Court Provides Cautionary Tale to Employers: Good faith required even when dismissal without cause

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  • March 30, 2016

Court Provides Cautionary Tale to Employers: Good faith required even when dismissal without cause

An Alberta Court ruled that, while an employer has the discretion to dismiss an employee without cause, it must do so reasonably and in good faith and in a manner that is neither “capricious” nor “arbitrary”.  The Court in Styles v. Alberta Investment Management Corp., 2015 ABQB 621 relied on the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71 to extend the common law duty of good faith to include an employer’s exercise of discretionary power under an employment contract to dismiss an employee without cause.

David Styles was employed by AIMCO as a Vice President.  At the time that he was hired, his employment agreement included a Long Term Incentive Plan (LTIP) as well as a termination provision which gave AIMCO the discretion to terminate his employment without cause as long as AIMCO provided the notice or pay set out in the agreement.  AIMCO terminated Styles without cause and paid him a lump sum amount, which did not include his LTIP.

Styles sued, claiming he was entitled to receive payment under his LTIP.  AIMCO’s position was that under the terms of the LTIP, he was not entitled to payment due to his termination.

The Alberta Court agreed with Styles and awarded over $400,000 in damages finding that AIMCO had breached its duty to treat Styles fairly in the manner in which he was terminated.  The Court focused on the employer’s failure to provide any evidence for Styles’ termination, particularly given his prior exemplary performance:

“While there is no evidence that the termination in this case was done in bad faith, the employer’s actions have created circumstances under which the employee is unable to receive his LTIP grants.  The employer has provided no evidence as to the reasons for termination and no reasonable explanation for the associated or consequential denial of the LTIP grants.  The contractual power of the employer to terminate without cause cannot be considered in isolation from the consequences to the employee when the termination also has the effect of undermining the condition necessary for the employee to receive his LTIP grants. The exercise of the discretion to terminate in this case is not just about termination.  It is also about triggering a deprivation of employee earned benefits on which the contract was based.  It is not fair for the employer to take the benefit of the employee’s hard work and then exercise a discretion which has the effect of depriving the employee of the compensation earned for that hard work.  When the exercise of the employer’s discretionary contractual power to terminate without cause is combined with the exercise of the discretion to deny the employee of any LTIP grants, the resulting deprivation of LTIP benefits previously awarded to and approved for the Plaintiff employee is unfair; and, given the inexplicable or unjustifiable nature of the deprivation outside the framework of discretion, appears to be arbitrary.”

The Albert Court concluded that the termination of the employment contract in this case “flies in the face of the Supreme Court’s comment that ‘contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests’.

The Court summarized:

“In other words, though the employer has the right to terminate without cause and thereby determine the composition of its work force, it cannot do it in a manner that unfairly undermines the legitimate contractual interests of the employee.”

The decision has been appealed to the Alberta Court of Appeal.  Unless overturned, this decision suggests that employers should err on the side of providing employees clear reasons for dismissal without cause which would show that the decision is not capricious or arbitrary, particularly where the effect of the dismissal may be to deny an employee an award of long-term incentives or bonus payment.