Background
In McElgunn v Vermilion Energy Inc, the Court of King’s Bench of Alberta considered an appeal from an arbitration award concerning a wrongfully dismissed employee’s entitlement to share-based compensation that would have vested during her reasonable notice period. The decision applies the Supreme Court of Canada’s framework from Matthews v Ocean Nutrition Limited, 2020 SCC 26, and offers important guidance on the standard required for exclusionary language in bonus entitlement and incentive plans to effectively remove an employee’s entitlement to compensation that would have been earned during the notice period.
The employee was a Senior Geological Advisor who had worked for the employer for approximately nine years when her employment was terminated without cause on August 24, 2022. The parties agreed to arbitrate the wrongful dismissal dispute. The arbitrator found that the employee was entitled to 10 months’ reasonable notice, establishing a notice period running to June 24, 2023.
At issue on appeal was a grant of 7,053 company shares under the employer’s incentive plan, scheduled to vest on April 1, 2023, a date that fell within the reasonable notice period. The arbitrator concluded that the employee was disentitled to those shares by virtue of an early termination provision in the 2020 version of the plan (the 2020 Early Termination Provision). The employee appealed on two grounds: procedural fairness, and the arbitrator’s application of the Matthews test.
Issue One: Procedural Fairness
The arbitrator’s conclusion that the 2020 plan bound the employee turned in part on a Board Amendment Provision in the original 2012 version of the plan, which authorized the employer’s board of directors to amend it. The employee argued that the employer had not expressly relied on this provision in the arbitration, and that she had been denied a fair opportunity to respond to it.
The Court dismissed this ground of appeal. Applying the principles set out in Esfahani v Samimi, 2022 ABKB 795, the Court noted that arbitration entitles parties to a fair hearing, not a perfect one, and that courts should only intervene for the most egregious procedural breaches. Three considerations informed the conclusion that no such breach had occurred.
First, the validity of the amendments to the plan was squarely at issue in the arbitration, and all relevant contractual documents had been placed before the arbitrator by both parties. A decision-maker is required to interpret contractual provisions in the context of the entire contract, and the parties would reasonably have expected the arbitrator to do so.
Second, the employee herself had relied on documents that referenced the Board Amendment Provision. Her employment contract expressly stated that her share awards would be subject to the terms of the plan, and the 2012 version, which she had agreed to at the outset, included the Amendment Provision.
Third, even if a procedural fairness error had occurred, it could not have prejudiced the employee, because the underlying conclusion, that the 2020 plan bound her, was independently correct and was not itself under appeal. Each year, to receive a share award, the employee was required to affirmatively accept a new Share Award Agreement. In July 2020, she had done so through an online platform, acknowledging receipt of the 2020 plan, agreeing that her share award was subject to its terms, and accepting a link to the full document. There was no pathway to receiving the 2020 share award without accepting those terms.
Issue Two: Application of the Matthews Test
The more significant ground of appeal concerned the arbitrator’s application of part two of the Matthews test. The Court allowed this ground and found that the arbitrator had erred.
The Matthews Framework
The Supreme Court in Matthews established a two-step approach for determining whether a wrongfully dismissed employee is entitled to bonus entitlement or incentive compensation that would have been received during the reasonable notice period.
First, but for the termination, would the employee have been entitled to the bonus entitlement or benefit during the reasonable notice period? Neither party disputed that this question was answered affirmatively, the April 2023 vesting date fell within the notice period.
Second, does the wording of the relevant agreement or plan unambiguously remove or limit that entitlement? Because the plan was a unilateral contract whose terms had not been negotiated, the exclusion provision was required to be construed strictly and to meet a stringent standard: it had to “clearly cover the exact circumstances” and be “absolutely clear and unambiguous.”
The 2020 Early Termination Provision
The 2020 Early Termination Provision provided that, effective 90 days after the “Date of Termination,” all unvested share awards would be terminated and forfeited, notwithstanding any severance entitlements or notice obligations. The plan defined “Date of Termination” as “the actual date the Service Provider ceases to provide services to the Corporation, regardless of the reason for the cessation of services.”
The employer argued that this language clearly and unambiguously captured the employee’s situation, pointing in particular to the phrase “any notice period thereafter (whether actual or compensated in lieu thereof)” as demonstrating that the provision was specifically intended to address wrongful termination scenarios.
The Court disagreed and found that the 2020 Early Termination Provision did not meet the Matthews standard for several reasons.
The defined term “Date of Termination” was not clear. It could refer to August 24, 2022, the date of the wrongful termination, or to June 24, 2023, the end of the reasonable notice period during which, under Matthews, the employment contract effectively remained alive for compensation purposes. The words “actual” and “regardless of the reason for the cessation of services” did not resolve this ambiguity.
