Court File and Parties
Court of Appeal for Ontario Date: 2022-08-29 Docket: C69373
Before: Feldman, George and Copeland JJ.A.
Between:
James Bowen and Jonathan Wiesblatt Plaintiffs (Appellants)
And:
JC Clark Ltd. Defendant (Respondent)
Counsel: Sara J. Erskine and Fraser Dickson, for the appellants James G. Knight and Laura J. Freitag, for the respondent
Heard: June 30, 2022
On appeal from the judgment of Justice Janet Leiper of the Superior Court of Justice, dated July 6, 2021, with reasons reported at 2021 ONSC 2016.
Overview
1The appellants were portfolio managers of a hedge fund. The hedge fund was acquired by the respondent in late 2012. As part of the acquisition, the appellants were hired by the respondent as portfolio managers for the fund. They worked at the respondent from December 3, 2012 until July 16, 2014, when their employment was terminated on a without-cause basis. At the time of their termination the appellants were each given two weeks’ salary plus $577 [1] in lieu of notice. The appellants commenced an action against the respondent seeking over $1.3 million in performance fees that they claim they were owed as a term of their employment for the portion of 2014 that they worked before their termination. The appellants appeal the decision of the trial judge dismissing their claim.
2The appellants challenge the trial judge’s finding that their only entitlement to a percentage of the performance fees of the fund was through a side agreement with Martin Braun, the lead portfolio manager of the fund, who had been the owner of the fund prior to its acquisition by the respondent. In particular, they challenge the finding of the trial judge that they were not entitled to an additional 30% [2] of the performance fees of the fund under the terms of their employment agreements with the respondent. They also challenge the trial judge’s ruling that they were not entitled to argue their entitlement to a discretionary bonus under a specific term in their employment agreements because the claim was insufficiently pleaded.
3I would allow the appeal in part for the reasons that follow. I would reject the appellants’ submissions in relation to their entitlement to performance fees, but I would find that the trial judge erred in precluding the appellants from arguing their entitlement to a discretionary bonus. In my view, the record is sufficient to assess the entitlement to a discretionary bonus and it is therefore not necessary to remit that issue to the trial judge.
Factual Background
4The appellants were hired by Martin Braun, a senior investment professional, in 2003. Braun had created and managed the Adaly Opportunity Fund (the “fund”) under the auspices of his investment firm, Adaly Investment Management Corp. The appellants started in junior roles, but by the spring of 2012, they were managing the fund under Braun’s supervision.
5In 2012, Braun negotiated the sale of the fund to the respondent company. The sale included terms that Braun join the respondent company to manage investor-client relationships at the fund. At Braun’s request, the respondent agreed to hire the appellants to manage the day-to-day activities of the fund. Braun and the appellants were to be the fund’s three portfolio managers. The sale terms were initially set out in term sheets, which Braun shared with the appellants. To complete the sale, Braun signed a “combination agreement” with the respondent which replaced the term sheets. The combination agreement provided that for four years after the sale of the fund, Braun would receive a 40% share of the management fees and a 40% share of the performance fees earned by the fund.
6The combination agreement required the respondent to offer employment to the appellants. It prescribed an employment offer to the appellants as follows:
2.6(e)(ii) [the respondent shall] offer employment … to each of [the appellants] pursuant to an employment agreement … which … shall provide, among other things:
(i) for a base salary of $100,000 per annum;
(ii) for the potential (but not a guarantee) of [the appellants] to be part of a discretionary bonus pool established by [the respondent];
(iii) [RRSP contribution matching up to $5,000];
(iv) for [the appellants] to receive such portions of the Allocated Trailer Amounts and Allocated Fee Amounts as may be determined by Braun; and
(v) [a benefits package].
7The combination agreement gave Braun the discretion to share his entitlement to 40% of any fees earned by the fund with the appellants. Braun asked the respondent for this mechanism to provide an incentive for the appellants to work hard. Braun shared drafts of the combination agreement with the appellants, but the appellants did not receive a copy of the final signed version of the combination agreement. Clause 2.6(e)(ii), above, was included in the drafts provided to the appellants and in the final version signed by the respondent and Braun. Braun told the appellants of his intention to share fees with them before they signed their employment agreements with the respondent. He said he would pay the appellants 50% of the management fees and 100% of the performance fees which were allocated to him.
