Michael Ford (post until Oct. 31/18)
Employment & Labour

The duty of good faith in employment contracts

By Stuart Rudner & Brittany Taylor

In 2015, the decision in Styles v. Alberta Investment Management Corporation made waves in the employment bar by granting an employee substantial damages for the value of bonuses payable under the employer’s Long-Term Incentive Plan (the LTIP), even though the employee did not appear to meet the eligibility criteria for payment set out in the LTIP. This award was based on a new common law obligation imposed on employers to exercise “discretionary contractual powers” reasonably, including the power to terminate an employee’s employment without cause.

The decision was groundbreaking for employees, in that it suggested that employers could not simply terminate an employee’s employment, even without cause, without a reasonable basis for doing so, including a consideration of how such a decision would impact the employee’s entitlement to other compensation, such as bonuses. However, in January 2017, the Alberta Court of Appeal released its decision allowing the appeal, making a clear statement that the plain wording of an employment agreement or incentive plan will govern.


The Styles decision arose when Derek Styles brought a claim against his former employer following the without cause termination of his employment. In this case, the only issue in dispute in the claim was whether or not Styles was entitled to payment of bonuses under the LTIP, which provided that an employee’s right to a bonus did not become payable until a four-year period had expired. Furthermore, bonuses would only be paid where participating employees were actively employed at the time they became payable. Styles had been employed for less than four years at the time his employment was terminated. As a result, he did not receive any bonus payments.

Trial decision

Applying the duty of honesty in the performance of contracts established by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, the court determined that the decision to terminate Styles’ employment was a discretionary decision which had to be exercised in good faith. Similarly, the decision regarding whether or not to award Styles bonus payments pursuant to the LTIP was also considered to be within the discretion of the employer. By failing to provide any evidence as to the reasons for termination and no explanation for the consequential denial of the LTIP grants, the court found that the employer failed to meet the “minimum standard of honesty” required in Bhasin. By choosing to terminate Styles’ employment, the employer had “created circumstances under which the employee is unable to receive his LTIP grants”. This was a violation of what the court coined a “common law duty of reasonable exercise of discretionary contractual powers”.

The court awarded $444,205 in damages to Styles for lost bonuses pursuant to the LTIP.

On appeal

The Court of Appeal firmly rejected the idea that Bhasin created a general principle requiring the “reasonable exercise of discretion” in contractual performance, noting that this would be a “radical extension of the law…unsupported by authority, and contrary to the principles of the law of contract.”

The court reinforced the right of an employer to terminate an employment relationship on a without cause basis without providing reasons for doing so, noting that the ability to terminate an employment contract on reasonable notice is an implied term of any employment agreement. As an employer is not required to explain the decision to terminate an employment agreement, the courts have no authority to examine the basis or reasonableness of the reasons for termination. Further, the court confirmed that it is inaccurate to describe this as a discretionary decision exercised by the employer.

Similarly, the court held that there was nothing discretionary about the employer’s decision not to pay the LTIP bonuses. Rather, the Court of Appeal found that the wording of the LTIP was clear in requiring that Styles be actively employed on the four year anniversary to be entitled to receive the bonus payments. In not paying the bonuses, the employer was not exercising any discretion – it was simply abiding by the terms of the LTIP.

Lessons learned

It is important for employees to understand that courts will give effect to clearly drafted provisions and restrictions contained within an employment agreement, bonus plan or other document governing the terms and conditions of an employee’s employment. The Court of Appeal explicitly recognized in Styles that the “honest performance” requirement established in Bhasin applies to the performance of an agreement only, not to contractual negotiation. As a result, absent situations where a contract is deemed to be “unconscionable or contrary to public policy, it is to be enforced in accordance with its terms.” This means that a court will not step in to fix a bad deal between an employer and an employee, so long as the wording is clear and unambiguous and both parties agreed to its terms.

Employees should carefully review all documents governing the terms of their employment to ensure they understand any limitations placed on their entitlements upon termination of employment and/or during the notice period. Before signing an employment agreement or other document, whether at the start of employment or otherwise, employees obtain legal advice to fully understand any restrictions being placed on them. In some cases, it may be possible to negotiate with the employer and revise the terms of the agreement. Where this is not possible, an employee will at least be able to make a determination of whether they will accept or decline the offer with a full understanding of what is on the table. Similarly, employers should work with employment counsel to understand their rights and ensure that any contracts or policies are entered into properly so they can be enforced in the future.

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