Matthews v. Ocean Nutrition, A SCC Primer: Can an employee claim a bonus that vests during a common law notice period?

Written by Kent Wakely, Osgoode Hall Law School, Class of 2020

The Supreme Court of Canada (“SCC”) is set to release its decision in David Matthews v. Ocean Nutrition Canada Ltd on October 9.  This post summarizes the background and issues involved in the case.

Factual and Trial Background

David Matthews started work as a food scientist and senior executive at Ocean Nutrition’s predecessor company in 1997, and his work in developing methods for processing Omega-3 oils made Ocean Nutrition (“Ocean”) a leader in that industry. In 2007, under the influence of a new investor, Ocean hired a new Chief Operating Officer (“COO”) to whom Matthews eventually became a direct report.

Over the approximately 5 years working under the new COO, Matthews’ job description and duties were changed or reduced five different times, and he was gradually sidelined from significant involvement in projects that were relevant to his job descriptions and expertise. There was also evidence, accepted at trial, that the COO had lied to other senior management about Matthews performance and lied to Matthews about his position in the company.

In 2007, the Company put in place a Long Term Incentive Program (“LTIP”) for the senior management team, Matthews included, that would grant the recipients a specified share of the proceeds if the company were to be sold during their tenure with the Company. In June 2011, Matthews left the Company and filed suit alleging constructive dismissal. In July 2012, Ocean Nutrition was sold to a competitor which would have triggered a $1,086,893.36 payout to Matthews under the terms of the LTIP were he to be deemed an employee at the time.

In a series of rulings – Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 16 and Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 123 – Justice LeBlanc of the Nova Scotia Superior Court (“the Trial Judge” and “the Trial Court” respectively) found that the ongoing diminishment of Matthews’ role within the company constituted constructive dismissal, awarding Matthews 15-months’ notice of termination – a period overlapping with the sale of the Company. The Trial Judge awarded Matthews the $1,086,893.36 based on the LTIP amount.

On appeal, the Nova Scotia Court of Appeal [Ocean Nutrition Canada Ltd v Matthews, 2018 NSCA 44] unanimously agreed with the Trial Court on the issues of wrongful dismissal and the 15-months’ notice. The Court, however, split on the issue of the bonus payout. In a 2-1 ruling, the Court of Appeal ruled against Matthews, finding that he was not entitled to the bonus payment. It is this question that the Supreme Court is currently contemplating.

Legal Background and the Court of Appeal Decision

Ocean’s LTIP was subject to a contractual limitation that the “Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.”

There is case law from Ontario (Kieran v Ingram Micro Inc, 2004 CanLII 4852 (ONCA) and Alberta (Styles v Alberta Investment Management Corp, 2017 ABCA 1) limiting employees’ eligibility for bonuses that vest during a common law notice period. The Ontario case turned on specific contract language, the Alberta one on broader reasoning. There’s also SCC jurisprudence finding that a duty of good faith is an implicit term of employment contracts (Honda Canada Inc v Keays, 2008 SCC 39), and that there is both a duty of good faith and a duty of honesty implicit in contracts outside of the employment context (Bhasin v Hrynew, 2014 SCC 71 [Bhasin]).

For the majority in the Court of Appeal, Justice Farrar (with Justice Bryson concurring) focussed almost entirely on the plain language of the contract itself, applied the Ontario and Alberta cases, and found no entitlement to the bonus on those grounds. The majority also found that there was no specific bad faith intention on the part of the employer to deprive Matthews of the LTIP payment in their decision to terminate Matthews’ employment.

Ultimately, the NSCA found Matthews ineligible for the million-dollar payout, either as a direct contractual entitlement or in damages for a breach of contract, reasoning that where there was no direct entitlement there could be no damages.

Writing in dissent, Justice Scanlan side-stepped the issue of the text of the LTIP agreement entirely. Instead, he focussed exclusively on the employer’s implicit duties of good faith and honesty in the performance of the contract arising from Keays and Bhasin. Justice Scanlan reasoned that the constructive dismissal of Matthews was in itself an act of bad faith in breach of the contract. He went further, however, in saying that the SCC in Bhasin, by quoting approvingly from Keays, intended for the duty of honesty to apply to employment contracts as well as other sorts of agreements. From there, he reasoned that the COO’s ongoing dishonest conduct breached this duty as well.

From that platform, Justice Scanlan reasoned that, but for the bad faith and dishonesty of the employer – or at least the COO – Matthews would have continued to be an employee at the time that the LTIP vested, and that a sale and a consequent payout were reasonably foreseeable by the parties, giving rise to damages as per the rule in Hadley v Baxendale, [1854] EWHC J70).

Justice Scanlan then turned to the question of whether the employer should be found liable for the bad faith and dishonesty that was grounded exclusively in the conduct of the COO. On this issue he found that either: a) the COO was acting in the course of his employment, which would make the employer vicariously liable as a matter of black letter law; or b) that if the COO was “on a frolic of his own” the employer should not be entitled to benefit from that misconduct by retaining the $1 million.

Looking Ahead to this Week’s SCC Decision

The SCC heard argument last fall. You can watch the webcast of the argument here.

The SCC has been asked to weigh in on five issues related to the LTIP payments: 1) Did the Court of Appeal err in failing to provide a remedy on the basis of a breach of the organizing principle of good faith and duty of honesty in contractual performance? 2) Did the Court of Appeal err in treating the employee as suing for the Long Term Incentive Plan (LTIP), rather than for damages? 3) Would equity entitle the employee to the LTIP? and 4) What standard of review is applicable under the circumstances?

Will the SCC find a direct contractual entitlement to the bonus? Will the Court extend Bhasin to the performance of employment contracts? The employment law bar is anxiety awaiting answers.

Kent Wakely, “Matthews v. Ocean Nutrition, A SCC Primer: Can an employee claim a bonus that vests during a common law notice period?” Canadian Law of Work Forum (October 7 2020): http://lawofwork.ca/?p=13024