Employment Law: Constructive Dismissal
Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (38252)
“Beginning in 1997, M, an experienced chemist, occupied several senior management positions with Ocean Nutrition Canada Limited (“Ocean”). As a senior executive, M was part of Ocean’s long term incentive plan (“LTIP”), a contractual arrangement designed to reward employees for their previous contributions and to provide an incentive to continue contributing to the company’s success. Under the LTIP, a “Realization Event”, such as the sale of the company, would trigger payments to employees who qualified under the plan. In 2007, Ocean hired a new Chief Operating Officer, who began a campaign to marginalize M in the company, limiting M’s responsibilities and lying to M about his status and prospects with Ocean. Despite his problems with senior management, the LTIP was a key reason for which M wanted to stay with Ocean, anticipating Ocean would soon be sold. However, M eventually left Ocean in June 2011, taking a position with a new employer.
About 13 months after M’s departure, Ocean was sold for $540 million. The sale constituted a Realization Event for the purposes of the LTIP. Since M was not actively employed on that date, Ocean took the position that M did not satisfy the terms of the plan, and he did not receive a payment. M filed an application against Ocean alleging that he was constructively dismissed, and that the constructive dismissal was carried out in bad faith and in breach of Ocean’s duty of good faith. The trial judge concluded that Ocean constructively dismissed M, and that M was owed a reasonable notice period of 15 months. The trial judge also held that M would have been a full‑time employee when the Realization Event occurred had he not been constructively dismissed, and that, because the terms of the LTIP did not unambiguously limit or remove his common law right to damages, M was entitled to damages equivalent to what he would have received under the LTIP. The Court of Appeal unanimously upheld the decision that M had been constructively dismissed and that the appropriate reasonable notice period was 15 months. However, a majority of the court found that M was not entitled to damages on account of the lost LTIP payment.”
The SCC (7:0) allowed the appeal, set aside the judgment of the Court of Appeal and restored the trial judgment.
“In these reasons, I seek to explain my view, respectfully stated, that the majority of the Court of Appeal erred in not awarding Mr. Matthews the amount of the LTIP as part of his common law damages for breach of the implied term to provide reasonable notice. In considering all of the complaints made by Mr. Matthews, it bears recalling that he did not seek damages for mental distress,and while he originally pleaded for punitive damages, he did not pursue that head of damages on appeal in this Court. Consequently, it is unnecessary in the circumstances, and perhaps even unwise given the method on which Bhasin rests, to resolve Mr. Matthews’ allegations of dishonest treatment since I propose to award him the only remedy sought on appeal — an amount equivalent to his LTIP entitlement — on the basis of reasonable notice. That said, Ocean’s alleged dishonest behaviour over a protracted period, but in the manner of dismissal nonetheless, attracts a brief comment. I come to this view for two reasons.
The first pertains to the proper method of analyzing claims for wrongful dismissal, like that of Mr. Matthews, where the employee alleges a failure to provide reasonable notice as well as bad faith. So long as damages are appropriately made out and causation established, a breach of a duty of good faith could certainly give rise to distinct damages based on the principles in Hadley, approved in this setting in Keays (at paras. 55-56), including damages for mental distress. Punitive damages could also be available in certain circumstances. To this end, ensuring litigants take care that their pleadings are properly made out, and ensuring courts are following a methodologically coherent approach to constructive dismissal cases is certainly of value as it can affect the ultimate damage amount to be awarded to an employee plaintiff.
It is apparent too from the pleadings here that there is a measure of uncertainty as to the impact of Bhasin, not just in Mr. Matthews’ case but on employment law more generally. At a minimum, I believe this is an occasion to re-affirm two important principles stated in Potter. First, given the various submissions in this case, I would recall that the duty of honest performance — which Cromwell J. explained in Bhasin applies to all contracts, and means simply that parties “must not lie [to] or otherwise knowingly mislead” their counterparty “about matters directly linked to the performance of the contract” — is applicable to employment contracts (Bhasin, at para. 33, see also para. 73; Potter, at para. 99). Second, given the four-year period of alleged dishonesty leading up to Mr. Matthews’ dismissal, I would also reiterate that when an employee alleges a breach of the duty to exercise good faith in the manner of dismissal — a phrase introduced by this Court in Wallace, and reinforced in Keays — this means courts are able to examine a period of conduct that is not confined to the exact moment of termination itself. All this reflects, in my view, settled law.
The second reason relates to the qualitatively different types of the contractual breaches alleged from the start by Mr. Matthews. This difference was addressed, in some measure, in Keays when it was determined that the breach in question should not, as was sometimes the case, simply bump-up the reasonable notice period.To say that one has been treated dishonestly is quite unlike saying that one has been dismissed without notice. This is directly relevant to Mr. Matthews’ call for the courts to declare that he was mistreated by Ocean.
