Manastersky v. Royal Bank of Canada

[Indexed as: Manastersky v. Royal Bank of Canada]

Ontario Reports

Court of Appeal for Ontario

K.N. Feldman, D.M. Brown and B.W. Miller JJ.A.

July 18, 2019

146 O.R. (3d) 647 | 2019 ONCA 609

Case Summary

Employment — Wrongful dismissal — Damages — Wrongfully dismissed plaintiff participating in carried interest incentive plan while employed by defendant — Plan terminated after plaintiff was dismissed — Plaintiff receiving all profits to which he was entitled at time of termination — Trial judge erring in awarding plaintiff damages for lost opportunities to earn entitlements under plan during 18-month notice period — Trial judge not erring in accepting plaintiff's "date of investment" methodology for foreign exchange rate that should be applied to value U.S. dollar investments made prior to termination of plan.

The plaintiff was employed by the defendant as a director of an investment fund. During his employment, he participated in profit-sharing plans called "carried interest plans". From late 2004 until his termination in 2014, he participated in the Mezzanine Carried Interest Plan (the "CIP" or the "Plan"). The Plan was terminated after the plaintiff was dismissed, and he received all of the profits to which he was entitled at the time of the termination. The plaintiff sued for damages for wrongful dismissal. The defendant conceded that it terminated the plaintiff's employment without cause, and the trial judge found that the plaintiff was entitled to 18 months' notice of termination. The defendant did not appeal that finding. The trial judge awarded the plaintiff the sum of $953,392.50 in respect of the lost opportunity to earn entitlements under the Plan during the 18-month reasonable notice period. The defendant appealed that award. The trial judge also awarded the amount of $190,789 in respect of the plaintiff's share of investment proceeds under the Plan for the period 2005 to 2013, as calculated using the plaintiff's foreign exchange methodology. The defendant appealed that award, arguing that the trial judge erred in adopting the plaintiff's foreign exchange methodology.

Held, the appeal should be allowed in part.

Per D.M. Brown J.A. (B.W. Miller J.A. concurring): The employment contract and the surrounding circumstances of the employment relationship did not indicate that if the defendant terminated the Plan, it would have to be replaced by another carried interest plan or comparable form of compensation. Rather, the Plan clearly stated that the defendant had the right to terminate the Plan at the end of any investment period and that the status of a participant with respect to any investment period "shall not give any Participant the express or implied right . . . to any Points for any future Investment Period". The trial judge erred in finding that the plaintiff was presumptively entitled to common law damages in respect of the Plan merely because the payments under the Plan historically had constituted a significant form of compensation to him. While the trial judge did not expressly find that the defendant was obligated to establish some notional fund that would exist at least until the reasonable notice period came to an end, he reached the same position by resorting to the concept of constructive dismissal, stating that if the plaintiff had not been dismissed and the defendant had terminated the Plan without offering him some alternate, comparable form of compensation, that would in all likelihood have amounted to a constructive dismissal. The defendant's termination of the Plan in accordance with its terms, which were known and agreed to by the plaintiff, could not amount to conduct by the defendant that evinced an intention to no longer be bound by the employment contract.

The trial judge did not err in accepting the "date of investment" foreign exchange methodology proposed by the plaintiff rather than the "exit rate" methodology proposed by the defendant. The Plan did not contain clear language about the choice of foreign exchange methodology to determine payments to participants. The trial judge's conclusion that it was not fair or appropriate for the defendant, after the fact, to seek to apply a methodology that had the effect of exposing participants to significant foreign exchange risk was firmly supported by the evidence.

Per K.N. Feldman J.A. (dissenting in part): The appeal should be dismissed on the foreign exchange issue. It should also be dismissed on the CIP entitlement issue. The trial judge found that the CIP constituted an integral component of the plaintiff's compensation. The fact that the CIP contained a term that allowed the defendant to terminate the Plan did not also mean that the defendant could unilaterally eliminate that integral component of the plaintiff's compensation without replacing it with a comparable form of compensation. That would take clear language to the effect that if the defendant chose to terminate the CIP, that portion of the plaintiff's compensation entitlement would also be terminated. The trial judge did not err in interpreting the terms of the CIP or determining the plaintiff's entitlement to damages.

APPEAL from the judgment of Monahan J., [2018] O.J. No. 789, 2018 ONSC 966 (S.C.J.).

Jeremy Devereux and Geoff Mens, for appellant.

Nancy Shapiro, for respondent.

D.M. BROWN J.A. (B.W. MILLER J.A. concurring):

I. Overview

[1] At issue on this appeal are two components of the damages awarded in respect of incentive plan compensation to the respondent employee, James Anthony Manastersky, in his wrongful dismissal action.

[2] Mr. Manastersky was employed by the appellant, RBC Dominion Securities Inc. ("RBCDS"), in its RBC Capital Partners unit. For ease of reference, I will refer to both as RBCDS.

[3] At trial, RBCDS conceded that it terminated the employment of Mr. Manastersky without cause. The trial judge found that Mr. Manastersky was entitled to 18 months' notice upon termination. RBCDS does not appeal that finding.

[4] During his employment, Mr. Manastersky participated in profit-sharing plans called "carried interest plans". From late 2004 until his termination in 2014, Mr. Manastersky participated in the Mezzanine Carried Interest Plan (the "Mezzanine CIP"). The trial judge awarded Mr. Manastersky (i) the sum of $953,392.50 in respect of "the lost opportunity to earn entitlements under" the Mezzanine CIP during the 18-month reasonable notice period: judgment, para. 5; and (ii) the amount of $190,789 in respect of Mr. Manastersky's share of investment proceeds under the Mezzanine CIP for the period 2005 to 2013, as calculated using Mr. Manastersky's foreign exchange methodology: judgment, para. 6.

[5] RBCDS appeals both awards.

[6] For the reasons set out below, I would allow the appeal in respect of the award of damages for lost opportunity and set aside para. 5 of the judgment. I would dismiss the appeal in respect of the award concerning the foreign exchange methodology.

II. The Mezzanine CIP Entitlements

A. The contract of employment

[8] In 2001, Mr. Manastersky was recruited to work as a director for the Mezzanine Fund. The Mezzanine Fund managed by RBCDS was designed to make investments in established companies with a track record of positive cash flow, secured by subordinated debt with some form of equity participation such as warrants or conversion rights. The funds invested largely originated with the Royal Bank of Canada (the "Bank") as investing principal. The average term to maturity of Mezzanine Fund investments would be five to seven years. As a director of the Fund, Mr. Manastersky was expected to source investment opportunities, perform appropriate due diligence and strategic analysis, and successfully close transactions.

The initial carried interest plan

[9] The May 17, 2001 RBC Offer of Employment that Mr. Manastersky accepted and signed stated that his base salary initially would start at $200,000 per year and he would participate in a discretionary bonus pool determined annually. As well, it confirmed that Mr. Manastersky had been allocated points as a participant in a carried interest incentive plan which, at the time, was the Royal Bank Capital Partners Carried Interest Plan (the "2000 Plan"):

Carried Interest Plan

You have been provided with a copy of the RBCP Carried Interest Plan. We confirm that you will be allocated:

1. 26.25 points in the 2001 Mezzanine Sector Pool; and

2. 1.75 points in the 2001 Shared Pool

Allocations for the fiscal 2002 Sector and Shared Pools will be completed in September 2001.

[10] After starting his employment, Mr. Manastersky received letters from RBC advising him of the points he had been awarded in the 2000 Plan for each of the years 2001, 2002, 2003 and 2004. Each letter stated that the award of points for a year did not constitute any agreement or commitment by RBC "to award the same amount of points or any points at all in the future or for future years".

