The implications of the Supreme Court of Canada’s decision in Bhasin v Hrynew, 2014 SCC 71, respecting the general duty of honesty in contractual performance have continued to evolve in the employment context, as can most recently be seen in the Court of Queen’s Bench decision of Styles v. Alberta Investment Management Corp., 2015 ABQB 621.

The principal issue before the Court in this summary trial decision was whether the employer was obligated to provide to the employee, upon termination of his employment, bonuses earned pursuant to the employer’s long term incentive plan (“LTIP”). The employment contract had explicitly permitted the employer to terminate the employee without cause and specified the amount to be paid in lieu of notice upon termination. The LTIP itself contained both an “entire agreement” clause and a provision stipulating that employees must be actively employed to be eligible to receive any LTIP payments. A subsequent iteration of the LTIP plan provided the employer with discretion with respect to whether LTIP bonuses would be paid out upon the termination of an employee.

Although there had been no evidence of bad faith on the part of the employer, the Court found that the employer’s exercise of its discretion, both in dismissing the employee and in not paying out to him his accumulated LTIP bonuses upon termination, was conducted unreasonably and without regard for the employee’s legitimate contractual expectations. This finding was made with specific consideration to the “payfor-performance” model of compensation that the employer had fostered and marketed to prospective employees.

The Court concluded that the employer’s conduct constituted a breach of its common law duty to exercise discretionary contractual powers reasonably and that the employee was, therefore, entitled to damages in the amount of the accumulated LTIP bonuses.

What does this mean for employers/ employees?

It is becoming increasingly apparent that courts are willing to place greater emphasis on an employee’s subjective expectations of the terms of employment with the result that otherwise sound, unambiguous contractual provisions in an employment agreement can be superseded. As such, employers who exercise discretionary powers granted to them under a contract of employment must take care to ensure such decisions are made fairly and reasonably, and not in a manner that could be construed as “capricious” or “arbitrary”. This bears specific consideration in situations where the employer may be perceived to be attempting to avoid contractual obligations by terminating an employee prior to these contractual obligations technically arising.

This post is intended to provide general information concerning developments in the law and is not intended to provide legal advice in respect of any particular situation.