Discretionary bonus carries an implied condition, court stresses
In Bowen v. JC Clark Ltd, 2022 ONCA 614, the Ontario Court of Appeal allowed the plaintiffs’ appeal in part, finding that the trial judge should not have prevented the appellants from claiming a discretionary bonus from the respondent upon their termination. The court found the case record sufficient to conclude that the appellants were entitled to a discretionary bonus of $115,000 each.
The two appellants, in this case, were portfolio managers of a hedge fund acquired by the respondent in late 2012 from Martin Braun. The respondent hired the appellants as portfolio managers alongside Braun. The respondent’s employment agreements with the appellants gave them, among others, a year-end bonus “[at] the total discretion” of the respondent, depending on factors such as personal performance and company profits.
Braun also had a side agreement with the appellants sharing 50 percent of his share in the management fees and 100 percent of his share in the fund’s performance fees. The respondent was aware of the arrangement Braun had cooked up as an incentive for the appellants to work hard but did not include it in their employment agreements to give Braun control over the payout.
The parties followed this arrangement from 2012 to 2014. The fund performed “exceptionally well” during the first half of 2014 when the respondent terminated the appellants’ employment without cause in July. The respondent gave each appellant two-week, pro-rata salary and bonus in place of notice. Braun additionally paid his entire share of the 2014 performance to the appellants amounting to $358,000 each. The appellants were dissatisfied, believing themselves entitled to performance fees from the respondent.
The trial judge dismissed the appellants’ claim. First, she found that the appellants knew that they had two sources of remuneration – salary, benefits, and a bonus from the respondent and shares of the management and performance fees earned by the fund from Braun – and that the performance fees came from Braun alone. Second, she did not allow the appellants to make submissions on their entitlement to the discretionary bonus mentioned in their employment agreements with the respondent, as she found the claim was not sufficiently pleaded.
The Ontario Court of Appeal agreed that the appellants were not entitled to a share of the performance fees of the fund beyond that given by Braun under their side agreement. Despite the respondent’s other portfolio managers being paid performance fees based on a 40/30/30 formula, this did not apply to the appellants, whose fees were clearly structured under different terms.
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In contrast, the appeal court overturned the trial judge’s refusal to hear the appellants’ arguments on entitlement to a discretionary bonus under their employment agreement. While the appeal court noticed that the appellants sometimes conflated their claim for performance fees with entitlement to discretionary bonuses, the pleadings and positions taken during the trial clarified that the appellants were making two separate claims. The respondent was sufficiently notified of them, as it had stated as a defence that the discretionary bonus created an unconstrained discretion on its part.
The appeal court did not agree. Relying on Bain v. UBS, 2016 ONSC 5362, Greenberg v. Meffert, 1985 CanLII 1975 (ON CA), and Chann v. RBC Dominion Securities Inc, 2004 CanLII 66310 (ON SC), it ruled that where an employment agreement provides for a discretionary bonus, there is an implied term that the discretion will be exercised fairly and reasonably. It calculated the appellants’ discretionary bonuses based on those paid in 2014 to two similarly situated portfolio managers of the respondent and pro-rated this for the seven months the appellants worked at the respondent in 2014, including the two-week notice period.
