No Common Law Duty Requiring Employers to Reasonably Exercise their Discretionary Contractual Powers in Relation to their Employees

10.3.17

In a recent decision, Styles v. Alberta Investment Management Corporation, 2017 ABCA 1, the Alberta Court of Appeal reversed a 2015 judgement of the Alberta Court of Queen’s Bench that had recognized a common law duty requiring employers to reasonably exercise their discretionary contractual powers in relation to their employees. The Court of Appeal found that such a duty is not one that should be imposed upon employers.

Important takeaways from the decision include that:

  • at common law, an employer has the right to determine the composition of its workforce and does not need to give an explanation for its decision to terminate on a without cause basis; and
  • where the terms of a bonus or incentive scheme clearly exclude an employee from being entitled to compensation under the scheme, an employer has no obligation to provide the employee with such compensation.
Facts

David Styles was employed with the Alberta Investment Management Corporation (“AIMCo”). His written employment agreement provided for a base salary and other compensation programs. The program giving rise to the case was the “Long Term Incentive Plan” (the “Plan”).  Under the Plan, Mr. Styles was eligible for “grants” each year. The vesting period for a grant under the Plan was four years such that no grant was payable for at least four years.  In order to receive a particular grant, Mr. Styles had to be “actively employed” by AIMCo on the vesting date of the grant. Being “actively employed” excluded any period of reasonable notice of termination.
 
Mr. Styles worked for AIMCo for three years and was approved for a grant each year. His employment was terminated without cause and he received three months’ base salary in accordance with the terms of his employment agreement. He did not receive any payment in respect of his grants because he was not actively employed by AIMCo on any vesting dates. Mr. Styles subsequently sued AIMCo claiming entitlement to the total value of his earned grants.
 
Lower Court
 
Justice Yungwirth of the Alberta Court of Queen’s Bench determined that Mr. Styles’ grants were payable after finding “a common law duty of reasonable exercise of discretionary powers.”  Among other things, she found that, in some situations, where the termination of an employee deprives him or her of the right to receive earned performance bonuses, grants or awards, then the exercise of the discretion to terminate without cause becomes arbitrary or capricious.

Court of Appeal
 
The Alberta Court of Appeal allowed the appeal. Writing for the majority, Justice Slatter held that, based on a plain reading of the Plan’s provisions, Mr. Styles was not entitled to any grants. He found that there was no exercise of discretion involved in Mr. Styles not receiving any grants. There was no right to receive them under the terms of the Plan unless Mr. Styles was actively employed on a vesting date. He also observed that an employer does not need to justify or explain the termination of an employee without cause. Accordingly, it is inaccurate to describe an employer’s decision to terminate without cause as a discretionary decision and it was an error for the lower court to review such a decision for reasonableness. Ultimately, Justice Slatter held that neither of the reasons given for awarding Mr. Styles the grants could be sustained.
 
Justice Slatter went on to discuss and reject Justice Yungwirth’s finding of “a common law duty of reasonable exercise of discretionary powers.” He noted that the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”) recognized a general requirement of honesty in the performance of contracts as a general organizing principle of the law of contract.  It did not invite the court to examine the terms of a contract.  Accordingly, unless a contract is unconscionable or contrary to public policy, it is to be enforced consistently with its terms.  Justice Slatter also observed that Bhasin does not make it dishonest, in bad faith, or arbitrary for one party to require that another party perform a contract in accordance with its terms.  Accordingly, AIMCo was not dishonest in refusing to pay grants that were not payable under the terms of the Plan. He concluded at paragraph 65:
 
It must have been obvious to the respondent that unless his employment with the appellant lasted for at least four years he would never receive any bonus under this Plan. Specifically, if he was terminated without cause within four years, any expectation of a bonus would be lost. Those are the terms of employment to which the respondent agreed. If he wished to earn some bonuses under the Plan in the eventuality that he was terminated without cause within four years, it was incumbent for him to negotiate such a provision.
 
The court also rejected the remainder of Mr. Style’s arguments and the appeal was allowed.