The 2004 and 2006 Mezzanine CIPs

[11] In late 2003, RBCDS decided to reduce the number of sector funds in which it was investing. However, it continued its investments in the Mezzanine Fund. To reflect that business shift, in November 2004 RBC revised the profit-sharing mechanism available to employees managing the Mezzanine Fund by establishing the Mezzanine CIP. Certain terms of the Mezzanine CIP were amended in December 2006, to which Mr. Manastersky agreed in writing.

[12] One purpose of the Mezzanine CIP was to incent the participating employees to maximize returns to RBCDS on its investment portfolio. The CIP entitled participating employees to receive incentive compensation payments "computed with reference to the net cash profits and fees resulting from [RBCDS'] investment activities".

[13] The concept of "Investment Periods": Under the Mezzanine CIP, investments made by the Bank and managed by RBCDS in the Mezzanine Fund were placed into portfolios established for defined "Investment Periods". The first portfolio covered an Initial Investment Period running from November 1, 2004 until December 15, 2006: the Fund 1 Investment Period, or Fund 1. Investments made in the subsequent Investment Period were known as the Fund 2 Investment Period, or Fund 2. The Fund 2 Investment Period would end when that fund had accumulated investments totalling $160 million. When the Fund 2 Investment Period ended, the Mezzanine CIP contemplated a possible Fund 3 Investment Period.

[14] The allocation of points in an Investment Period fund: All full-time employees of RBCDS were eligible to participate in the Mezzanine CIP, but no employee was entitled as of right to participate. The decision as to which employees would participate lay in the hands of a management committee. When a person became entitled to participate, the committee would issue the participant an allocation letter that established the participant's points in the Mezzanine CIP. Section 4.4 of the Plan stated:

Status as a Participant with respect to any Investment Period shall not give any Participant the express or implied right to continued employment by the Bank, RBCP or any of the Bank's subsidiaries or to any Points for any future Investment Period.

(Emphasis added)

[15] Under the Mezzanine CIP, a participant was granted points "[w]ith respect to each Portfolio relating to a given Investment Period". Those points represented the participant's "share of the portion of the aggregate profits and losses of [RBCDS] with respect to that Portfolio". Points were not allocated to a participant on an annual basis. The points allocated to Mr. Manastersky for Funds 1 and 2 were set out in schedules to the 2004 and 2006 Mezzanine CIPs. In connection with any Investment Period after the Fund 2 Investment Period, art. 6.1.3 of the Mezzanine Plan stated:

In connection with each Investment Period thereafter, RBCP will deliver to each Participant who is granted Points for the Portfolio applicable to such Investment Period Allocation Letters, dated on or about the date on which such Investment period commences, setting forth such Participant's Points for each such Portfolio.

[16] An RBC letter dated October 18, 2007, and signed by Mr. Manastersky, confirmed that he had been allocated 56.25 points in respect of the Fund 1 Investment Period and 50 points for the Fund 2 Investment Period. The letter stated that the CIP would otherwise remain in full force and effect. The letter continued: "Nothing herein shall restrict the ability of the Management Committee to modify the CIP, provided such changes do not negatively affect your interest in the Fund 1 and Fund 2 Investment Periods."

[17] There is no dispute that at the time of his termination, Mr. Manastersky's points were fully vested. When the employment of a participant was terminated without cause, the participant continued as a participant, retaining "in all Portfolios with respect to which he or she has Points, all rights represented by his or her Vested Points".

[18] Payments of profits to participant employees: Participants in the Mezzanine CIP did not receive annual profit-sharing payments. Whereas the investment periods under the 2000 Plan were annual periods, the 2004 and 2006 Mezzanine CIPs provided for Investment Periods based on the cumulative dollar amount of investments made in the given investment period. The timing of profit-sharing payments to participants was tied to the end of an Investment Period, such as the end of the Fund 1 Investment Period or the Fund 2 Investment Period.

[19] Article 7.1 of the Plan provided, in part, that "[p]ayments in respect of Investment Proceeds and Net Fee Income will be made in respect of each Investment Period within 45 days after the end of the Fiscal Year in which an Investment Period ends, and semi-annually thereafter on June 15 and December 15 . . . to the extent such Investment Proceeds and Net Fee Income are received by [RBCDS]" (emphasis added).

[20] Mr. Manastersky did not receive any Mezzanine CIP payments from 2008 to 2014. His interests in Funds 1 and 2 were carried during that period of time, with final payments in respect of those funds made to him in 2015 and 2016.

[21] Article 7.2 of the Mezzanine CIP prescribed the priority of distribution of the proceeds from the disposition or realization of an investment in a portfolio for an Investment Period. In general terms, such proceeds were to be used first to return to RBCDS its invested capital and a stipulated annual rate of return, with the remainder of the proceeds to be split 85/15 between RBCDS and participant employees, who would share the 15 per cent split in accordance with their vested points.

[22] The duration of the Mezzanine CIP: Under art. 9.3, the CIP's Management Committee was entitled to terminate the CIP effective "as of the end of any Investment Period with respect to future Investment Periods".

The termination of Mr. Manastersky's employment and the Mezzanine CIP

[23] By mid-2013, Mr. Manastersky was advised that RBCDS was reconsidering its continued reinvestment in the Mezzanine Fund. In an October 2013 presentation, Mr. Manastersky canvassed the possible termination of the Mezzanine CIP and moving the RBCDS Mezzanine Fund team into the Bank's client services group. He noted that a pending transaction would effectively bring the Fund 2 Investment Period to an end and that the Fund's portfolio would mature naturally over the next three years.

[24] By late 2013 or early 2014, a business decision evidently had been made to pursue mezzanine investments using Bank funds within the commercial banking arm of the Bank, not through RBCDS.

[25] This decision formed the background to the January 21, 2014 offer to Mr. Manastersky to join the Bank as Managing Director, Mezzanine Finance, National Client Group. The compensation offered included payment of an annual incentive but not participation in a carried interest plan similar to the Mezzanine CIP. Mr. Manastersky expressed disappointment with the offer. Some further discussions took place. They did not prove fruitful from his perspective.

[26] On February 12, 2014, RBCDS informed Mr. Manastersky that his employment would end effective Friday, February 14, 2014. The termination letter offered to pay Mr. Manastersky his base salary, bonus payments and benefit entitlements for a period of 13 months, or until March 15, 2015. The letter also provided the option of retiring immediately and receiving a lump sum payment. With respect to the Mezzanine CIP, the termination letter stated that "[y]our rights and interests in respect of the RBC Capital Partners mezzanine fund carried interest plan remain fully vested and all payments to which you may ultimately be entitled, if any, will be determined by and distributed in accordance with the terms of the plan".

[27] Mr. Manastersky did not accept the termination offer. This litigation ensued.

[28] In June 2014, the Bank began making mezzanine investments through its Mezzanine Finance, National Client Group. In a June 25, 2014 memorandum, RBCDS sought formal approval from the Mezzanine CIP's Management Committee to wind-down Funds 1 and 2 and "to approve the termination of the Plan in respect of all future Investment Periods pursuant to Article 9.3 of the Plan". The memo noted that RBCDS was in the process of winding down the portfolio through the maturity and repayment of the underlying loans in both funds. RBCDS advised that it did not intend to make any further investments in respect of the portfolio. RBCDS sought to terminate the Plan "to ensure no new investment periods are permitted to commence automatically as currently contemplated by the Plan".

[29] Approval was granted. Funds 1 and 2 were wound down. The Bank's Mezzanine Finance, National Client Group managed the winding-down on behalf of RBCDS. The actual book of investments wound down stayed within RBCDS for financial and accounting purposes.

[30] Over the 13 months following his termination, RBCDS paid Mr. Manastersky his base salary of $200,000 per annum over the 13-month notice period, for a total of $216,667; $188,058 on account of his bonus entitlement for the notice period; and his employee benefits.