8The respondent sent draft employment agreements for each of the appellants to Braun in October 2012. The finalized employment agreements, which were identical for both appellants, included a base salary of $100,000, health and dental benefits, and an RRSP-matching provision. They also contained a discretionary bonus provision ( paragraph 5 of each employment agreement), which reads, “At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.”
9All of these terms were consistent with the language of the employment offer term in the combination agreement (clause 2.6(e)(ii)).
10Executives of the respondent, Colin Stewart and Jennifer Doherty, contemplated referring to the performance fee payout provisions from the combination agreement in the appellants’ employment agreements, but decided against doing so given that Braun would control the payout of the 40% performance fee share, and because referring to the performance fees would be inconsistent with the other employment agreements at the respondent company, which do not mention performance fees. Although the appellant Wiesblatt initially testified that he believed the bonus provision at paragraph 5 of his employment agreement encompassed both a discretionary bonus and an entitlement to performance fees, he agreed in cross-examination that the bonus provision had “nothing to do with performance fees”.
11Braun and the appellants began working at the respondent in December 2012. The appellants’ role was to manage the day-to-day activities of the fund. Because the fund did not earn performance fees in 2012, there were no fees to allocate in 2013. In December 2013, each of the appellants received a discretionary bonus of $15,000 from the respondent. By year-end of 2013, the fund earned performance fees of over $121,000. In January 2014, Braun directed the respondent to take his 40% share of the performance fees, which he was entitled to under the combination agreement, and share it equally between the appellants, resulting in a payout of just over $24,000 to each appellant. Thus, for 2013, each appellant received a discretionary bonus of $15,000, and a performance fee sharing payment from Braun’s allocation of just over $24,000.
12During the first half of 2014, the fund performed exceptionally well under the appellants’ management. However, in July 2014, the respondent terminated the appellants’ employment on a without-cause basis after the relationship between the respondent and the appellants deteriorated. Braun remained at the respondent company. Braun directed his entire 40% share of the 2014 performance fees to be paid to the appellants, amounting to $358,000 after tax for each appellant. The appellants were dissatisfied with their share of the 2014 performance fees that they received at Braun’s direction from the respondent, and took the position that they were also entitled to be paid performance fees by the respondent.
The Trial Judge’s Reasons
13The trial judge found that the appellants had two sources of remuneration: the respondent paid them employment income, a discretionary bonus, and benefits under the employment agreements; and Braun paid them a percentage of the performance fees of the fund from the 40% share paid to him by the respondent. She found that this mechanism was known to the appellants when they signed their employment agreements, which expressly provided for salary, bonus, and benefits, but were silent as to any entitlement to performance fees. She found that the appellants’ knowledge of these sources of their remuneration was further supported by their request and receipt of two signed side agreements with Braun, dated November 29, 2012 and December 1, 2012, in which he formalized his intention to share with them 50% of the fund’s management fees that were allocated to him and 100% of the fund’s performance fees that were allocated to him.
14The trial judge found that the bonus provision in paragraph 5 of the employment agreements referred only to the discretionary bonus payable at fiscal year end, but not to any performance fees.
15She dismissed the appellants’ claim, finding that Braun paid the appellants the performance fees to which they were entitled for the portion of the year they worked in 2014, and that the appellants were not entitled to a share of performance fees directly from the respondent. She declined to allow the appellants to make submissions on their entitlement to a discretionary bonus under paragraph 5 of the employment agreements for the portion of the year they worked in 2014 on the basis that the claim was not sufficiently pleaded and it would therefore be unfair to the respondent.
Analysis
16The appellants frame the issues raised on appeal as follows:
i. that the trial judge failed to interpret the appellants’ employment agreements and determine (a) what the bonus provisions in the appellants’ employment agreements mean and include; and (b) the source of the appellants’ entitlement to performance fees from the respondent;
ii. that the trial judge failed to correctly apply the law to the appellants’ employment contractual and/or discretionary entitlements; and
iii. that the trial judge erred in determining that the appellants’ claim for a discretionary bonus was not properly pleaded or argued.
