Be Wary of Ambiguity: A “Bonus” Lesson for Employers

November 2017

Article by: Ryan Copeland

Previously printed in the LexisNexis Labour Notes Newsletter.

The recent BC Supreme Court case of Kenny v. Weatherhaven Global Resources Ltd., [2017] B.C.J. No. 1510 (S.C.) illustrates the perils of poorly drafted employment agreements.

After being dismissed without cause, the plaintiff claimed unpaid bonuses for prior years and for the 12-month notice period immediately following the termination of his employment. The plaintiff’s claims were based on contractual terms, which he argued guaranteed a minimum bonus of 20 percent of his base salary for the periods in dispute.

The defendant opposed the relief sought, asserting that the plaintiff was merely eligible for bonuses, with the actual determination on whether to pay out any bonus, and in what amount, being at the defendant’s discretion based on the achievement of corporate and individual objectives.

The key contractual provision in this dispute stated that the plaintiff “will be eligible to receive a minimum of 20% and up to 60% of the Base Salary annually, as a performance bonus (the ‘Bonus’), less applicable tax withholdings required by law, based on the achievement of corporate objectives and personal objectives as mutually agreed to by the Company and the Executive”.

The Court agreed that there was ambiguity in this provision of the contract. To resolve the ambiguity, the Court applied a series of contract interpretation principles which should be kept in mind by employers when drafting employment terms.

First, the Court acknowledged that it was necessary to construe the plain language and ordinary meaning of the words used, having regard to the context of the contract as a whole.

Second, the Court held that it could consider evidence of the factual matrix or surrounding circumstances when the contract was made. In other words, the Court was prepared to examine the circumstances the parties knew or reasonably ought to have known in order to assist in determining the objective meaning of the words used.

Third, an interpretation of contract language must always be grounded in the text of the contract itself, meaning the surrounding circumstances cannot overwhelm the words used by the parties. For example, it would be improper to interpret a contract in such a way as to make one or more of its provisions ineffective.

Fourth, any ambiguity should be resolved so as to achieve a result consistent with commercial efficacy and good sense, as informed by considerations of reasonableness and fairness. In the context of employment agreements, contract interpretation should attempt to favour general employment law principles, including the protection of vulnerable employees in their dealings with their employers.  However, the Court was careful to acknowledge that general contract interpretation principles – including, in particular, discovery of the intention of the parties – will often prevail, even if doing so detracts from employment law goals which are otherwise presumed to apply.

Finally, if the relevant contractual term remains ambiguous after a review of the foregoing principles, the Court may apply the doctrine of contra proferentem, which requires resolution of ambiguity in favour of the party that did not draft the term (normally the employee).

Applying these principles, the Court held that the defendant’s interpretation rendered ineffective other terms in the agreement which related to the payout of bonuses on a change of control. The Court also found that the plaintiff’s interpretation aligned with commercial efficacy and good sense, as informed by considerations of reasonableness and fairness.  More specifically, interpreting the contract in favour of the plaintiff produced an objectively reasonable and consistent outcome, whereby in the event of either a change of control or dismissal without cause, the plaintiff would be entitled to any unpaid bonuses for the previous years’ work, a proportionate or prorated bonus for his work in the year in which he was dismissed, and compensation for the bonus he would have made in the next year had he continued working for the defendant.

Notably, the Court never really addressed the defendant’s central point – i.e. there is no unfairness to the plaintiff in the non-payment of past bonuses, or bonuses during the notice period, if those bonuses would not have been payable either because the plaintiff did not meet his performance objectives or the company did not attain its economic goals.

Lessons for Employers

Clearly, the various contract interpretation principles reviewed by the Court in Kenny v. Weatherhaven Global Resources Ltd. stack the deck in favour of employees.  To avoid unintended liability for discretionary bonuses, or indeed for any other kind of payment, the only real solution for employers is to draft unambiguous contractual terms which clearly outline when compensation will and will not be payable.  Fortunately, this can easily be done with a little foresight and attention to detail.