[31] Over the course of 2015 and 2016, as the portfolios within the Mezzanine Fund were wound down, RBCDS paid Mr. Manastersky a total of $5,434,309, representing the company's calculation of his entitlement under the Mezzanine CIP from Fund investments made between 2005 and 2013. There is no dispute that RBCDS paid Mr. Manastersky the full amount he was entitled to in respect of his participation in Funds 1 and 2.

[32] At trial, Mr. Manastersky testified that he was not taking the position that he was entitled to an allocation of points with respect to some new or notional Fund 3 Investment Period that was never established by RBCDS under the Mezzanine CIP.

B. The issue stated

[33] When RBCDS terminated his employment in February 2014, Mr. Manastersky held vested points in both Funds 1 and 2 pursuant to the Mezzanine CIP. At that time, the Mezzanine CIP comprised only Funds 1 and 2.

[34] The 18-month period of reasonable notice to which the trial judge found Mr. Manastersky was entitled ran from February 2014 until August 2015. During that period, RBCDS proceeded to wind-down Funds 1 and 2 and distribute the proceeds of distribution in accordance with the priorities established by the Mezzanine CIP. Mr. Manastersky received his full share of the profits realized upon the disposition of Funds 1 and 2.

[35] RBCDS did not establish any new fund under the Mezzanine CIP; no Fund 3 Investment Period was started. Instead, RBCDS ended the Mezzanine CIP.

[36] The trial judge held that Mr. Manastersky was entitled to an amount beyond the full share of profits he had been paid in respect of Funds 1 and 2. He awarded Mr. Manastersky the sum of $953,392.50 "in respect of the lost opportunity to earn entitlements under [the Mezzanine CIP] during the 18 month reasonable notice period".

[37] RBCDS contends that although the trial judge began his analysis of the issue by citing the correct legal principles, he misapplied those principles to the facts of the case. In its view, since Mr. Manastersky received all the profits he was entitled to in respect of Funds 1 and 2, and as under the terms of the Mezzanine CIP the managing committee was under no obligation to start up a new Fund 3 Investment Period, Mr. Manastersky did not lose any opportunity to earn further entitlements under the Mezzanine CIP, which was the contractual basis for his entitlement to incentive plan compensation during his employment.

[38] On his part, Mr. Manastersky takes the position that the trial judge properly interpreted his contract of employment and applied the governing jurisprudence, so this court should not interfere with his award. In his view, the surrounding circumstances of his employment relationship and all of the other evidence clearly illustrated that if RBCDS terminated the Mezzanine CIP, it would have to be replaced by another carried interest plan or comparable form of compensation. He submits that an employer cannot take advantage of the discontinuance of a part or function of its business to avoid payment to an employee of compensation tied to production of that function during the notice period.

C. Applicable legal principles

[39] The parties agree that the applicable legal principles are those set out in three decisions of this court: Taggart v. Canada Life Assurance Co., [2006] O.J. No. 310, 50 C.C.P.B. 163 (C.A.); Lin v. Ontario Teachers' Pension Plan Board, [2016] O.J. No. 4221, 2016 ONCA 619, 402 D.L.R. (4th) 325; and Paquette v. TeraGo Networks Inc., [2016] O.J. No. 4222, 2016 ONCA 618, 352 O.A.C. 1. The Lin and Paquette decisions were decided by the same panel and released the same day.

[40] The analysis in each of the three decisions proceeded from the general principle that where an employer terminates an employee without cause, the employer is liable for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period: Taggart, at para. 13; Lin, at para. 84; Paquette, at para. 16. A terminated employee is entitled to a common law claim for damages for the loss of pension benefits that would have accrued or he would have earned had the employee worked until the end of the notice period: Taggart, at paras. 13 and 20. A similar approach applies in the case of bonuses or incentive payments that are an integral part of the employee's compensation: Lin, at para. 86.

[41] When considering a claim by a terminated employee for damages in respect of benefits payable under such plans during the period of reasonable notice, Taggart describes the two-step inquiry a court should undertake: (i) first, consider the employee's common law right to damages for breach of contract; and then (ii) consider whether the terms of the plan alter or remove a common law right: at para. 12.

[42] As to the first step of the inquiry, although Taggart stated that a terminated employee's claim "is not for pension benefits but rather for damages as compensation for the [pension] benefits he lost as a result of the appellant's termination of his employment contract", the decision explained that the claim "is for common law contract damages as compensation for the pension benefits the respondent would have earned had the appellant not breached the contract of employment" (emphasis added): at paras. 11 and 16. The proper measure of damages reflects the employer's obligation "to pay damages that 'place the employee in the position that he or she would have been in had the contract been performed'": Taggart, at para. 16.

[43] Once a court determines on the evidence what benefits the employee would have earned had the employer not breached the contract of employment, the employee is entitled to claim damages for loss of those common law rights unless there is some contractual term limiting the employee's common law right. This is the focus of the second step of the Taggart analysis. As put by Taggart in respect of pension plans, a court must ascertain whether there is anything in the pension plan at issue "capable of depriving the [employee] of his common law right to damages for the loss of the pension benefits that he would have earned during the notice period" (emphasis added): at para. 15. As to bonus plans that contain entitlement terms placing limitations on or conditions for the payment of a bonus, the question is whether the wording of the bonus plan was sufficient to limit the employee's common law right to receive compensation for lost bonuses during the period of reasonable notice and whether any limiting language was brought to the attention of the employee and formed part of his or her contract of employment: Lin, at para. 86; Paquette, at paras. 18 and 46.

D. Analysis

[44] The standard of review applicable to the trial judge's determination of Mr. Manastersky's claim in respect of incentive plan compensation is that set out in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53 and its progeny: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37; Teal Cedar Products Ltd. v. British Columbia, [2017] 1 S.C.R. 688, [2017] S.C.J. No. 32, 2017 SCC 32.

[45] Mr. Manastersky framed his claim for damages in respect of the Mezzanine CIP as one for payment in lieu of lost participation in the CIP during the period of reasonable notice, using an annual rate of payment of $1,053,735. In assessing that claim, the trial judge undertook the first step in the Taggart analysis: determining the employee's common law right to damages for breach of contract: at para. 38. However, in this part of his analysis, the trial judge focused exclusively on the materiality or magnitude of payments made under the Mezzanine CIP in relation to Mr. Manastersky's overall compensation. He held that payments under the RBCDS carried interest plans "represented an integral part of Manastersky's compensation": at para. 39. In the trial judge's view, "the CIP was a significant, nondiscretionary variable form of compensation that represented more than half of Manastersky's annual income, similar to the variable forms of incentive compensation considered [in Lin]. It was integral to his compensation and therefore forms part of his presumptive entitlement to damages at common law during the notice period": at para. 41.

[46] RBCDS submits that although the trial judge correctly identified the applicable analysis as that set out in Taggart, the first step of his inquiry incorrectly framed the question to be asked. Instead of asking what Mr. Manastersky would have earned in respect of the Mezzanine CIP had RBCDS not breached the contract of employment, the trial judge wrongfully concluded that Mr. Manastersky was presumptively entitled to common law damages in respect of the Mezzanine CIP merely because the payments under that Plan historically had constituted a significant form of compensation to him. RBCDS contends that the trial judge erred by failing to ask and answer the proper question under the first step of the Taggart analysis.

[47] I am persuaded by this submission.

[48] A finding that some form of incentive compensation was an integral part of the employee's compensation package does not exhaust the inquiry under the first step of the Taggart analysis. It only recognizes that a head of damages is available to a terminated employee if he can demonstrate that he would have earned that form of compensation during the period of reasonable notice. That commonly occurs, for example, where an employee can point to a history of receiving annual performance bonuses: see, for example, Paquette, at para. 7; Singer v. Nordstrong Equipment Ltd., [2018] O.J. No. 1988, 2018 ONCA 364, at para. 10.