17In substance, the appellants’ submissions raise two issues. The first is a claim that the trial judge erred in finding that the appellants were not entitled to a percentage of the performance fees of the fund as an implied term of their employment agreements. The second is a claim that the trial judge erred in refusing to consider the appellants’ claim that they were entitled to a discretionary bonus under paragraph 5 of their employment agreements on the basis that the claim was insufficiently pleaded and argued. I address these two issues in turn below.
(1) Did the trial judge err in finding that the appellants were not entitled to 30% of the performance fees for the fund as an implied term of their employment agreements?
18I would not interfere with the result reached by the trial judge that the appellants were not entitled to a share of the performance fees of the fund beyond the share provided for in the combination agreement and the side agreements with Braun (i.e., 20% of the performance fees to each appellant, representing an equal division of the 40% share of the performance fees paid to Braun).
19Although the appellants testified that they believed that as part of their employment agreements they would receive 40% of the performance fees of the fund from the respondent (in addition to Braun paying them the 40% share of the performance fees that he received from the respondent), the trial judge did not accept their evidence. Without reproducing all of her analysis, the trial judge’s reasons demonstrate the nature of her factual findings:
I accept Braun and Stewart’s evidence about what was said about [the appellants’] entitlement to performance fees: this was provided for through the Combination Agreement and was a matter of Braun’s discretion. This mechanism was known to [the appellants] when they signed their employment agreements which provided for salary, bonus and benefits but were silent as to any entitlement to performance fees. The words “performance fees” do not appear in the employment agreements, nor is there any definition that could be said to describe the calculation or fact of performance fees as part of the remuneration offered to [the appellants]. This is consistent with [the appellant] Wiesblatt’s evidence in which he adopted his earlier answer that the bonus provisions in his employment agreement had nothing to do with performance fees.
[The appellants’] knowledge of the sources of remuneration is further supported by their request and receipt of two signed side agreements dated November 29, 2012 and December 1, 2012 with Braun in which he formalized his intention to share 50% of management fees and 100% of the Fund’s performance fees with them.
According to the evidence from Stewart and Braun, [the appellants] knew of the decision responsibilities for their sources of remuneration: [the respondent] for employment income, bonuses and benefits and Braun for management and performance fees. Delegating responsibility to Braun of a potentially significant source of income may have contributed to the deterioration of [the appellants’] relationships with [the respondent’s] management. As can be seen, the relationships progressively worsened as the Fund’s performance, and the anticipated fees related to performance, increased.
20The trial judge found that the appellants were aware of the arrangement that they would be paid a share of the performance fees of the fund through Braun, rather than directly by the respondent, at the time that they signed their employment agreements. She found that a plain reading of the employment agreements signed by the appellants, in the circumstances known to the parties at the time, revealed that the performance fees were not owed to the appellants by the respondent under the terms of those agreements.
21In a number of places in her reasons, the trial judge characterizes the appellants’ state of mind as “knowledge” or “awareness” of the fact that a share of the performance fees would be paid to them only through Braun, and not directly from the respondent as a term of their employment agreements. However, in the context of her reasons as a whole, it is clear that she found that the appellants agreed to these terms – they had knowledge that they would be paid a share of the performance fees only through Braun, and possessing this knowledge, they signed the employment agreements that did not provide for any performance fees to be paid by the respondent to the appellants.
22The record and the trial judge’s findings disclose that the appellants were not entirely happy with this arrangement, and over time they tried to renegotiate it. But their disgruntlement does not change the fact that they agreed to the terms of the employment agreements when they signed them.
23The appellants submit that all of the other portfolio managers and investment team members at the respondent company were paid performance fees in accordance with a 40/30/30 formula [3] and therefore such a term should be implied in their employment agreements, and that it would be unfair to them as employees not to imply such a term into their agreements. The appellants also submit that for them not to earn performance fees on the 40/30/30 formula would be inconsistent with industry practice.
24I do not accept this submission. The record at trial supports that the 40/30/30 split was agreed to as a term of employment of other portfolio managers, even if not reduced to writing. As I have explained, the record and the findings of the trial judge do not support that an agreement was reached between the appellants and the respondent about being paid performance fees based on the 40/30/30 formula. Rather, the agreement was that the appellants would be paid performance fees through the 40% share allocated to Braun under the combination agreement.
