Lessons Learned from Tom Brady's Case

"With all due respect, Mr. Brady's explanation of that made no sense whatsoever" (I get to some legal stuff, trust me; not till the end though).

The above comment was rendered by the majority of an appellate court panel in a decision issued today. In my second blog post this last week to make such an observation, that might seem all telling - were it taken in a vacuum.

For those of you who do not share my love of NFL football, here is a recap:

• Tom Brady was the figurehead of the New England Patriots when they beat the Indianapolis Colts to advance to Superbowl 49, where they ultimately beat the Seattle Seahawks to claim Brady's fourth Lombardi Trophy.
• After their win over the Colts, allegations surfaced that the Patriots had tampered with the air pressure in game balls - in defiance of the game's rules, and to gain an unfair advantage.  Some would say "cheating" if being direct.
• The league eventually found Mr. Brady culpable in the incident, after several rounds of appeals that decision has been reinstated (the prior round of litigation went Mr. Brady's way).

Full disclosure - I am a Broncos fan.  I have a vested interest in things not going the Patriots' way and I will go to my grave having never cheered for Tom Brady.

So what made "no sense" in the above excerpt?  Well, to summarize as dispassionately as I think I am able to, Tom Brady essentially stated that he had a cell phone with conclusive proof of his non-involvement in the "deflate-gate" scandal, but that he destroyed this very phone while cognizant of the fact that it could clear his good name.

Wait, is "good name" the right phrase... "good statistical record," that's what I meant!

Mr. Brady's explanation made no sense, I fully agree.  

If I were a judge, I think I would treat with some skepticism a litigant's statement to the effect of "I had exculpatory evidence, and certainly nothing condemning, but then I just destroyed it - while this proceeding was afoot, and for no particular reason. Nonetheless find in my favour."

So why did Mr. Brady win a round of litigation, and convince one of the three judges on this recent appeal to side with him?

This is my real-world introduction to a problem faced by all litigators, self included. The process ultimately comes down to people, making it very difficult to guarantee a particular result - even when we as counsel and/or parties see the matter as clear cut.  Most sports fans will be able to recount for you a moment where their team lost the 'big game' due to a blown call which video replay conclusively showed was incorrect.  So too, you will find that most litigators likely have a story or two about how the Court misapplied the law. Video replay might be equated to the Court of Appeal in this imperfect analogy.  Eventually, however, there is a final result and many if not most times, at least one of the parties disagrees with whatever that result might be.

I spent the last several months saying the result was not fair, and now I am in the 'fully vindicated' column once more.  If it does not end up in a higher court, I will remain in my happy place - on this result.

99% of cases settle.  Maybe if we were millionaires with millions of dollars in endorsement deals on the line it would be worth fighting to see who wins.  For those of us not in that camp risk avoidance is what makes the world go around.

J.P. v. Dominion Masonry Ltd., 2013 BCCA 184

Martin Sheard argued this important employment law matter both at trial and in the Court of Appeal J.P. v. Dominion Masonry Ltd., 2013 BCCA 184 (Groberman, MacKenzie, Harris JJ.A.).  He was successful in both courts. David McWhinnie of our office also appeared in the appeal. Opposing counsel was a partner at a national law firm.

In the trial decision (also summarized on our website) the trial judge found that our client was constructively dismissed when his employer unilaterally decided to stop paying him his bonuses. He awarded $106,250 in damages plus interest and costs. On cross appeal we successfully argued for an additional $32,500 in damages. Several of the issues in the appeal are summarized below.

First, the Appellant contended that the trial judge erred in using excerpts from Farber v. Royal Trust Co., [1997] 1 S.C.R. 846 ("Farber") which referred to the Quebec (civil law) definition of constructive dismissal. The Court of Appeal concluded that those provisions "do not, in my view, state a test that is any different from the [common law] test[.]"

Second, the employer offered to continue employing our client, giving rise to the question of whether the plaintiff had a duty to return to work to mitigate his damages. The trial judge found that he did not and the Court of Appeal deferred to his finding. He had no duty because the employer acted in a dismissive manner toward him during his final weeks of employment, which made it unreasonable to require him to return to work to mitigate his damages.