[49] It remains the case, however, that when applying the Taggart approach to a claim for a form of incentive compensation, a court must inquire into the terms of the incentive compensation plan, which may contain eligibility criteria or establish a formula for the calculation of the incentive compensation: Paquette, at para. 18.

[50] The first step of the Taggart analysis therefore required the trial judge to ascertain whether Mr. Manastersky had a common law right to damages for breach of contract in respect of incentive compensation related to the Mezzanine CIP. That required the trial judge to determine what Mr. Manastersky would have earned under the Mezzanine CIP had RBCDS performed the contract of employment and provided him with 18-months' notice of termination. That, in turn, required the trial judge to examine the terms of the Mezzanine CIP as part of the first step in the Taggart analysis. The trial judge failed to do so and thereby fell into error, ignoring key provisions of the Mezzanine CIP relating to what Mr. Manastersky would have earned during the notice period.

[51] Incentive-type plans vary greatly in their structure and pay-out terms. Of necessity, the analysis under the first step of the Taggart approach will be very case-specific. The analysis in respect of one type of incentive plan may not be transferable to the analysis of another type of incentive plan.

[52] For example, Taggart, Lin and Paquette all involved situations where the incentive or pension plan in question continued in the ordinary course of the employer's business during the applicable period of reasonable notice. At issue in Lin and Paquette was the terminated employees' entitlement to annual payments under continuing bonus or incentive plans: Lin, at para. 69; Paquette, at paras. 30 and 49. Taggart concerned the entitlement of a terminated employee to accruing pension benefits during the period of reasonable notice.

[53] By contrast, the structure and conditions of entitlement under the Mezzanine CIP are quite different. Mr. Manastersky's contract of employment called for him to manage investments in mezzanine opportunities made through the RBCDS Mezzanine Fund. In the last decade of his employment, his entitlement to carried interest incentive-type compensation in respect of such investments was governed by the terms of the Mezzanine CIP.

[54] The CIP was the product of an agreement between a sophisticated employer and a group of sophisticated employees. The terms of the agreement were fully disclosed to Mr. Manastersky. As a participant in the plan, he signed the December 15, 2006 amended Mezzanine CIP.

[55] The entitlement of a participant, such as Mr. Manastersky, to earn payments under the Mezzanine CIP was tied to the existence of the funds created for different Investment Periods. Two funds existed during the last decade of Mr. Manastersky's employment and the period of reasonable notice: Funds 1 and 2. In accordance with the terms of the Mezzanine CIP, Mr. Manastersky was allocated a specific amount of points in respect of each Fund.

[56] As art. 4.4 of the Mezzanine CIP clearly stated, the status of a participant with respect to any Investment Period "shall not give any Participant the express or implied right . . . to any Points for any future Investment Period" (emphasis added).

[57] By the time of his termination, Mr. Manastersky's allocated points for Funds 1 and 2 were fully vested. However, payments in respect of his carried interests in each Fund were not done annually but were to be made after the end of each Investment Period from the net proceeds of the disposition or realization of investments in a portfolio or fund. The investments in Funds 1 and 2 were not fully realized until after the termination of Mr. Manastersky's employment and the running of the period of reasonable notice.

[58] Mr. Manastersky was entitled to his pro rata share of the Investment Proceeds received by RBCDS in a particular Investment Period. In respect of the Funds 1 and 2 Investment Periods, he was paid that entitlement during the period of reasonable notice -- which ended on August 14, 2015 -- as well as in 2016. There is no dispute that RBCDS paid Mr. Manastersky the full amount of the payments to which he was entitled in respect of Funds 1 and 2 based on his allocated points.

[59] Accordingly, those payments in respect of his share of profits in Funds 1 and 2 reflect what Mr. Manastersky would have earned by way of incentive plan compensation had RBCDS given proper notice of the termination of his employment.

[60] But, the trial judge awarded Mr. Manastersky significantly more. In so doing, he did not identify any term of the Mezzanine CIP that entitled Mr. Manastersky to earnings or payments during the period of reasonable notice beyond his allocated share of profits in Funds 1 and 2.

[61] It is not surprising that the trial judge was unable to identify any such provision. None existed. To the contrary, the terms of the Mezzanine CIP provided that Mr. Manastersky was not entitled to any further earnings under that plan:

(i) the Management Committee was entitled to "terminate the Plan effective as of the end of any Investment Period with respect to future Investment Periods": art. 9.3. The Management Committee did so. No new Fund 3 Investment Period was created;

(ii) a participant was granted points in respect "to each Portfolio relating to a given Investment Period" and those points represented the Participant's share of the portion of the aggregate profits and losses of RBCDS with respect to that Portfolio: art. 6.1.1;

(iii) any allocation of points in connection with an Investment Period after the Funds 1 and 2 Investment Periods would be done by way of a new allocation letter: art. 6.1.3; and

(iv) an employee's status as a participant in respect to any Investment Period did not give the participant "the express or implied right . . . to any Points for any future Investment Period": art. 4.4.

[62] Those provisions, when combined with the decision of the Management Committee to terminate the Plan, indicate that Mr. Manastersky was not entitled to any common law damages in respect of the Mezzanine CIP profit-sharing plan beyond those relating to his vested points for Funds 1 and 2. The trial judge erred in law by finding to the contrary because he failed to make the inquiry mandated by the first step of the Taggart approach. He incorrectly relied on the magnitude of Mr. Manastersky's carried interests under the Mezzanine CIP as a sufficient basis upon which to find a common law right to further incentive amounts during the period of reasonable notice.

[63] The trial judge did address RBCDS' submission regarding its ability to terminate the Plan, albeit in the portion of his reasons dealing with the second step of the Taggart approach. The trial judge reasoned, at para. 44, that

I do not believe that the fact that RBC had the option of terminating the Plan at the end of an investment period should be regarded as limiting Manastersky's entitlement to notice at common law. First, RBC's right to terminate the CIP was in no way tied to the termination of Manastersky's employment. Far from containing "clear language" limiting rights upon termination of employment, the provision in the CIP permitting RBC to terminate the Plan did not purport to limit or reduce his common law entitlements. Nor could it be said that the parties did not turn their minds to the consequences flowing from the termination of Manastersky's employment on his entitlements under the CIP. In fact, the CIP enhanced Manastersky's entitlements in the event his employment was terminated without cause, through accelerated vesting of his Points.

(Emphasis added)

[64] With respect, the trial judge fell into palpable and overriding error by holding that "the provision in the CIP permitting RBC to terminate the Plan did not purport to limit or reduce his common law entitlements". I have explained in paras. 61 and 62 above how that provision, when read with other provisions in the Mezzanine CIP, set the parameters on Mr. Manastersky's common law entitlement to incentive payments during the period of reasonable notice. Respectfully, the trial judge failed to read that provision -- art. 9.3 -- in the context of the contract as a whole, thereby falling into reversible error.

[65] At trial, Mr. Manastersky testified that he was not taking the position that he was entitled to an allocation of points in respect of some new Fund 3 that RBCDS should have set up under the Mezzanine CIP. Yet, by awarding Mr. Manastersky damages for earnings beyond those relating to Funds 1 and 2, the trial judge effectively was holding that RBCDS was obligated to establish some notional Fund 3 that would exist at least until Mr. Manastersky's period of reasonable notice came to an end.

