for the awarded LTIP grants and the matter came before the Alberta Court of Queen's Bench by way of a summary trial. The evidence at trial, by the agreement of the parties, was limited to the affidavits sworn by Mr. Styles and a representative of AIMCo, as well as the transcripts of the questioning conducted on those affidavits.

Nothing in the evidence before the Court suggested that Mr. Styles wasn't committed to his employment with AIMCo. His performance had been excellent and he contributed significant value to the investments under his management. No reasons were provided to the court to explain why Mr. Styles' employment had been terminated, except to say that it was without just cause. The main question at trial was whether Mr. Styles was entitled to receive any payment under the LTIP plans?

In framing his argument, Mr. Styles raised a number of issues centred on whether the common law duty of honesty in contractual performance enunciated by the Supreme Court of Canada (SCC) in Bhasin v. Hrynew 2014 SCC 71, should be applied to his benefit, notwithstanding the forfeiture language in the LTIP plans. He argued that the company, in exercising its discretion to terminate his employment, controlled the timing of same, which timing prevented him from fully performing under the contract until the maturity dates to earn out the LTIP grants. His performance had been exemplary, in keeping with the expectations of AIMCo in making the LTIP grants, and yet the entire benefit of the LTIP compensation program was withheld from him on the basis of the forfeiture language triggered by the timing of the termination chosen by the company. As an alternative remedy, Mr. Styles claimed relief from forfeiture and also raised the question of whether the initial bonus grant, was "wages" as defined by the Alberta Employment Standards Code.

While it is important to recognize that every contract succeeds or fails based on the specific words and phrases used in the contract, the reasoning in this case should be carefully reviewed by employers who rely on discretionary language in their compensation plans, particularly plans with multi-year vesting provisions, where employment may end midway through the vesting period. The analysis in this case considers terms frequently relied on to end vesting of multi-year plans, including: a clause restricting payout to only those employees who remain actively employed at the time of vesting; an entire agreement clause; and forfeiture language.

The eligibility provisions for participation in payment under the AIMCo LTIP plan included the following language: "The Long Term Incentive Plan can be modified or amended, or terminated, in whole or in part, at any time, at the discretion of AIMCo, provided that in the event of such termination, a Participant will continue to be entitled to all grants previously awarded, subject to the terms and conditions of the Long Term Incentive Plan." The LTIP also provided: "Eligibility for Payment: Unless otherwise stipulated, participants must be actively employed by AIMCo, without regard to whether or not the Participant is receiving, or will receive any compensatory payments or salary in lieu of notice or termination on the date of payout, in order to be eligible to receive any payment."

Under the Participation Agreement, Mr. Styles acknowledged that he had read and understood the forfeiture provisions of the LTIP, which included a clause specifically referring to termination with or without cause, and further stated that the participant would have no other rights to any grants which had been made other than set forth in the plan or other written agreement with the participant. It also provided that the participant would not be entitled to recover damages or be paid any benefits or recover any compensation that the participant may have otherwise being entitled to under the plan if the participant continued to remain and employee. The plan document also included an entire agreement clause.

In reviewing the documentation provided to Mr. Styles concerning the LTIP program, the court considered the changes that were made to the 2009 LTIP plan (which was provided with his offer of employment) to the 2011 LTIP program under which his was issued, most notably, the language concerning entitlement to an LTIP grant which then provided that such grants, vested or unvested may be forfeited upon the date of termination. During his employment, Mr. Styles received grant letters dated June 1, 2011, May 1, 2012, and May 1, 2013, with each letter advising him that a plan grant had been approved for him. As well, by various letters issued from time to time, AIMCo confirmed the estimated value of his awarded unvested grants. In considering all of the language set out in the various contracts, including: the employment agreement, LTIP grant letters and Participation Agreements, the Judge held that although under the terms of the employment contract the awarding of LTIP grants was purely discretionary, once the letters approving the grants were issued to Mr. Styles the awarded LTIP grants were no longer discretionary.