25Based on the findings of the trial judge, this conclusion was neither unfair nor inconsistent with industry practice. The appellants were paid a share of the performance fees of the fund; however, the manner of their payment was structured differently than for other portfolio managers and investment team members with other funds at the respondent company because the fund that the appellants managed had recently been acquired by the respondent, and because of the structure of that acquisition. The trial judge accepted the evidence of the respondent’s expert that an arrangement where a senior portfolio manager, such as Braun, is given discretion to direct payout of performance fees to more junior portfolio managers, such as the appellants, was consistent with industry practice. I see no basis to interfere with the trial judge’s conclusion on this issue, which she stated as follows:
I conclude that the context is consistent with the wording of the employment agreements: there was no commitment to pay any performance fees under the plain wording of those contracts. Further, the Combination Agreement provisions were for [the respondent] to pay Braun the fees and allow him to allocate those to [the appellants]. This discretion, along with Braun’s stated intention to share these generously with [the appellants], is an objective set of facts that support a conclusion that this transaction and the agreements, operating together, were consistent with industry standards and practices for remuneration. With all of this in play, I conclude that [the respondent] was not required to explicitly state that performance fees were excluded from the employment agreements. It was clear to all the parties that they were not provided for in the employment agreements.
26Thus, I find no error in the trial judge’s conclusion that the appellants were not entitled to a share of the performance fees of the fund directly from the respondent for 2014. They were entitled to be paid performance fees through Braun from the 40% share of the performance fees that he was entitled to under the combination agreement, and Braun directed his entire 40% share of the performance fees of the fund for 2014 to the appellants.
(2) Did the trial judge err in refusing to consider whether the appellants were entitled to a discretionary bonus on the basis that the issue was insufficiently pleaded and argued?
27As noted above, paragraph 5 of the appellants’ employment agreements provides for a discretionary bonus. The appellants sought to argue at trial that, even if they were not entitled to a percentage of the performance fees of the fund, paragraph 5 of their employment agreements provided for a discretionary bonus which was not based on a direct percentage of the fund’s performance fees.
28The trial judge declined to allow the appellants to argue their entitlement to a discretionary bonus under paragraph 5 of the employment agreements for the portion of 2014 that they worked. She held that the claim for a discretionary bonus was insufficiently pleaded or identified as an issue at trial.
29I conclude that the trial judge erred in refusing to allow the appellants to argue their entitlement to a discretionary bonus under paragraph 5 of the employment agreements. In my view, this issue was sufficiently pleaded in the amended statement of claim and was sufficiently raised in the submissions and evidence at trial. Although the respondent objected at trial – and maintains its objection on appeal – to the appellants claiming a discretionary bonus, I am not persuaded that there is any unfairness to the respondent in allowing the appellants to advance this aspect of their claim.
30The amended statement of claim pleads specific amounts of damages for breach of contract, which are based on the 40/30/30 formula for allocation of performance fees. The amended statement of claim refers to this allocation as the “Bonus Structure”. However, the amended statement of claim also asserts that the respondent “paid bonuses to the [appellants]” during their employment with the respondent. The respondent took the position in its statement of defence and at trial that any bonus amounts paid by the respondent to the appellants during their employment (as distinct from a share of the performance fees paid by Braun to the appellants) was a discretionary bonus under paragraph 5 of the employment agreements, and had nothing to do with performance fees. Read in this context, it is clear that, to some extent, the amended statement of claim conflates the claim for performance fees with the entitlement to a discretionary bonus under the employment agreements. The opening submissions of counsel for the appellants at trial also conflated the discretionary bonus under paragraph 5 of the employment agreements with the performance fees.
31The substance of the appellants’ claim was that they were entitled to non-salary amounts due for the period they worked in 2014, plus the two-week notice period. This included the discretionary bonus under paragraph 5 of the employment agreements. Although the amended statement of claim could have been clearer, the pleadings and the positions taken at trial made clear that the appellants were seeking not only a percentage of the performance fees of the fund, but also whatever discretionary bonus they were entitled to under paragraph 5 of the employment agreements.