[66] The trial judge did not make such an express finding, but he reached the same position by resorting to the concept of constructive dismissal. At para. 46 of his reasons, the trial judge stated:

What if Manastersky's employment had continued past February 14, 2014 and in June 2014 RBC had terminated the CIP without offering Manastersky some alternate, comparable form of compensation? Although consistent with the terms of the CIP, this would have amounted to a unilateral significant reduction in his compensation, as it would have eliminated the opportunity for him to continue to accrue entitlements through the CIP. This would in all likelihood have amounted to a constructive dismissal, thereby triggering an entitlement to damages at common-law, including damages for the lost opportunity to continue to earn entitlements under the CIP.

[67] With respect, I do not see how RBCDS' termination of the Mezzanine CIP in accordance with its terms, which were known and agreed to by Mr. Manastersky, could amount to conduct by an employer that evinces an intention to no longer be bound by the employment contract: Potter v. New Brunswick Legal Aid Services Commission, [2015] 1 S.C.R. 500, [2015] S.C.J. No. 10, 2015 SCC 10, at para. 30. The termination of the Mezzanine CIP did not involve any breach of contract by RBCDS. As the trial judge recognized [at para. 46], the CIP's termination was "consistent with the terms of the CIP".

[68] Nor did the CIP's termination "more generally [show] that the employer intended not to be bound by the contract" or demonstrate "conduct that, when viewed in the light of all the circumstances, would lead a reasonable person to conclude that the employer no longer intended to be bound by the terms of the contract": Potter, at paras. 33 and 42. Mr. Manastersky was hired to manage specific funds. At the time of his offer of employment, he was provided with a copy of the 2000 Plan. Mr. Manastersky signed the 2006 Mezzanine CIP. Those plans contained the same art. 9.3, which clearly disclosed that one risk embedded in Mr. Manastersky's contract of employment was that the Management Committee could terminate the plan effective as of the end of any Investment Period with respect to future Investment Periods.

[69] By terminating the Mezzanine CIP, RBCDS was not evincing an intention not to be bound by the employment contract. On the contrary, it was exercising a fully disclosed right it had under the contract of employment. Consequently, I see no evidentiary support for the trial judge's finding that a termination of the Mezzanine CIP would have amounted to a constructive dismissal.

[70] For these reasons, I would give effect to this ground of appeal and set aside para. 5 of the Judgment, which awarded Mr. Manastersky damages of $953,392.50 in respect of the lost opportunity to earn entitlements under the Mezzanine CIP.

III. The CIP Foreign Exchange Methodology

A. The issue stated

[71] The second ground of appeal concerns the appropriate foreign exchange rate that should be applied to value U.S. dollar investments made in the Mezzanine Fund between 2005 and the ultimate disposition of the investments in Funds 1 and 2 for the purpose of calculating the payments out to Mezzanine Plan participants.

[72] At trial, RBCDS contended that the Canada-U.S. dollar exchange rate in place at the time of the disposition or maturity of an investment in the Funds -- the "exit rate" -- should be applied to calculate the book value of a U.S. dollar investment as well as the proceeds received upon its disposition or maturity. Mr. Manastersky argued that the exchange rate as of the date of the investment should be used to calculate the book value and proceeds of disposition.

[73] As a practical matter, the parties' differing positions only affect the valuation of U.S. dollar investments that had been written off during the lifetimes of Funds 1 and 2.

[74] The trial judge accepted the methodology proposed by Mr. Manastersky. RBCDS submits he erred in so doing.

B. The evidence

[75] From the point of view of the main investor in the Mezzanine Fund -- the Bank -- its capital investments in the Fund were fully hedged at the Bank, not Fund, level against the risk of foreign exchange fluctuations. However, the Mezzanine CIP did not contain any express provision dealing with the impact of foreign currency exposure on returns to employee participants.

[76] The methodology advanced by Mr. Manastersky at trial had been used by RBCDS to calculate payments made under the 2000 Plan to participant employees for the investment periods between 2001 and 2004.

[77] In August 2013, RBCDS retained Kroll Inc. to provide advice on the appropriate foreign exchange methodology to use in winding-down a carried interest plan that was separate from, but used language similar to that in, the Mezzanine CIP. Ms. Bessie Petroff, a vice-president on the financial and accounting side of RBCDS, testified that the company had reached out to Kroll for their "guidance and assistance . . . because there was nothing implied in [the other carried interest plan] to help guide us on how to do it". According to Ms. Petroff, the Mezzanine CIP also was "silent" on what foreign exchange methodology to use. When taken to the definition of "invested capital" in the Mezzanine CIP as "the original book value of the Investment . . . determined in accordance with Canadian generally accepted accounting principles consistently applied", Ms. Petroff testified that the definition did not specify the currency or the applicable exchange rate.

[78] Alan Hibben, the RBCDS executive involved in setting up both the 2000 Plan and the Mezzanine CIP, acknowledged that the absence of any foreign exchange methodology was a "miss" in the plan documents, which they had to cover by adopting a matching practice.

[79] The trial judge heard evidence from Mr. Peter McFarlane, the individual at Kroll who supervised giving RBCDS foreign exchange methodology advice in 2013. Mr. McFarlane is a chartered professional accountant. He was not qualified as an expert witness nor did he provide a report under rule 53.03 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Mr. McFarlane also acknowledged that the Mezzanine CIP was silent on the foreign exchange translation methodology.

[80] According to Mr. Hibben, "the philosophy of the plan was that . . . currency exposure was not taken by the participants in the plan other than to the extent that a U.S. dollar profit would have been translated at a spot rate of exchange when the . . . payment from the carried interest plan would have been made". Mr. Hibben conceded that he did not really know how U.S. investments were valued on the books of the Fund.

[81] Kroll advised using an exit rate foreign exchange methodology, advice which RBCDS accepted and used to calculate Mr. Manastersky's entitlements under the Mezzanine CIP from investments made between 2005 and 2013.

[82] Ms. Petroff testified that RBCDS accepted the exit rate methodology in part because it "didn't want any FX noise to the participants", by which she meant that the company did not want currency swings to go to the participants because that would not be fair. She also testified that a change to the exchange methodology that might result in less proceeds to the participants could not be established without the consent of the employee participants: "That would be a change that they would have to agree upon."

[83] Ms. Petroff also stated that when RBCDS accepted Kroll's exit rate methodology, she did not think of going back to see if it differed from the calculations RBCDS had used historically for the exchange rates on U.S. dollar investments.

[84] At trial, Mr. Manastersky argued that in the absence of an express foreign exchange methodology in the Mezzanine CIP, it would be unfair to require a participant such as himself to bear the risk of exchange fluctuations. RBCDS acknowledged that had it used the methodology advocated by Mr. Manastersky (as it had between 2001 and 2004), Mr. Manastersky's entitlement to payouts in respect of Funds 1 and 2 would have increased by $190,789.

[85] The trial judge accepted Mr. Manastersky's position and awarded him $190,789 "in respect of his share of investment proceeds under the CIP for the period 2005 to 2013, as calculated using the Plaintiff's foreign exchange methodology". Based on his assessment of the evidence, the trial judge found, at paras. 65 and 66 of his reasons, that

(i) the CIP was silent on the foreign exchange issue;

(ii) participants in the CIP were not expected to bear the risk associated with fluctuations in foreign exchange;

(iii) applying a methodology that had the effect of exposing participants to significant foreign exchange risk was neither fair nor consistent with the goals of the Mezzanine CIP, including the goal of providing investment professionals with an incentive to maximize returns to RBCDS on its investment portfolio, as well as providing a financial incentive that would assist RBCDS in retaining and recruiting talented individuals to carry out its business objectives;

(iv) the methodology proposed by Mr. Manastersky was utilized by RBCDS in calculating payouts under the 2000 Plan arising from investments made between 2001 and 2004; and

(v) utilizing Mr. Manastersky's foreign exchange methodology for the limited purpose of calculating payouts under the Mezzanine CIP would not create any difficulties for the Bank in preparing the company's financial statements.