Properly understood, the claim pursued here indeed rests on allegations of distinct contractual breaches of Mr. Matthews’ employment contract.
Neither party disputes that, at common law, an employer has the right to terminate the employment contract without cause — or, in this case, prompt the employee to choose to leave their job in circumstances that amount to a dismissal — subject to the duty to provide reasonable notice, a right which, as this Court noted in Farber v. Royal Trust Co.,  1 S.C.R. 846, at para. 23, is reciprocal in the contract of employment. When breached, the obligation to provide reasonable notice does not, in theory, turn on the presence or absence of good faith: it is, in a manner of speaking, a “good faith” wrongful dismissal (see Machtinger, at p. 990). The contractual breach that arises from the employer’s choice in this regard is simply the failure to provide reasonable notice, which leads to an award of damages in lieu thereof (Wallace, at para. 115, per McLachlin J., as she then was, dissenting, but not on this point). There is some dispute in the cases regarding how to determine what damages should be awarded in the event of a breach, which I will consider below, but this breach does not turn on whether or not the employer acted honestly or in good faith.
Running parallel to the argument on reasonable notice, Mr. Matthews has alleged that his termination was also in breach of contract because it failed to meet the expected standard of good faith. Under rules recognized by this Court in Bhasin and Potter, an unhappy employee can allege dishonesty in the performance of the contract by the employer — i.e., a breach of the duty of honest performance, which Cromwell J. in Bhasin described as contractual doctrine — independently of any failure to provide reasonable notice. This Court has also recognized in Wallace and Keays that an unhappy employee can allege mistreatment — i.e., conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” — in the manner of dismissal by the employer (Wallace, at para. 98; Keays, at para. 57). A breach of the duty to exercise good faith in the manner of dismissal is also independent of any failure to provide reasonable notice. It can serve as a basis to answer for foreseeable injury that results from callous or insensitive conduct in the manner of dismissal, a point to which I will return to at the conclusion of these reasons (Wallace, at para. 88).
Importantly, damages arising out of the same dismissal are calculated differently depending on the breach invoked. Again, this is nothing but a reflection of settled law. In Keays, at para. 56, for example, Bastarache J. helpfully explained that “[t]he contract of employment is, by its very terms, subject to cancellation on notice or subject to payment of damages in lieu of notice without regard to the ordinary psychological impact of that decision”. By contrast, he explained that failure to act in good faith during the manner of dismissal “can lead to foreseeable, compensable damages” based on the Hadley principle (para. 58). Contrary to what had been thought until that time, an extension of the notice period was not to be used to determine the proper amount to be paid (para. 59). This is because the nature of the contractual breach is of a different order than that associated with the failure to provide reasonable notice. Indeed, it is this fundamental difference that explains why principles of mitigation apply differently to mental distress damages flowing from a breach of the good faith obligation in the manner of dismissal (Evans v. Teamsters Local Union No. 31, 2008 SCC 20,  1 S.C.R. 661, at para. 32).
With this in mind, I turn now to examine the duty to provide reasonable notice, which as will become plain, is dispositive of this appeal.
In the case at bar, the only disagreement in respect of reasonable notice turns on whether Mr. Matthews’ damages include an amount to compensate him for his lost LTIP payment.
In my respectful view, the majority of the Court of Appeal erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due for Ocean’s failure to provide Mr. Matthews with reasonable notice. The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error.
Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period (Wallace, at paras. 65-67). This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period” (para. 115). Whether payments under incentive bonuses, such as the LTIP in this case, are to be included in these damages is a common and recurring issue in the law of wrongful dismissal. To answer this question, the trial judge relied on Paquette and Lin from the Court of Appeal for Ontario. I believe he took the right approach.
Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
The question is not whether these terms are ambiguous but whether the wording of the plan unambiguously limits or removes the employee’s common law rights (Paquette, at para. 31, citing Taggart, at paras. 12 and 19-22). Importantly, given that the LTIP is a “unilateral contract”, in the sense that the parties did not negotiate its terms, the principle of contractual interpretation that clauses excluding or limiting liability will be strictly construed “applies with particular force” (Taggart, at para. 18, citing Hunter Engineering Co. v. Syncrude Canada Ltd.,  1 S.C.R. 426, at p. 459). As this Court recognized in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4,  1 S.C.R. 69, at para. 73, albeit in the commercial context, and cited here to underscore just this point, sophisticated parties are able to draft clear and comprehensive exclusion clauses when they are minded to do so.