Finally, in a cross-appeal, damages were awarded for unpaid bonuses both retroactively (this non-payment was a component of the constructive dismissal allegations) and going forward into the notice period. Even though the bonuses were not a straight mathematical calculation, the trial judge erred in not assessing them. The bonuses were intended to approximate what is mutually fair; this being the case, the Court determined that a general downturn in the economy justified a relatively lower bonus amount.

Largest Punitive Damage Award for an Employment Case in Canada

On June 29, 2012 Chris Forguson completed a 3 week jury trial in Prince George.  

The plaintiff, Larry Higginson had been dismissed from the Babine sawmill in Burns Lake in October, 2009.  The Babine sawmill had been acquired in November 2006 by Hampton Lumber Mills Inc. based in Portland, Oregon.  Babine Forest Products Inc. and Hampton Lumber Mills Inc. were joint defendants.  

The defendants alleged cause for dismissal and paid Mr. Higginson no severance after 34 years of faithful service.  In the lawsuit, Mr. Higginson took the position that the cause for dismissal was essentially concocted by the defendants as a way to get rid of him without paying any severance.  Mr. Higginson further alleged that his dismissal was part of a scheme to avoid severance costs for long service employees and that Hampton Lumber Mills was responsible for this scheme and for his dismissal.  

After a 3 week trial, the jury determined that there had been no cause to dismiss Mr. Higginson and awarded $236,000 in compensatory damages for wrongful dismissal.  The jury further awarded $573,000 in punitive damages against the defendants for the conduct which gave rise to Mr. Higginson’s dismissal.  

This is the largest punitive damage award arising from an employment case in Canada.

Systad v. Ray-Mont Logistics (18 month award for 65 year old Container Lift Operator)

A 65 year old Container Lift Operator, with no supervisory duties was awarded 18 months notice after 18 years service, in spite of the employer's argument that 8 weeks' notice was enough given his (allegedly) non-responsible job duties.

The full text of the reasons for judgement are available here.

Character of Employment:

The judge dismissed the employer's arguments based on its allegation that Mr. Systad's "character of employment" was such that only statutory notice was required to comply with the BC Employment Standards Act.

"[19] There is no evidence to suggest that an employee with the responsibilities of Mr. Systad will have an easier time finding suitable alternate employment than an employee having more "senior" duties. I am satisfied that there are very few situations where the "character of employment" will be of paramount relevancy in the consideration of the appropriate notice period to be ordered. I adopt the statements that giving undue attention to the character of employment represents "antiquated social values" and is "antithetical to the law's ultimate goal, namely egalitarian justice". Character of employment is merely another matter which I take into account along with the other factors set out in Bardal, supra."

Employment Standards Acts minimums NOT adequate notice in most circumstances:

Judge Burnyeat in strong language concluded that for Mr. Systad the minimum notice requirements of the Employment Standards Act were inadequate.

[23] Mr. Systad has approximately ten years in excess of the period of employment that would entitle him to a maximum of eight weeks notice provided under the Act. At the same time, the employment of Mr. Systad was not that of a young, low-service employee with an "entry level" job. Mr. Systad was paid over $75,000 for his efforts, his hourly rate of approximately $36.80 far exceeded that of forklift drivers who he says earn $14 per hour, and he was entitled to eight weeks paid vacation. As well, Mr. Systad trained less experienced drivers and he had been asked by the Terminal Manager to supervise other employees when the Terminal Manager was absent.

[24] The decision in Pelech, supra, is clearly distinguishable. Based on his age, his responsibilities, and his compensation, he could not be described as a young entry-level employee. I reject the submission of Ray-Mont that the statutory notice provisions under the Act are appropriate in this case. It will be a rare case where someone of this age, compensation, years on the job, and duties will only be entitled to the compensation provisions set out under the Act. This is not such a case. While Mr. Systad had few remaining supervisory functions, he nevertheless was being paid commensurate with considerable responsibilities.