The Court also found that the “for clarity” clause at the end of the provision had the opposite effect. Rather than clarifying the timing of disentitlement, it introduced additional confusion about whether the 90-day period and the reasonable notice period ran consecutively or concurrently. The word “thereafter” strongly suggested a consecutive sequence, which would mean disentitlement did not occur until after both periods had elapsed, a result the employer clearly did not intend.
The Court noted that the employer was a sophisticated party fully capable of drafting precise language to address wrongful termination scenarios, and that it had simply not done so. Cases in which Alberta courts had found the Matthews standard to be met, including Kosteckyj v Paramount Resources Ltd, 2021 ABQB 225, and Hunsley v Canadian Energy Services LP, 2020 ABQB 724, involved considerably clearer language specifically targeting wrongfully terminated employees.
The appeal was allowed. The Court varied the arbitration award to include a direction that the employer pay damages to compensate the employee for the April 2023 share award she did not receive.
Analysis
McElgunn is a useful illustration of how courts apply the Matthews framework in practice, and in particular of the consequences that flow from imprecise drafting of incentive plan exclusion clauses.
The decision confirms that the threshold for exclusionary language to be effective is high. It is not sufficient for an employer to use broad language that might be read to capture wrongful termination scenarios, the language must do so clearly and unambiguously. Where a defined term is capable of more than one reasonable interpretation, or where the internal logic of a provision creates ambiguity rather than resolving it, that ambiguity will be resolved against the employer. This is especially so where the plan is a unilateral contract, as is common with employer-driven incentive programs.
The “for clarity” clause in this case is instructive. Language that purports to clarify but instead introduces competing interpretations is not merely unhelpful, it can actively undermine the enforceability of the broader provision. Drafters of incentive plans should treat such clauses with particular care.
The procedural fairness analysis also has practical relevance. Where parties to an arbitration place the full contractual record before the arbitrator and both engage with questions of contractual authority and amendment, the arbitrator is generally entitled to draw on the entire record in reaching its conclusions. A party cannot reasonably expect to benefit from selective engagement with only those provisions that favour its position.
Recommendations
For Lawyers and HR Professionals
Practitioners advising employers on the drafting or review of incentive plans should treat the Matthews test as the baseline standard against which all exclusionary language will be measured. The question is not whether the language could be read to cover wrongful termination scenarios, but whether it does so clearly and unambiguously on its face. Plans should explicitly address the scenario in which an employee is terminated without cause and without reasonable notice, and should define key terms, including any equivalent to “Date of Termination”, in a manner that leaves no doubt as to their application in that context.
Practitioners advising employees should note that vague or ambiguous exclusionary language will be construed strictly against the employer, and that the Matthews framework protects entitlements that arise during the reasonable notice period even where the employee has accepted annual plan documentation. The employee’s acceptance of updated plan terms does not automatically cure drafting deficiencies in those terms.
For those advising on arbitration strategy, McElgunn is a reminder that the full contractual record placed before the arbitrator is fair game, regardless of which party introduced any particular document. Parties should anticipate that arbitrators will read documents holistically.
For Employers
Employers who rely on incentive plans to form a meaningful part of employee compensation should ensure that those plans are reviewed by employment counsel specifically for compliance with the Matthews framework. A plan that has not been updated to address wrongful termination scenarios in clear and explicit terms creates real exposure on termination.
The cost of imprecise drafting is significant. In this case, the employer’s failure to use sufficiently precise language in its early termination provision resulted in a damages award covering a share grant that it had intended to forfeit. The investment in careful drafting at the plan level is substantially less than the litigation cost of defending ambiguous provisions.
Employers should also be attentive to the cumulative effect of plan amendments over time. Where a plan evolves through successive board amendments, each iteration should be reviewed to ensure that the exclusionary language remains effective and internally consistent. Provisions added as clarifications should be scrutinized carefully, as they may introduce new ambiguity.
For Employees
Employees who receive share awards, bonuses, or other incentive compensation as part of their remuneration should be aware that exclusionary language in those plans, however broadly worded, may not be effective to remove entitlements that arise during the reasonable notice period following a wrongful dismissal. The Matthews framework requires that such language meet a high standard before it will be given effect.
Where an employment relationship involves significant incentive compensation, employees should seek legal advice before accepting a termination package. The value of share awards or other benefits that would vest during the notice period can be substantial, and those entitlements are not automatically extinguished by the terms of the plan.
Employees should also be aware that accepting updated plan documentation each year, as required by many incentive programs, does not necessarily mean that all terms in those updates are enforceable against them in a wrongful dismissal context. The enforceability of exclusionary provisions turns on whether they meet the Matthews standard, not on the fact of acceptance alone.
You can learn more about wrongful dismissal in this article.
For Employees
Terminated while holding unvested shares or bonus entitlements? You may be entitled to more than you’ve been offered. Contact us to speak with an employment lawyer before you sign anything.
This article is intended for general informational purposes and does not constitute legal advice. Readers with questions about their specific circumstances should seek independent legal counsel.
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