To this end, the provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period (Paquette, at para. 33, citing Schumacher v. Toronto-Dominion Bank (1997), 147 D.L.R. (4th) 128 (Ont. C.J. (Gen. Div.)), at p. 184; see also para. 47; Lin, at para. 89). Indeed, the trial judge and the majority of the Court of Appeal agreed that an “active employment” requirement is not sufficient to limit an employee’s damages (trial reasons, at para. 398; C.A. reasons, at para. 66).
Similarly, where a clause purports to remove an employee’s common law right to damages upon termination “with or without cause”, such as clause 2.03, this language will not suffice. Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice. As this Court held in Bauer v. Bank of Montreal,  2 S.C.R. 102, at p. 108, exclusion clauses “must clearly cover the exact circumstances which have arisen”. So, in Mr. Matthews’ case, the trial judge properly recognized that “[t]ermination without cause does not imply termination without notice” (para. 399; see also Veer v. Dover Corp. (Canada) Ltd. (1999), 120 O.A.C. 394, at para. 14; Lin, at para. 91). Yet, it bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement.
I therefore agree with the trial judge that clause 2.03 does not unambiguously limit or remove Mr. Matthews’ common law right. In my respectful view, the majority of the Court of Appeal erred in concluding otherwise.
In reaching a different conclusion regarding the interpretation of clauses 2.03 and 2.05, the majority judges relied on Styles from the Court of Appeal of Alberta. Ocean urges this Court to do the same. While this is not the occasion to examine the law in Alberta in depth, I allow myself the following observations.
At issue in Styles was a similar question to the one here: was the employee, upon being terminated without cause, entitled to receive a payment under his employer’s contractual long-term incentive plan? Upon termination, the employer paid the employee a lump sum payment equal to three months’ salary pursuant to the terms of his employment contract (Styles v. Alberta Investment Corp., 2015 ABQB 621,  4 W.W.R. 593, at paras. 9 and 27, per Yungwirth J.). The bonus would not have vested until several years after the employee’s termination (Styles, at paras. 17-23, per Yungwirth J.). Consequently, the employee could not recover damages for a payment under the bonus in connection to the reasonable notice period. At a minimum, Styles is thus distinguishable from Mr. Matthews’ case. The latter raises issues surrounding damages connected to the notice period, while the former does not.
It also bears noting that the Court of Appeal of Alberta in Styles suggested that Paquette, one of the cases I rely on here, is premised upon an erroneous reading of this Court’s decision in Sylvester v. British Columbia,  2 S.C.R. 315. In Styles, the Court of Appeal noted that “[t]he common law implies a term of reasonable notice, or pay in lieu, in those circumstances. The payment in lieu is not ‘damages’ for a breach of the contract, but rather one component of the compensation provided for in the contract. If an employer fails to give proper notice or pay in lieu, the breach is in the failure to pay, not in the termination” (para. 34 (footnote omitted)). The Court of Appeal then observed that “[t]here are decisions from other jurisdictions that treat termination as a breach, but they do not reflect the law of Alberta: see for example [Paquette]. Paquette relies on the dictum in [Sylvester], at para. 1, but para. 15 of that decision confirms that it is the non-payment that is the breach, not the termination itself” (para. 34, fn. 1).
On my reading, this Court in Sylvester confirmed that “[d]amages for wrongful dismissal are designed to compensate the employee for the breach by the employer of the implied term in the employment contract to provide reasonable notice of termination” (para. 15 (emphasis added)). Authority elsewhere confirms this same idea: there is no such implied term of the contract to provide payment in lieu (see, e.g., Love v. Acuity Investment Management Inc., 2011 ONCA 130, 277 O.A.C. 15, at para. 44).
As explained by the Court of Appeal for British Columbia in Dunlop v. B.C. Hydro & Power Authority (1988), 32 B.C.L.R. (2d) 334, at pp. 338‑39, there are three principal reasons why this is an important distinction. First, there are issues surrounding the complexity of an implied term to provide pay in lieu of notice, and whether such a term can readily be implied into an employment contract. Second, implying a term to provide pay in lieu of notice “would mean that if an employer elected to give pay in lieu of notice, the employer would be complying with the contract and not breaking it”, and thus “the contract would require the full payment to be made immediately”. Third, if the employer elected to invoke such an implied term and gave no notice of termination, “there would be no obligation on the part of the employee to mitigate damages by seeking other employment” since the term requires a payment in full without regard to the employee’s actual losses. Ensuring that courts and litigants properly understand this distinction is thus important as it can profoundly affect employees’ financial lives. To the extent that some cases suggest otherwise, I respectfully disagree.