This decision underlines the severe limitations on application of the Pelech principle to very young and short service employees with entry level jobs.

Relevance of Physical or Mental Disabilities to Length of Notice Period:

The court accepted and applied submissions by plaintiff's counsel that the length of notice period could in proper circumstances be extended by particular problems facing the plaintiff in terms of re-employment. Mr. Systad had knee problems with both knees. When dismissed, he was just about to go off work for left knee surgery, and at the time of trial he had not yet returned to an active job search because he was still unable to drive. He faced the prospect of further surgery on his other knee, a factor complicating his return to active employment.

Defence counsel argued that these circumstances were irrelevant and ought not to be taken into account when assessing the notice period. The court disagreed.

[25] Mr. Systad is 65 years-old and, while provincial legislation has been changed so that age 65 is no longer the date for mandatory retirement, I am satisfied that it will nevertheless be difficult for Mr. Systad to find employment in competition with a younger applicants for employment. I also take into account that his recent operation and the possibility that he will require further operations will make it more difficult for him to compete in finding comparable employment. As well, the availability of similar employment having regard to his experience, training and qualifications may not be available and he may be required to settle for jobs having considerable less remuneration. The possibility that he may require further surgery may well make him less desirable as a potential employee. Taking into account all of the factors set out in Bardal, supra, I am satisfied that the reasonable notice period is 18 months.

Modest Contingency Reduction for Damage Assessment Early in Notice Period:

The judgement was rendered only 6 months after the dismissal, thus 12 months remained during the notice period, and the defendant asked for a large deduction for the contingency that remunerative employment might be found during that period. The court only reduced the 18 month notice period by two weeks to reflect the contingency that Mr. Systad might earn income during the notice period.

[27] Taking into account the notice period of 18 months, the age of Mr. Systad, the number of years of his service, the type of work that he was undertaking, the possibility that his experience as a Container Lift Operator is specialized so that his skills and abilities are not readily transferable to other areas of employment, the level of responsibility, his efforts to date to find employment, and the information before the Court that his future employment may well be limited to employment at $14 per hour and not the $36.80 hourly wage that he was earning, I am satisfied that some contingency should be in place to reflect the possibility that Mr. Systad will find employment in the 12-1/2 months subsequent to this summary trial.

[28] Ray-Mont submits that the period of reasonable notice should be reduced by two months. There is very little information available regarding available employment given the skills of Mr. Systad. What is available allows me to conclude that what may be available will pay Mr. Systad less than 40% of what he was earning with Ray-Mont. In the circumstances, I provide a contingency equivalent to two weeks of his former salary. This contingency reflects the possibility of finding future employment but at a greatly reduced hourly wage. If I had any confidence in predicting that Mr. Systad would find employment at the salary he was receiving, I would have assessed the contingency factor at six weeks.

Mitigation of Damages:

The court refused to make any reduction in the notice period in spite of defendant's arguments of failure to mitigatge, writing:

[29] A further question which Ray-Mont raises is whether Mr. Systad failed to mitigate his damages. In Koos v. A&A Contract Customs Broker Ltd., [2009] B.C.J. No. 857, Rice J. set out the nature of this obligation as follows:

The plaintiff has an obligation to mitigate her loss, that is, to take such steps as a reasonable person in the plaintiff's position would take in her own interest to maintain her income and her position in her industry, trade or profession: see Smith v. Aker Kvaerner Canada Inc., 2005 BCSC 117, at para. 31. The onus is on the defendant to prove that the plaintiff has failed to mitigate or failed to take reasonable steps to mitigate. The defendant must show not only that the plaintiff failed to take steps to mitigate but also that had the plaintiff taken those steps she could likely have found equivalent employment: see Jorgenson v. Jack Cewe Ltd. (1978), 93 D.L.R. (3d) 464, 9 B.C.L.R. 292 at 296 (C.A.), aff'd [1980] 1 S.C.R. 812, 111 D.L.R. (3d) 577. (at para. 35)

[30] There was no evidence that, with diligent effort, Mr. Systad could have already secured alternative employment. Mr. Systad is only now able to work, having just recently recovered from his knee surgery. I think it highly unlikely that Mr. Systad would have been in a position to compete with those who could have started employment immediately when he would have not have been in a position to return to work until he has sufficiently recovered from his knee operation and until he could drive a vehicle again – not only to get to work but to operate comparable equipment in any new employment.

