Since Bhasin v Hrynew, 2014 SCC 71, courts have been applying the “organizing principle” of good faith in all contractual relationships thereby delinating its scope in different cirucmstances. One recent decision applying this principle addressess the circumstances where an employer excercises a discretionary contractual right to effectively deny an employee his compensation under a benefits plan.
In Styles v Alberta Investment Management Corporation, 2015 ABQB 621, the Plaintiff employee received a offer of employment where (i) the Defendant employer could terminate the employee without cause and (ii) the employee would be entitlted to participate in a long term incentive plan (the “LTIP”) i.e., performance based compensation. For unknown reasons, the employer choose to excercise it’s discretionary authority to terminate the employee without cause but refused to make payment to the employee under the LTIP, on the grounds that the employee was terminated before the maturity date, a violation of a condition precedent and/or act constituting forfeiture of the LTIP bonus.
The Alberta Court of Queen’s Bench held that while the employer had the right to terminate the employee without cause, it could not do so in a manner that unfairly undermines the legitimate contractual interests of the employee (para 71):
[…] [I]t is reasonable to recognize as a manifestation of the general organizing principle of good faith, a common law duty which requires that discretionary powers granted under a contract must be exercised fairly and reasonably and not in a manner that is “capricious” or “arbitrary” (para 63).
In holding that it was unfair for the employer to receive the benefit of the employee’s hard work and then refuse him compensantion through the exercise of its discretionary power, the court determined it was “reasonable for the employee to have assumed that as long as it performed, he would be compensated as promised, and that the employer would not act in an arbitrary manner to unfairly take away that compensation” (para 117). The court concluded that the employer’s exercise of its discretionary power was unfair, unreasonable and arbitrary and awarded damages to the employee.