AIMCo's evidence was that participants in the LTIP were required to sign the Participation Agreement, in order to activate the grant. The Judge therefore found that Mr. Styles had activated his grants when he signed the Participation Agreements, the legal effect of which activation meant that Mr. Styles had not, in fact, forfeited the grants he had been awarded. He had acquired an interest in the LTIP, including the right to participate in the plan and to receive payment in accordance with the terms of the plan. The Judge found that by Mr. Styles' "exemplary hard work, and complete compliance with the elaborate provision of the LTIP's Participation Agreement makes this case distinguishable from other cases or scenarios where the ordinary and purely discretionary bonuses are being awarded." The Judge further held "it is reasonable to infer that the LTIP agreement itself contemplated the conferral of a right or title being conveyed in regard to the grants awarded to the Plaintiff." She further relied on the following language in the Participation Agreement "The Long Term Incentive Plan can be modified or amended, or terminated, in whole or in part, at any time, at the discretion of AIMCo provided that in the event of such termination, a Participant will continue to be entitled to all grants previously awarded, subject to the terms and conditions of the Long Term Incentive Plan"

With reference to the 2011 Participation Agreement, the Court emphasized the following: "without delivering notice to each Participant, to modify or amend the plan, [provided] that such modification or amendment may not [materially] prejudice the Participant's entitlement to any particular grant which had been awarded to a Participant prior to such amendment." The Judge held: "these provisions reinforced the position that previously awarded grants could not be prejudiced by any amendment or modification to the LTIP agreement." The Judge's reasoning concerning the structure of the LTIP was that the exercise of discretion to award a grant to a key talent transformed the grant into an accrued right which ceased to be at the discretion of the company and AIMCo could not prejudice those rights. It was logical and reasonable to conclude that employees such as Mr. Styles would have the right to receive the grant at the maturity date, even though the value was unknown. The Judge found that these were legitimate contractual interests of Mr. Styles for which AIMCo should have had due consideration when it made its decision to terminate his employment without cause.

The Judge held that although there was a clear agreement between Mr. Styles and AIMCo specifically providing for a stipulated termination payment in lieu of notice, as well as an entire agreement clause in the LTIP, the terms of the LTIP relating to forfeiture were not as clear. The Participation Agreements in 2009, 2011 and 2012 all provided that the participant must be actively employed to receive payment of the LTIP, however, the eligibility provisions for the 2011 LTIP were expanded and provided that the LTIP grants, whether they were vested or unvested may be forfeited. The Judge therefore found the addition of the words "may be forfeited" implied an element of discretion as to whether the grants would be forfeited. Taking into consideration the purpose of the LTIP, which was part of the pay for performance compensation program used by AIMCo to attract key talent, it was difficult to reconcile the concept of the employer's right to terminate without cause and effectively deprive the employee of the entirety of the pay for performance compensation used to attract the key talent in the first place. The Court considered the "friction" between AIMCo's right to terminate Mr. Styles' employment without cause with the duty imposed on AIMCo to perform its contractual obligations in good faith and dealing fairly with Mr. Styles "by exercising it discretionary contractual powers reasonably and not arbitrarily or capriciously."

The Judge therefore found that AIMCo breached the terms of the employment contract and the incorporated LTIP when it exercised its discretion and refused to pay Mr. Styles his earned, awarded, and approved payout under the LTIP grants. In assessing the loss of the value of the LTIP, the court took into consideration various contingencies applicable to valuing the grants and awarded Mr. Styles damages of $444,205.00.

The caution to employers is that following the SCC decision in Bhasin v. Hrynew the courts are more willing to intervene in the decisions made by employers involving the exercise of discretion to withhold payouts under any form of discretionary bonus or compensation plan. The expectation is that when an employer withholds payment under a pay for performance type plan and the employee brings a claim, the court will review the employer's decision, and may award a partial payout on the basis that it was within the reasonable expectation of the parties that the employee, by his or her good performance, reasonably expected to earn, and did earn, some benefit under the plan. Employers should therefore take this analysis into consideration when assessing termination costs involving discretionary pay for performance plans even where the plan provides for forfeiture of the benefit under the plan or the exercise of discretion related to forfeiture provisions.

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