Clear contractual language prevails in court decision on incentive payout upon terminationStyles v Alberta Investment Management Corporation, 2017 ABCA 1 (CanLII)
The recent Alberta Court of Appeal decision Styles v Alberta Investment Management Corporation has highlighted the inherent right of an employer to terminate employment without cause on reasonable notice or payment in lieu thereof. This finding does not apply to federally-regulated employers.
Mr. Styles was terminated without cause prior to the vesting of certain grants under the employer’s long-term incentive plan (“LTIP”). The employment agreement and LTIP clearly indicated that an employee must still be employed at the vesting date in order to be eligible for the bonus. The Court of Appeal overturned the trial judge’s finding that Mr. Styles was owed a bonus under the LTIP.
The majority of the Court of Appeal rejected the trial judge’s expansion of the duty of honest performance in contracts to create a common law duty of “reasonable exercise of discretionary contractual powers,” noting that the duty of honest performance does not relate to the negotiation of terms, and confirmed that an agreement should be interpreted in accordance with its terms unless it is unconscionable or contrary to public policy. The majority noted that it is not dishonest to insist that an employee meets a condition precedent in order to gain a benefit under a contract, nor to require that a party perform a contract in accordance with its terms.
The majority rejected the trial judge’s argument that the denial of LTIP benefits was a discretion afforded to the employer under the employment agreement, and underscored that the waiver of rights in an agreement is a right that exists outside of that agreement, rather than a discretion in contractual performance. They also rejected the trial judge’s consideration of termination without cause as an exercise of contractual discretion. The majority stressed that the right to terminate on reasonable notice is an implied term – and not the breach – of an employment agreement, and therefore payment in lieu of notice is not damages for breach of contract, but is part of the compensation contemplated by the contract.
The complete reported decision in Styles can be read here, and is an important reminder of the value in clearly-drafted employment agreements and benefit plans, the freedom of contracting parties to act in their own respective best interests, and the ability of an employer to terminate without cause whether or not that decision is “reasonable,” as long as they provide reasonable notice or payment in lieu thereof.