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Exclusion Clauses and the Duty of Good Faith in Employment Contracts

3 minute read

The common law duty of good faith and honest performance in contracts was formally recognized by the Supreme Court of Canada in its 2014 decision in Bhasin v. Hrynew 2014 SCC 71.  This decision did not relate to an employment contract or relationship.  Six years later, it appears likely that the impact of this principle will be fully understood in the employment context as the Supreme Court of Canada is expected to release a decision in 2020 related to exclusion clauses in employment contracts.

In Canada Ltd. v. Matthews 2018 NSCA 44, the Nova Scotia Court of Appeal determined that, notwithstanding the fact that the employer may have breached its duty of good faith (the principle discussed in Bhasin v. Hrynew), because of an exclusionary clause in an executive’s employment contract, he was not entitled to the compensation outlined in a long-term incentive plan (LTIP) for the duration of the notice period. The Court of Appeal emphasized the language of the LTIP clause which stated, in part:

“ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.”

The Nova Scotia Court of Appeal’s decision was similar to a decision made by Ontario’s top court in Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512.  In Dawe, the Court of Appeal for Ontario held that where a bonus plan unambiguously provides that an employee will not be entitled to a bonus payment during the notice period, and if this fact is sufficiently brought to the attention of the employee, then the employee will not be entitled to that bonus payment. Similarly, in Matthews, the Nova Scotia Court of Appeal held that the language of the LTIP clause was unambiguous, and notwithstanding that the employer may have breached its duty of good faith, the employee was not entitled to the bonus payment. The decision in Matthews was appealed and the Supreme Court heard the case in October 2019.  It is expected that the decision will be released in 2020.

The Supreme Court’s decision to hear the case is itself interesting insofar as it signals the court’s willingness to hear arguments about the employer’s implied duty of good faith and consider what type of damages the employee is entitled to because of that breach. The employee argued that he should be entitled to those damages he would have been entitled to had the employer not breached its duty of good faith, i.e. the amounts under the LTIP for the notice period. The employer argued that any such breach could be compensated with aggravated or punitive damages.  If the court determines that an otherwise clear exclusion clause cannot be relied upon because the duty of good faith and honest performance was breached, then it will have far reaching effects for employers. Exposure to damage awards may increase as an employer will not as readily be able to rely upon the clear wording of an exclusion clause in the employment contract.

Lerners LLP will continue to monitor the situation and provide an update once the decision is released. If you have any questions regarding an employer’s duty of good faith and honest performance, or an employee’s entitlement under a bonus plan, our team would be happy to help.

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George A. Hamzo

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