[31] Regard must be made to his physical and mental condition: Pereira v. Business Depot (c.o.b. Staples Business Depot), [2009] B.C.J. No. 1731 (S.C.) at para. 110. It is also appropriate to take into account the reasonable period of time to get over the shock of having his employment terminated: Smith v. Aker Cavaner Canada Inc. [2005] B.C.J. No. 150 (S.C.) where the following statement was made:

...I am satisfied that it is not necessarily a failure to mitigate where a finding could be made that a plaintiff has not immediately commenced a job search. I am satisfied that any employee should be given a reasonable period of time of having their employment terminated, to organize their thoughts as to how best to go about obtaining new employment, and to undertake the necessary research and preparation of resumes so that they are in a position to compete for available positions. (at para. 35)

[32] After his employment was terminated, Mr. Systad made only minimal efforts to find employment. As well, he did not take up the offer made to assist him in finding employment. When I combine the initial period of shock with the immobility caused by the necessary operation on his right knee, I conclude that Ray-Mont has failed to meet the onus of showing that Mr. Systad has failed to mitigate his damages. In this regard, I also take into account that reasonable mitigation efforts must take into account not only his current knee operation but the possibility that he will require further operations.

Not Appropriate to Deduct amounts for Employment Insurance premiums, Canada Pension Plan premiums, or Old Age Pension payments:

The court rejected the argument by defence counsel and deductions should be made for these premiums and payments.

Can an Employer Monitor Employee's Computer for Private Material

A recent Ontario case involving a criminal charge against a teacher for possession of child pornography has garnered significant media attention.

Ontario Supreme Court Decision

Ontario Court of Appeal Decision

This is in part because of a wide interest by employees about the privacy of information they choose to keep on computers at work.

Workplaces often have little or no express policy regarding private use of computers at work.

This particular case involved portable computers provided for the use of teachers, where the teachers were allowed to use computers for personal purposes.

In these circumstances, the Ontario courts decided that in a criminal investigation for possession of child pornography (the accused was found in possession of a nude photographe of a grade 10 student) a police search of the teacher's laptop without a warrant was a breach of his Charter rights, in spite of the School Board having permitted the search.

The implications for employees and employers are significant, not only for criminal cases, but claims involving employment law principles and disciplinary steps up to dismissal. Inappropriate searches of employee computers might in some cases amount to a constructive dismissal, leaving the employer exposed to a wrongful dismissal claim.

Employers and employees would both be served by a workplace with express policies regarding the personal use of computers by employees.

Employers who wish to ensure an unfettered ability to search computers (used by employees) without limitation might want to establish and communicate clear written policies which set the ground rules.

Employers might for example take steps such as ensuring all computers they wish to monitor are employer owned, establishing and communicating clear written policies which inform employees of the employer's right to monitor all communications, to prohibit private use of computers (should that be appropriate), or if private use by employees is permitted, at least to expresssly restrict the use of computers for inappropriate purposes.

On August 7, 2009 in Kerry (Canada) Inc. v. DCA Employees Pension Committee the Supreme Court of Canada upheld the Ontario Court of Appeal's 2007 decision.

The case will be welcome to employers with pension plans, and serves to clarify the ground rules about use of pension funds to pay pension expenses and take contribution holidays.

The SCC made the following key determinations:

• Contribution Holidays: Where a pension plan has both defined benefit ("DB") and defined contribution ("DC") components, surpluses in the plan may be used by the employer to take contribution holidays from its DC contributions, so long as certain requirements are met.
  