32The respondent could not have been taken by surprise by the claim for the discretionary bonus under paragraph 5 of the employment agreements. Indeed, in its statement of defence, the respondent expressly pleaded that paragraph 5 of the employment agreements provided only for a discretionary bonus, that it was the only bonus provision in the contract, and that it was distinct from performance fees (but the respondent took the position that the discretionary bonus provision created an unconstrained discretion in the employer, and that it complied with the employment agreements in relation to discretionary bonuses). As set out earlier in these reasons, paragraph 5 of the employment agreements expressly provides that the appellants were entitled to a discretionary bonus.
33The respondent submits that the evidentiary record from the trial is insufficient for either the trial court or this court to address the discretionary bonus issue. I disagree. Indeed, in a submission on this issue at trial during the evidence of Bowen, counsel for the respondent said there would be evidence from Stewart on the issue of how discretionary bonuses under terms such as the one in paragraph 5 of the employment agreements were awarded at the respondent company. And, in the event, such evidence was led, which I return to below.
34In sum, allowing the appellants to argue their entitlement to a discretionary bonus under paragraph 5 of the employment agreements would not cause unfairness to the respondent. There was no dispute that paragraph 5 of the employment agreements created a discretionary entitlement to a bonus unrelated to performance fees. The respondent could not have been taken by surprise by this issue.
(i) Entitlement to the discretionary bonus under paragraph 5
35I do not accept the respondent’s position that the discretionary nature of the bonus provision in paragraph 5 of the employment agreements means that the employer was entirely unconstrained as to how that discretion was exercised. Where an employment agreement provides for a discretionary bonus, there is an implied term that the discretion will be exercised in a fair and reasonable manner: see Bain v. UBS, 2016 ONSC 5362, at paras. 85-90, aff’d 2018 ONCA 190, 46 C.C.E.L. (4th) 50; Greenberg v. Meffert (1985), 18 D.L.R. (4th) 548 (Ont. C.A.), at pp. 555-56, leave to appeal refused, [1985] 2 S.C.R. ix; and Chann v. RBC Dominion Securities Inc. (2004), 34 C.C.E.L. (3d) 244 (Ont. S.C.), at para. 48.
36The issue then is whether a fair and reasonable exercise of the discretion provided for in paragraph 5 of the employment agreements would result in the appellants being awarded a discretionary bonus for the period they worked in 2014 plus the two-week notice period, and, if so, the quantum.
37Because the trial judge did not allow the appellants to argue the entitlement to a discretionary bonus under paragraph 5 of the employment agreements, she made no findings about the quantum of any discretionary bonus the appellants were entitled to for the period they worked in 2014 (January 1, 2014 to July 16, 2014, plus two weeks’ notice, i.e., until July 31, 2014 – a period of seven months).
38The only discretionary bonus the appellants were paid in 2014 was $577 each, which was referred to in their termination letters as a “2-week pro-rata bonus” for the two-week notice period. Thus, they were given no discretionary bonus whatsoever for the period from January 1, 2014 until July 16, 2014, and $577 each for the period from July 17, 2014 to July 31, 2014. This was not a fair and reasonable exercise of the employer’s discretion in all of the circumstances.
39The appellants submit that the discretionary bonus amount should be calculated by comparison with the discretionary bonus amounts that were paid in 2014 to two employees who, in the appellants’ submission, were similarly situated to the appellants. The respondent submits that the assessment of the quantum of the discretionary bonus should be remitted to the trial judge.
40I am satisfied that the record below is sufficient for this court to set the quantum of the discretionary bonus.
41The evidence of the representatives of the respondent at trial, in particular Stewart (but to some extent also Doherty), was that Stewart and Doherty met in December of each year to consider the allocation of discretionary bonuses from a pool of funds set aside for that purpose. They considered a variety of factors, including corporate performance, individual performance, attitude, teamwork, and how individuals were performing in their roles. To some extent, the allocation of bonuses also took into account factors including how long individuals had been at the firm, their seniority, and their position within the company. The allocation of bonuses to employees was, as Stewart phrased it, “purely subjective”; the allocation was discretionary, and no calculations were involved. I note that, to the extent that this evidence asserted an unconstrained discretion on the respondent with respect to awarding bonuses, it is inconsistent with the obligation to exercise that discretion in a fair and reasonable manner. In cross-examination, Stewart agreed that considerations such as fund performance in a given year, raising assets for a fund, and marketing a fund would also be factored into assessing the amount of a discretionary bonus.