C. Analysis

[86] RBCDS submits that the award of damages in respect of foreign exchange risk should be set aside as a result of four errors made by the trial judge: (i) he ignored the clear language of the Mezzanine CIP that calculations of investment gains and losses were to be determined in accordance with GAAP; (ii) the only foreign exchange methodology identified in the evidence as consistent with GAAP was the exit rate methodology proposed by Mr. McFarlane from Kroll; (iii) no expert evidence was called to support Mr. Manastersky's "date of investment" methodology; and (iv) the trial judge improperly allowed evidence of surrounding circumstances and the parties' subjective intentions to rewrite the words of the Mezzanine CIP.

[87] I am not persuaded by any of those submissions.

[88] First, the Mezzanine CIP did not contain clear language about the choice of foreign exchange methodology to determine payments to participants. RBCDS' own witnesses were unanimous on that point. Ms. Petroff said the CIP was "silent"; Mr. Hibben acknowledged that the absence of such evidence was a "miss".

[89] The definition of "invested capital" in the Mezzanine Plan does not fill that gap. It simply states that "Invested Capital" with respect to an investment means "the original book value of the Investment . . . determined in accordance with Canadian generally accepted accounting principles consistently applied". That definition of "Invested Capital" is used in determining the amount of the proceeds of disposition or realization of an investment that is returned in first priority to RBCDS, in accordance with s. 7.2.1 of the Mezzanine CIP. The collective effect of the evidence of Ms. Petroff and Mr. Hibben was that the definition of "Invested Capital" did not provide them with contractual guidance about which foreign exchange methodology to use. That contractual silence was one reason why RBCDS sought outside advice from Kroll on the issue.

[90] Second, Mr. McFarlane, who supervised Kroll's provision of advice to RBCDS, did not testify that GAAP required the Mezzanine Plan to use the exit rate for calculating payments out to participants. His testimony was to a different effect, as can be seen from the following exchange during his examination-in-chief:

Q. When you provided advice to Royal Bank Capital Partners, what was your view as to whether the foreign exchange methodology applied was consistent or inconsistent with generally accepted accounting principles under the CICA handbook or IFRS?

R. My view was that, you know, the -- the requirements of GAAP with regard to the foreign country translation were -- were dealt with at -- at the macro level at the bank, and so the assumption was that certainly at a macro level that the bank was conducting itself in accordance with GAAP.

S. And what was your view as to whether the foreign exchange methodology was consistent or inconsistent with the methodology referred to in Royal Bank's published financial statements?

A. It was consistent.

Q. And have you views on these issues changed?

A. No.

Q. Is there any requirement under accounting standards that the foreign exchange methodology used in the carried interest plans be the same methodology used in Royal Bank's published financial statements?

A. No.

(Emphasis added)

[91] Mr. McFarlane did testify, in re-examination, that the "exit rate" methodology he had proposed to RBCDS was the "preferred rate", but he did not put his view any higher than that.

[92] Third, although Mr. Manastersky is not a chartered professional accountant, he had decades of experience making and managing investments. That experience provided a firm basis for the trial judge's acceptance of Mr. Manastersky's evidence about the appropriate foreign exchange methodology for the investments that he had managed, especially given his unchallenged evidence that the methodology had been used by RBCDS to calculate payments out to participants under the 2000 Plan.

[93] Fourth, the trial judge did not improperly allow evidence of surrounding circumstances and the parties' subjective intentions to rewrite the words of the Mezzanine CIP. The evidence was clear: the Mezzanine CIP was silent on the issue of the appropriate foreign exchange methodology. Simply put, there was no contractual term to rewrite.

[94] Finally, the trial judge's conclusion that it was not fair or appropriate for RBCDS, after the fact, to seek to apply a methodology that had the effect of exposing participants to significant foreign exchange risk was firmly supported by the evidence. The Mezzanine CIP was silent on the issue of the applicable foreign exchange methodology. Consequently, by imposing the "exit rate" methodology on the calculation of payments to Mr. Manastersky in respect of Funds 1 and 2, RBCDS in effect was amending the CIP in a material way, as well as departing from the methodology it had used in making payments out under the 2000 Plan. Article 9.2.1 of the Mezzanine CIP required the written consent of a participant to any change that "may materially and adversely affect the determination of any amount to be paid to any Participant in respect of any Investment Period which has already commenced". Mr. Manastersky did not consent to using the "exit rate" methodology. Consequently, the trial judge's conclusion on this point found firm support in the language of the Mezzanine CIP.

[95] For these reasons, I would not give effect to this ground of appeal.

IV. Disposition

[96] For the reasons set out above, I would allow the appeal in part and set aside para. 5 of the judgment. I would dismiss the appeal in respect of para. 6 of the judgment.

[97] The parties agreed that the successful party should be awarded costs of the appeal in the amount of $23,000. In the event success was split, they agreed that amount should be reduced but in a way that would reflect that the parties had put a greater amount of work into the first ground of appeal. Accordingly, I would award RBCDS its costs of the appeal fixed at $15,000, inclusive of disbursements and applicable taxes.

[98] If the parties are unable to agree on the costs of the trial in light of the disposition of the appeal, they each may file costs submissions not exceeding three pages in length no later than August 9, 2019.

K.N. FELDMAN J.A. (dissenting):

Overview

[99] I have had the benefit of reading the reasons of my colleague and I agree that the appeal should be dismissed on the foreign exchange issue. However, I would also dismiss the appeal on the Mezzanine Carried Interest Plan (the "CIP" or the "Plan") entitlement issue.

[100] The trial judge found that the CIP constituted an integral component of the respondent's compensation. The fact that the CIP contained a term that allowed RBC to terminate the Plan does not also mean that RBC could unilaterally eliminate this integral component of the respondent's compensation without replacing it with a comparable form of compensation. That would take clear language to the effect that if RBC chose to terminate the CIP, that portion of the respondent's compensation entitlement would also be terminated. In my view, the trial judge did not err in interpreting the terms of the CIP or determining the respondent's entitlement to damages. I would accordingly dismiss the appeal.

Standard of Review

[101] The issue in this case is the application of the test for determining the quantum of compensation to which a wrongfully dismissed employee is entitled (the "Taggart test") and the interpretation of an individual contract of employment. Therefore, the standard of review is governed by the principle in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, at paras. 50-55, for questions of mixed fact and law: see, also, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37; Teal Cedar Products Ltd. v. British Columbia, [2017] 1 S.C.R. 688, [2017] S.C.J. No. 32, 2017 SCC 32.

[102] In my view, the trial judge made no error of law in his application of the Taggart test or palpable and overriding error in the interpretation of the terms of the respondent's contract of employment. His decision is entitled to deference by this court.

Applicable Legal Principles

[103] This court has made clear in a series of recent cases that a wrongfully dismissed employee is entitled to damages for all forms of compensation that formed an integral component of the employee's compensation at the time of the termination of employment, subject only to clear contractual language limiting those rights.

[104] The legal framework for determining a wrongfully dismissed employee's entitlement to damages is set out in Lin v. Ontario Teachers' Pension Plan Board, [2016] O.J. No. 4221, 2016 ONCA 619, 402 D.L.R. (4th) 325, at para. 85 (citing Taggart, at paras. 11, 16); see, also, Paquette v. TeraGo Networks Inc., [2016] O.J. No. 4222, 2016 ONCA 618, 352 O.A.C. 1, at paras. 30-31; Dawe v. Equitable Life Insurance Co. of Canada, [2019] O.J. No. 3217, 2019 ONCA 512, at para. 48. First, the court must determine the terminated employee's common law right to damages for breach of contract based on what the employee would have earned had he or she continued in his or her employment. Second, the court must consider whether the terms of the relevant contract(s) alter or remove that presumptive common law right on termination of employment.