• Pension Plan Expenses: Employers can use pension trust monies to pay reasonable and bona fide plan expenses unless it separately committed clearly that such expense would be paid by it. This even includes "in-house" administration expenses. Even if the originating pension plan documents contain an "exclusive benefit" clause, expenses can ordinarily be taken from the trust fund, and the employer can lawfully amend Vis-à-vis payment of pension plan expenses, unless an employer has clearly committed to paying a plan expense, it is not obliged to do so and it is not unlawful to charge reasonable and bona fide expenses to the pension trust fund (including bona fide expenses of the employer for "in-house" administration).

• The amendment of a pension plan to allow the employer to charge reasonable plan expenses to the plan trust fund is not prohibited merely because the trust agreement or pension plan (or both) contains an "exclusive benefit" clause.

While the decision deals with an Ontario plan, the principles of the SCC's ruling should have application in respect of other pension standards laws outside of Québec, subject to specific prohibitions in those laws.

Facts

In 1954, the Canadian Doughnut Company Ltd., which later became DCA Canada Inc., established a defined benefit plan, the assets of which were held in trust. In 1994, DCA Canada Inc.'s parent sold all of its shares to the parent of Kerry (Canada) Inc. ("Kerry") and Kerry acquired all assets and liabilities of DCA Canada Inc.

Before 1975, the pension plan document had no provision for the payment of plan expenses. It provided that all contributions made by the employer "were irrevocable" and could only be used "exclusively for the benefit of" members. The trust agreement provided that "no part of the corpus or income of the fund shall revert to the Company or be used or diverted to purposes other than for the exclusive benefit" of the members. The expenses incurred by, and all other charges and disbursements of, the trustee were to be paid by the employer. It also provided that no amendment "shall authorize or permit any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit" of members unless approved by the Minister of National Revenue.

In 1975, the employer amended the plan to allow it to direct fees of the trustee, investment counsel and other fund manager to be paid from the plan fund as well as other expenses reasonably and properly incurred by the fund manager or the employer. In 1987, this provision was amended to allow for the payment of all normal and reasonable expenses incurred in the plan's operation, including those for actuarial, consulting, administrative, investment management and auditing services, and government filing fees. In 2000, Kerry further expanded this provision to provide the payment of all costs and expenses incurred by the employer as administrator of the plan or by its agents and advisors, including actuarial, consulting, legal and accounting fees and disbursements, expenses relating to the addition of a defined contribution option and expenses incurred in the winding up of the plan.

From 1954 to 1985, the employer made all required employer contributions. In 1965 the terms of the pension plan were amended to specifically refer to actuarial discretion in determining the employer's contribution obligations. However, it was not until 1985 when the employer commenced a lengthy contribution holiday.

From 1954 to 1984, all plan expenses were paid by the employer. After 1983, certain plan expenses were paid out of the plan fund. In 1994, DCA reimbursed the plan fund for trustee fees paid from the plan fund before 1994. After its assumption of the plan, Kerry continued to have plan expenses, other than trustee fees, paid from the plan fund.

In 2000 Kerry amended the pension plan to add a DC component. The plan was thus made up of Part 1 for DB plan members and Part 2 for DC members. Existing plan members were given a one-time option to convert their DB accruals to DC benefits and all new employees became DC members. The DC component featured employee accounts and these accounts were maintained pursuant to an insurance policy which presumably consisted of a contract between the insurer and Kerry. The plan provisions seem to have provided that DC members were not entitled to benefit under the original pension fund (which was restricted to DB members). The plan provisions also provided that the employer was permitted to take contribution holidays in respect of the DC members from the trust fund.

Certain plan members objected to a number of activities by Kerry in respect of the plan, including the implementation of the DC component and ultimately the proposed employer contribution holidays. They also took issue with certain plan expenses which Kerry had paid from the pension trust fund.