42The employees to whom the appellants submit they are similarly situated are Veeral Khatri and John Dynes, who were also employed at the respondent as portfolio managers. The funds Khatri and Dynes worked on did not perform as well as the funds the appellants managed in 2014. In the circumstances, I accept that Khatri and Dynes were similarly situated to the appellants for the purpose of considering the appellants’ discretionary bonus entitlement. In 2014, for the full year, Khatri received discretionary bonuses of $115,000 plus $85,277.50, totalling $200,277.50, and Dynes received discretionary bonuses of $110,000 plus $85,277.50, totalling $195,277.50. Thus, Khatri and Dynes received roughly $200,000 each in discretionary bonus for the full year of 2014.
43The objective evidence is that there was a significant bonus pool in 2014, based on the bonuses awarded to other portfolio managers. It was also uncontradicted that the fund managed by the appellants earned remarkable returns during the portion of 2014 prior to the appellants’ terminations in July 2014 (and for 2014 as a whole, although less so after the appellants’ terminations). Doherty, the Chief Operating Officer of the respondent, described the fund’s returns in 2014 as “jaw dropping”.
44In light of the evidence that the discretionary bonuses were awarded based on corporate performance, individual performance, and other factors as outlined above; considering that it was clear that the respondent allocated significant sums to discretionary bonuses for portfolio managers for the 2014 year; and considering the remarkable returns of the fund for the period in 2014 when the appellants were still managing the fund, as well as the returns of the fund in 2014 as a whole, I am satisfied that a fair and reasonable exercise of the discretion under paragraph 5 of the employment agreements would be to award each appellant a discretionary bonus in the same range awarded to the similarly-situated employees, Khatri and Dynes, for 2014. This amount shall be pro-rated for the seven months that the appellants worked at the respondent in 2014, including the two-week notice period. Based on $200,000 as the approximate bonus amount paid to each of Khatri and Dynes in 2014, pro-rating to seven months works out to roughly $116,000. As the appellants sought $115,000 in their trial submissions and in their factum on appeal, I would award damages to each appellant in the amount of $115,000, plus pre- and post-judgment interest, for the discretionary bonus that each of them was entitled to for the seven months of 2014 they worked at the respondent.
45Although the respondent pleaded and to some extent led evidence that its management had concerns about the appellants’ attitudes of not behaving like team players, and was concerned at the time of the termination that the appellants were planning to leave and start a competing fund, the appellants were dismissed on a without-cause basis. Further, on the record before the court, the returns of the fund and the bonuses paid to other similarly-situated portfolio managers are the best objective evidence of the bonus that would result from a fair and reasonable exercise of the employer’s discretion.
Disposition
46I would allow the appeal in part. I would set aside the judgment, and grant judgment to each appellant in the amount of $115,000, plus pre and post-judgment interest at the rates outlined in the Courts of Justice Act, R.S.O. 1990, c. C. 43.
47To reflect the mixed success on the appeal, I would award costs of the appeal to the appellants in the amount of $10,000, inclusive of HST and disbursements, and reduce the costs award in the court below to $160,000, inclusive of disbursements and HST.
Released: August 29, 2022 “K.F.”
“J. Copeland J.A.”
“I agree K. Feldman J.A.”
“I agree J. George J.A.”
Footnotes
[1] The termination letters characterized the $577 as a pro-rated bonus amount for the two-week notice period. The trial evidence confirmed that the $577 was based on pro-rating the $15,000 bonus that each appellant had been given in December 2013 for the 2013 year. The appellants were also given amounts for pro-rated RRSP contribution matching pursuant to their employment agreements at the time of their termination. [2] At trial, the appellants’ position was that they were entitled to 40% of the performance fees. [3] 40% to the lead portfolio manager, 30% to the investment team, and 30% to the respondent company.