[105] Under the first branch of the Taggart test, the terminated employee's common law right to damages for breach of contract is "measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period": Taggart, at para. 13; see, also, Paquette, at para. 16. Damages may include bonuses or other benefits if they formed an integral part of the employee's compensation package: Paquette, at paras. 30-31; Singer v. Nordstrong Equipment Ltd., [2018] O.J. No. 1988, 2018 ONCA 364, 47 C.C.E.L. (4th) 218, at para. 24. This may be the case even where the bonus is described as discretionary: Paquette, at para. 17; see, also, Howard A. Levitt, The Law of Dismissal in Canada (Toronto: Canada Law Book, 2003) (looseleaf updated 2017), ch. 9, at pp. 7-13.

[106] In Taggart and Paquette, the pension plans that formed part of the compensation packages contained language that purported to limit the employee's right to earn his or her full pension during the reasonable notice period following dismissal. Therefore, in those cases it was logical to look at the terms of the pension at the second stage of the analysis to see whether they limited the right the employee would have had, had he or she not been dismissed, to earn that pension. However, where a benefit plan contains terms that apply to an employee during employment, then the court will look at the terms of the plan at the first stage of the analysis, to determine the integral components of the employee's compensation package.

[107] Some of the factors that Ontario courts consider in determining whether a bonus (or other benefit) is integral to the employee's compensation package include: whether the bonus was received each year; whether bonuses were required to remain competitive with other employers; whether bonuses had been awarded to the employee in the past; whether the employer had ever exercised its discretion to not award a bonus to the employee; whether the bonus was promoted as an integral part of the employee's compensation; and, whether the bonus constituted a significant component of the employee's overall compensation: see Bain v. UBS Securities Canada Inc., [2016] O.J. No. 6478, 2016 ONSC 5362 (S.C.J.), at paras. 83-84 (citing Wolfman v. Rocktenn-Container Canada, L.P., [2015] O.J. No. 1118, 2015 ONSC 1432 (S.C.J.), at para. 37) ("Bain (ONSCJ)"); Dawe, at para. 49.

[108] Once the court has determined the employee's common law right to damages for breach of contract (i.e., what the employee would have earned during the reasonable notice period), it must consider whether anything in the contract of employment or the benefit plan at issue alters or removes that right on termination of employment: Lin, at para. 85. "Clear language is required in order to take away or limit a dismissed employee's common law rights": Lin, at para. 86 (citing Taggart, at para. 20); Dawe, at para. 48. I would add that clear contractual language is required at either stage of the Taggart test to limit an employee's rights to compensation.

Decision of the Trial Judge

[109] The trial judge accurately described the issue and the positions of the parties, at paras. 26-27 of the reasons:

The Termination Offer provided that Manastersky's entitlements under the CIP remained fully vested and all payments to which he was entitled would be distributed in accordance with the terms of the Plan. However, although RBC compensated Manastersky for amounts he had earned from investments made up until the date of his termination, they did not compensate him for additional amounts that he might have earned from Mezzanine Fund investments that might have been made had he remained employed during the notice period.

RBC maintains that it was not required to provide any such compensation due to the terms of the CIP itself. In particular, RBC maintains that at the time of the termination of Manastersky's employment, it was entitled to terminate the CIP in respect of future investment periods. Therefore, RBC maintains, since it could have terminated the CIP at the time of Manastersky's dismissal, it was not required to compensate him for amounts that he might have earned from future investments. Manastersky, on the other hand, argues that the CIP was a fundamental component of his compensation and that RBC was required to compensate him for the lost opportunity to accrue additional entitlements under the CIP during the notice period.

[110] The appellant made the same argument at trial that it made on appeal: because it had the right to terminate the CIP in respect of future investment periods, the respondent was not entitled to be compensated for what he might have earned during the notice period from the CIP from a future investment fund.

[111] My colleague states that the trial judge erred by asking the wrong questions in applying the Taggart test. He states that the trial judge should have looked at the terms of the CIP when assessing the first stage of the Taggart test to determine the respondent's common law entitlement to damages, and not at the second stage. He also states that the trial judge made a palpable and overriding error in finding that the terms of the CIP did not limit or reduce the respondent's common law entitlements.

[112] I do not agree that the trial judge erred in either respect. He was alive to the contractual interpretation issue raised by the appellant, which he addressed and rejected. In my view, he was correct to do so.

[113] In considering what the respondent was entitled to earn as part of his compensation package, the trial judge first examined the RBC Capital Partners Mezzanine Fund (the "Mezzanine Fund" or the "Fund") in detail, and how the CIP, which was linked to the performance of the Fund, operated as a profit-sharing vehicle for those employees who were eligible to participate in it, including the respondent.

[114] In describing how the respondent was originally recruited and hired as the director of the Fund, the trial judge noted [at para. 5] that the job description stated that the successful candidate would be offered a "highly attractive compensation package, including base salary, annual performance bonus and participation in the [F]und's carried interest" (emphasis added). The respondent's participation in the Plan was provided for as part of his "compensation program" and agreed to in his contract of employment.

[115] The trial judge also described the points in the Fund that were allocated to the respondent over his years of employment, from June 2001 to February 2014. He noted that while the allocation of a specific number of points was discretionary, the respondent's points had remained constant since 2007 when he received 50 per cent of the available points for all employees. Over the course of his 13 years of employment with RBC, the respondent's CIP share represented well over 50 per cent of his total annual earnings. The trial judge referred to Bain (ONSC) for the general test for determining whether a bonus is an integral part of an employee's compensation. One element of that test is whether the employee received a bonus every year: Bain (ONSCJ), at para. 83.

[116] The trial judge then reviewed the leading cases on the issue of how to determine an employee's entitlement to damages for wrongful dismissal, including all forms of compensation beyond wages which form an integral part of the employee's compensation package: see Lin; Paquette; Taggart.

[117] The point of contention in the respondent's case was whether the CIP represented an integral part of the respondent's compensation. That issue had to be determined in order to address the first part of the Taggart analysis: the employee's common law right to damages.

[118] In deciding whether the CIP entitlement formed an integral part of the respondent's compensation, the trial judge took into account the following contextual factors: it formed part of his contract; he participated throughout his 13 years of employment; although the points allocation was discretionary, his had remained constant since 2007; and his CIP entitlement represented over 50 per cent of his annual income. The trial judge concluded, at para. 41:

In short, the CIP was a significant, nondiscretionary variable form of compensation that represented more than half of Manastersky's annual income, similar to the variable forms of incentive compensation considered by Corbett J. in [Lin v. Ontario Teachers' Pension Plan Board, 2015 ONSC 3494, at paras. 92-94]. It was integral to his compensation and therefore forms part of his presumptive entitlement to damages at common law during the notice period.

[119] The trial judge then turned to the second component of the test: whether the terms of the CIP altered or removed the respondent's common law right to damages on termination of his employment. He noted, relying on the jurisprudence of this court, that clear language is required to limit common law entitlements. He focused on the fact that the CIP specifically addressed what would happen on termination of employment by providing for accelerated vesting of the respondent's points in the CIP. It did not purport to reduce or limit the respondent's entitlement.

[120] The trial judge then addressed the argument, which is renewed on appeal and which my colleague accepts, that because the Plan provided that RBC could terminate the CIP at the end of any investment period, RBC was entitled to eliminate the respondent's ability to earn CIP during his employment, which in turn constituted a limitation on the respondent's right to have the CIP be considered part of his compensation package and presumptive common law entitlement on termination. The trial judge rejected that argument, as follows [at paras. 43-46]:

RBC argued that Manastersky was not entitled to compensation in respect of the CIP during the common law notice period by virtue of a provision which allowed RBC to "terminate the Plan effective as of the end of any Investment Period with respect to future Investment Periods." As noted earlier, by the fall 2013, the CIP was nearing the end of the investment period for Fund 2, by virtue of the fact that the total amount invested through the Mezzanine Fund was approaching $160 million. Upon the conclusion of the Fund 2 investment period, a new investment period would automatically begin. However, RBC could also elect to terminate the CIP with respect to future investment periods upon the conclusion of the Fund 2 investment period and prior to the commencement of Fund 3. In fact, RBC exercised this right on June 25, 2014, when it terminated the CIP in respect of future investment periods.