On April 22, 2002, the Superintendent of Financial Services issued two notices of proposal ("NOP") under section 87 of the PBA. In the first NOP, the Superintendent proposed to refuse to make certain orders requested of him relating to the 2000 pension plan amendments, including the refusing to register the plan amendments which added the DC component and to challenge Kerry's ability to take a contribution holiday under the plan. The second NOP proposed an order requiring Kerry to reimburse the plan fund for all expenses paid out of the plan fund after January 1, 1985 and for all income that the plan fund would have earned had the expenses not been paid from it. With respect to the first NOP the employee group requested, and with respect to the second NOP Kerry requested, a hearing before the Financial Services Tribunal.

Summaries of pre-SCC Decisions

The following summary of the Tribunal and lower courts decisions are restricted to the issues of the DC contribution holiday and plan expenses. The issues of the standard of review of the Tribunal's decision and orders on costs of the plan members from the pension fund are discussed only in the review of the SCC decision.

Tribunal Decision

On the issue of the contribution holidays, the Tribunal noted that the contribution holidays were not taken until after the plan amendment in 1965 had been adopted. It identified salient case law, and ruled that the legislation was permissive with regard to DB contribution holidays and that the 1965 amendments were valid and effective to allow the employer to take a DB contribution holiday. Accordingly, the DB contribution holidays taken from 1985 were lawful. With respect to the DC contribution holidays, the Tribunal noted that the 2000 plan amendments were not effective to permit lawful contribution holidays since the structure of the amended plan was such that the DC members were not included as beneficiaries of the pre-existing trust fund. Allocating assets from the trust fund to the member accounts under the DC provisions would result in the allocation of assets from the trust fund in violation of the "exclusive benefit" provision in the trust agreement. The "exclusive benefit" provision forbids the use or diversion of assets in that trust fund:

to purposes other than for the exclusive benefit of such persons or their beneficiaries or personal representatives as from time to time may be designated in the Plan except as therein provided. [emphasis added]

The Tribunal also opined that the terms of the pension plan could be amended, with retroactive effect, to include the DC members as beneficiaries of the trust fund. Provided this was done, DC contribution holidays would be lawful because the terms of the trust agreement and the plan text contemplated that the class of beneficiaries could be amended to include other persons "designated in the Plan", and retroactive plan amendments are permitted under ss. 13(2) of the PBA. Accordingly, the Tribunal directed the Superintendent to deny registration of the 2000 plan amendments and, if the plan was not amended within 90 days of the order to make the DC members beneficiaries of the trust fund, Kerry would be required to re-imburse the pension fund for all DC contribution holidays taken since 2000.

On the issue of expenses, the Tribunal held that expenses relating to the plan were for the exclusive benefit of members in the sense of the terms of the trust. It reasoned that this term means expenses for the "primary benefit" of the members "since no such expense can fairly be said to be for the exclusive benefit of the members on a strict literal view of that expression." The only expenses that the Tribunal found not to be for the primary benefit of members were consulting fees relating to the addition of the DC option to the plan in 2000.

Divisional Court

With respect to the DC contribution holidays, the Divisional Court took the view that the Tribunal erred in its conclusions, largely because it determined that there were two pension plans, not one, since 2000. It concluded that, because there were two pension plans the use of surplus in the DB component was an unlawful "cross-subsidization" of one plan from another and determined that the remedy of revising the 2000 plan amendments was not permitted as it resulted in an unlawful revocation of the 1954 trust by adding as beneficiaries of the trust persons who were not even members of the plan to which that trust related.

On the topic of expenses, the Divisional Court also disagreed with the Tribunal, holding that the power to amend was subject to the "exclusive benefit" proviso and that the plan amendments were therefore invalid because they purported to revoke the trust in whole or in part.

