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Alberta Court of Appeal Upholds Long Term Incentive Plan Delayed Vesting

04-Jan-17

By Hugh McPhail, Q.C.

In a decision issued today, the Court of Appeal allowed the employer’s appeal in a case involving the Alberta Investment Management Corporation. Vicki Giles and Hugh McPhail of McLennan Ross were successful counsel in the appeal. The trial decision in the Court of Queen’s Bench had sent shock waves through employers because of both the result and other broader ramifications.

The Queen’s Bench decision had seriously threatened the continued operation of long-term incentive plans (“LTIP”) because it gave judgment for LTIP grants although the employee had been terminated well before the vesting/payout date. It treated them as entitlements which were enforceable. It determined that an employer was unreasonable to apply the terms of an agreement which clearly required employment on the date of payout in order to receive LTIP payments. It ignored 6 places where the agreements with the employee stated that he had to be actively employed on the payout date in order to receive his LTIP “bonuses”. The agreements made it clear that an employee who was terminated without cause was no longer “actively employed” (i.e. the period covered by pay in lieu of reasonable notice did not qualify as “active employment”).

In arriving at its decision, the Court of Appeal criticized the trial judge for her conclusion that the denial of payment was the exercise of a discretion for the simple reason that it is not an exercise of discretion to follow the clear terms of a contract. Secondly, she was criticized for concluding that the decision to terminate employment without cause is an exercise of discretion. The Court of Appeal also noted that there is no common law principle that an employee is somehow entitled to bonuses unless a reasonable basis for the termination is shown.

Of broader importance, the Court of Appeal also squarely rejected the trial judge’s creation of a “common law duty of reasonable exercise of discretionary contractual power” with the Court noting that “this radical extension of the law is unsupported by authority, inconsistent with the leading Supreme Court of Canada decisions, and contrary to the principles of the law of contract.” In an affirmation of core principles, the Court noted that “unless a contract is unconscionable or contrary to public policy, it is to be enforced in accordance with its terms.” It said it is not the job of the courts to decide if “rights granted by contracts…are ‘fair’, or whether the consequences of performance are more or less advantageous to either party than that party might have hoped or desired.” Quoting from the Supreme Court of Canada decision in Bhasin v. Hrynew, it cautioned that the courts must not “veer into a form of ad hoc judicial moralism or “palm tree justice”, implicitly accepting the employer’s arguments that that was what the trial judge did.

As noted in the concurring reasons of one of the three justices, the case should have been decided on a plain reading of the contract between the parties. It was clear that LTIP units may have been granted but that there was no entitlement to payment if you were not employed on the payout date which in this case was 4 years later. The case therefore emphasizes the considerable importance of careful wording of these plans. Expert assistance is vital. They have to be clear, and, if they are, this decision sends a resounding message that LTIPs, like other contracts, will be upheld by the courts.
 

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