Finally, at this stage of the analysis, it may also be appropriate in certain cases to examine whether the clauses purporting to limit or take away an employee’s common law right were adequately brought to the employee’s attention (Paquette, at para. 18; Taggart, at paras. 20-23; Poole v. Whirlpool Corp., 2011 ONCA 808, 97 C.C.E.L. (3d) 20, at paras. 5-6). This issue, however, does not arise on these facts. Moreover, as several interveners commented on in this appeal, it may be appropriate to question whether the clause at issue is compatible with minimum employment standards (Machtinger, at p. 1004). This issue was not canvassed by the courts below and, in the present circumstances, it is unnecessary to explore further.
In sum, I agree with the trial judge that Mr. Matthews is entitled to receive damages equal to what he would have received pursuant to the LTIP, subject to mitigation.
On this latter point, I would take this opportunity to recall that, had the issue been properly placed before the trial judge, it was certainly within the trial judge’s prerogative to tie the dishonesty that occurred over the four-year period to the “manner of dismissal”. Due to the circumstances in Wallace and Keays, “in the manner of dismissal” was originally conceptualized as the moment of dismissal, suggesting to some degree that good faith must exist only at the very end of the employment relationship. Yet, circumstances of constructive dismissal show that this reading sometimes needs to be extended. Following Potter, an employee’s constructive dismissal may be better understood as the consequence of conduct over a series of events in time, and not just a tipping point. On this reading, Potter extends the notion of “in the manner of dismissal” to encompass circumstances in which termination stems from an employee’s decision to leave their job brought about, as here, by a series of events that predate the actual moment of the parting of ways between employer and employee (paras. 31-35). The constructive dismissal may, depending on the facts of a given case, reflect a choice to leave prompted by a series of changes to the employee’s working conditions over time, absent any misconduct. Or a constructive dismissal may reflect a choice to leave where dishonest or like misconduct eventually pushes the employee out the door. In the latter circumstance, this suggests that, at least retrospectively, the duty is relevant to the performance of the contract prior to the moment of termination. Indeed, there is no coherent reason why the measure of misconduct cannot be understood retrospectively in cases of wrongful dismissal “so long as it is ‘a component of the manner of dismissal’” (Doyle v. Zochem Inc., 2017 ONCA 130, 31 C.C.P.B. (2nd) 200, at para. 13, citing Gismondi v. Toronto (City) (2003), 64 O.R. (3d) 688 (C.A.), at para. 23).
In recognizing this, Potter affirmed what courts were already doing: examining the employment relationship retrospectively, and thus implicitly finding that good faith is owed not merely at the very end of the relationship. As Professor England has observed, courts have frequently examined whether employers treated their employees with good faith in constructive dismissal cases by, for example, ensuring employees were safeguarded from bullying, intimidation, and harassment from managers and other employers (Individual Employment Law (2nd ed. 2008), at pp. 92‑93). This extension in Potter thus allowed for a more flexible measure of conduct over the period leading up to the moment of actual termination of the employment contract.
I would not, however, say anything further on how Bhasin, on the one hand, and Wallace and Keays, on the other, apply to this case. It suffices to say that a contractual breach of good faith rests on a wholly distinct basis from that relating to the failure to provide reasonable notice. I say this on the basis of my proposed conclusion above, with respect to Mr. Matthews’ financial claim for breach of the implied duty to provide reasonable notice. At the hearing, counsel for Mr. Matthews acknowledged that, if he received damages to compensate him for his lost LTIP payment as part of his reasonable notice damages, he cannot now claim the same amount under the Hadley principle. While the breaches of contract are indeed distinct, they cannot be deployed to provide what amounts to double recovery. Moreover, Mr. Matthews drew the Court’s attention to the anxiety caused by Ocean, but made no request for damages for mental distress. As noted, while he originally claimed for punitive damages at trial, he did not pursue this head of damages on appeal. Given that Mr. Matthews failed to press his claim with further detail or argument, even when questioned on point by members of the Court, I need not go further to decide whether some duty of good faith has been breached, since no further remedies are being sought.
Mr. Matthews’ argument is a serious one. Not all mistreatment by an employer will result in a constructive dismissal — some employees, for financial or other reasons, might choose not to leave their job. It might be that, as argued by various parties in this appeal, a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee. I recognize, however, that whether the law should recognize this is a matter of fair debate.
This is a dismissal case. In light of the comment in Bhasin (at para. 40) that the common law should develop in an incremental fashion, I would decline to decide whether a broader duty exists during the life of the employment contract in the absence of an appropriate factual record.”