I do not believe that the fact that RBC had the option of terminating the Plan at the end of an investment period should be regarded as limiting Manastersky's entitlement to notice at common law. First, RBC's right to terminate the CIP was in no way tied to the termination of Manastersky's employment. Far from containing "clear language" limiting rights upon termination of employment, the provision in the CIP permitting RBC to terminate the Plan did not purport to limit or reduce his common law entitlements. Nor could it be said that the parties did not turn their minds to the consequences flowing from the termination of Manastersky's employment on his entitlements under the CIP. In fact, the CIP enhanced Manastersky's entitlements in the event his employment was terminated without cause, through accelerated vesting of his Points.

Further, the fact that RBC terminated the CIP in respect of future investment periods on June 25, 2014, four months after Manastersky's dismissal without cause, does not alter this analysis. As Sharpe JA explained in Taggart, in cases where a terminated employee seeks compensation for entitlements under a benefit plan, the claim is not for the benefits themselves. Rather, the claim is for common law contract damages as compensation for the benefits that the employee would have earned had the employer not breached the contract of employment. The employee is claiming for the lost opportunity to continue to earn or receive benefits that would have been available in the event their employment had continued. As of the date of the Termination Offer, RBC had not in fact terminated the CIP, and it therefore remained in place as an integral component of Manastersky's compensation.

What if Manastersky's employment had continued past February 14, 2014 and in June 2014 RBC had terminated the CIP without offering Manastersky some alternate, comparable form of compensation? Although consistent with the terms of the CIP, this would have amounted to a unilateral significant reduction in his compensation, as it would have eliminated the opportunity for him to continue to accrue entitlements through the CIP. This would in all likelihood have amounted to a constructive dismissal, thereby triggering an entitlement to damages at common-law, including damages for the lost opportunity to continue to earn entitlements under the CIP.

Analysis

[121] My colleague takes issue with the trial judge's application of the Taggart test. He says the trial judge had to consider the terms of the CIP as part of the first step in the Taggart analysis in order to determine the respondent's common law right to damages, and that he erred in law by failing to do so.

[122] The argument is that the CIP contains a limit on the respondent's common law right to earn CIP during his employment, rather than a limit on his right to a bonus or a pension following termination, as in Paquette and Taggart. In other words, because RBC had no obligation to continue the CIP beyond the two existing funds or to start a third fund, it could not be said that the respondent would have continued to earn CIP during his employment or during the reasonable notice period.

[123] I agree with my colleague that, as a matter of law, the terms of the employment contract and the terms of any plan documents incorporated into the employment contract by reference -- as the CIP was here -- are relevant at the first stage of the Taggart test in determining what the employee would have earned during the period of reasonable notice: see Paquette, at para. 18.

[124] However, as I read his reasons, the trial judge carefully considered the terms of the CIP in determining whether the appellant's right to terminate the CIP prevented that portion of the respondent's compensation from forming part of his presumptive entitlement to common law damages. He made two cogent observations, at para. 44: (1) RBC's right to terminate the CIP was in no way tied to the termination of the respondent's employment, and (2) that right did not purport to limit or reduce the respondent's common law entitlements.

[125] The trial judge considered the appellant's argument on this point fully at the end of his analysis and rejected it. While it would have been preferable for the trial judge to have addressed this argument in the part of his reasons where he deals with the first stage of the Taggart test, read as a whole, the trial judge's reasons reveal that he properly considered the terms of the relevant documents and the applicable law in determining the respondent's entitlement to damages.

[126] Moreover, I disagree with my colleague that the trial judge made a palpable and overriding error in finding that the terms of the CIP did not preclude that component of the respondent's compensation from constituting part of his presumptive common law right to damages for breach of contract.

[127] A palpable and overriding error is one that is "plainly seen": Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at paras. 1-6. This standard is met "if the trial judge misapprehended the evidence in that the findings are 'clearly wrong', 'unreasonable', or not 'reasonably supported by the evidence'": RBC Dominion Securities Inc. v. Crew Gold Corp., [2017] O.J. No. 4146, 2017 ONCA 648, 73 B.L.R. (5th) 173, at para. 29 (citing L. (H.) v. Canada (Attorney General), [2005] 1 S.C.R. 401, [2005] S.C.J. No. 24, 2005 SCC 25, at paras. 55-56).

[128] In my view, the trial judge did not make a palpable and overriding error. To the contrary, not only was the trial judge's interpretation of the CIP a reasonable one, in my view it was correct.

[129] The trial judge took into account all of the history and other contextual factors surrounding the respondent's compensation while employed at RBC in interpreting his common law entitlement. As the trial judge found, the provision that allowed RBC to unilaterally discontinue the Plan, a particular mechanism of part of the compensation, does not contain clear language that has the effect of removing the employee's right to receive compensation in an amount equivalent to what he would have earned through that mechanism during the period of reasonable notice: Lin, at para. 86 (citing Taggart, at para. 20).

[130] The reason clear language is required is to ensure that the employee is bound only by what was understood and agreed to. There is no dispute that the respondent understood and agreed that the CIP could be terminated by RBC. However, he did not agree as a term of his contract that his compensation package would then no longer include participation in an incentive plan. Nor was there evidence that it was the intention of the parties that the clause that gave RBC the right to terminate the CIP would have that effect.

[131] I agree with the trial judge that RBC's right to discontinue the CIP does not constitute the type of clear language that is required to limit an employee's common law entitlement to damages in lieu of notice. It gives the company the business discretion and flexibility to continue or discontinue a particular mechanism of compensation linked to the company's investments. It does not speak to the employee's entitlement to receive the level of compensation to which the employee is entitled.

[132] While RBC could terminate the CIP pursuant to art. 9.3, it would have been required to offer the respondent an alternate comparable form of compensation, because the contract does not provide that the effect of the employer's ability to terminate the CIP is that the respondent's compensation would be unilaterally reduced by that amount, in this case about 50 per cent. If RBC had terminated the CIP without offering alternate comparable compensation, that would have evinced RBC's intention to no longer be bound by the employment contract and would have amounted to constructive dismissal: Potter v. New Brunswick Legal Aid Services Commission, [2015] 1 S.C.R. 500, [2015] S.C.J. No. 10, 2015 SCC 10, at para. 30.

[133] My colleague observes, and I agree, that inclusion of entitlement to the CIP was the product of an agreement between a sophisticated employer and a group of sophisticated employees. Had it intended to do so, the sophisticated employer in this case could have drafted a contractual provision that clearly stated that if it terminated the CIP, then the employee's compensation would be reduced accordingly.

[134] Further, it is difficult to imagine a sophisticated employee knowingly agreeing to continue in the position if the employer could, in its sole discretion, remove over 50 per cent of the employee's compensation, especially considering the CIP was intended to "assist RBC CP in retaining and recruiting talented individuals to carry out its business objectives": reasons, at para. 7.

Conclusion

[135] I agree with the trial judge that the language of the CIP, and in particular art. 9.3, does not limit the respondent's right to CIP or its equivalent as an integral part of his compensation. The trial judge did not err in law or commit a palpable and overriding error in his interpretation of the contract. There is therefore no basis to interfere with his decision. I would dismiss the appeal with costs.

Appeal allowed in part.