Ontario Court of Appeal

On the topic of the DC contribution holidays, the OCA disagreed with the Divisional Court and sided with the Tribunal. It held that there was only one pension plan and that there was no reason to disturb the Tribunal's proposed remedy of amending the plan terms to make clear that the DC members are beneficiaries of the trust fund. The OCA gave five reasons for so concluding: (1) consistent with the approach outlined in the Schmidt case³ there was nothing in the plan terms which precluded employer contribution holidays, (2) section 9 of the regulations under the PBA contemplated DC contribution holidays on a full conversion from a DB plan to a DC plan and, while the Kerry plan was not the subject of a full conversion, this feature of the PBA signalled that the legislation did not preclude DC contribution holidays, (3) Kerry had authority under the plan documents to unilaterally amend the plan to add a new category of plan member, (4) if a new category of member was added, Schmidt allowed a contribution holiday, and (5) "cross-subsidization" was not precluded by the trust agreement, as what was precluded was using assets of the trust for other than the exclusive benefit of beneficiaries. Once the amendments outlined by the Tribunal were made, the DC members became beneficiaries of the trust.

On the topic of expenses, the OCA found that the PBA did not contain any provision governing the payment of pension plan expenses, and no principles of law require the employer to pay such expenses. It stated as a starting point that "if, in the documentation, the company undertook to pay the Plan Expenses, it must do so, unless that undertaking was validly amended." The OCA found that, although the employer had undertaken to pay the trustee's fees and expenses in the trust agreement, it had not done so in respect of the other services such as actuarial, accounting and investment functions that a pension plan of this nature might require. As neither silence nor the employer's voluntary assumption of plan expenses for a period of time created a legal obligation, the trust fund would bear the expenses in accordance with general trust law and principles.

Supreme Court of Canada

The SCC ruled on several issues, and the court's rulings are discussed in the order of appearance in its decision.

Standard of Review

On this topic, the SCC reviewed recent administrative case law and determined that in the matter at issue, because it involved a review of pension plan documentation and, in respect of the costs issue, the Financial Services Commission of Ontario Act, the applicable standard of review was reasonableness. This is to be contrasted with the higher standard of review of "correctness" which the SCC ruled applicable in the Monsanto decision⁴ a few years ago. As a practical matter, this means that so long as the Tribunal's decision is found to be reasonable the courts will not overturn it. This part of the decision is interesting since the SCC in Monsanto had concluded that the standard of review for the Tribunal in interpreting subsection 70(6) of the PBA, relating to surplus distribution on partial wind up was the higher standard of correctness. It is interesting, however, that one of the reasons given for the lawfulness of the DC contribution holidays is that the PBA does not prohibit it, which naturally involves the application of and, presumably, the interpretation of the PBA.

Plan Expenses

The SCC agreed with the OCA on the disposition of the expenses issue. It agreed that the trust agreement merely required the employer to pay for trust expenses but was silent on the issue of plan expenses. It also agreed that these are distinct types of expenses and concludes that, while the overall pension program consists of the plan and the pension trust fund, these are different elements of a whole. However, the SCC noted that the Tribunal was justified in looking at expenses individually rather than lumping everything to do with the pension plan in the same category and agreed that the consulting fees which the Tribunal had excluded from permitted expenses should not be payable from the pension fund. The SCC rejected the employee committee's arguments that charging plan expenses to the trust fund violated an amendment made to the trust agreement made in 1958 (which added reference to the employer paying taxes, interest and penalties incurred by the trust), and constituted a benefit to the employer and so violated the "exclusive benefit" provision of the trust agreement. On the latter point, the SCC agreed with the OCA that the term "exclusive benefit" does not mean that the only persons who may benefit are the employees and noted that there is always some incidental benefit to an employer in having a pension plan (such as attracting and retaining employees) and to the employees' families in the income security the plan provides. Ultimately, the existence of the plan is a benefit to the employees, the payment of expenses is necessary to continue the plan and so for the purposes of the "exclusive benefit" clause, the expenses may be said to be for the exclusive benefit of the plan participants.

In another important element of its decision, the SCC, like the OCA, rejected claims that the payment of plan expenses from the pension fund constituted a "revocation of trust" and concluded that payment of reasonable fees for services necessary in the administration of the plan "whether the services are provided by third parties or the employer itself" are not prohibited. The SCC found that payment of in-house administration expenses of an employer charged to the fund do not constitute an unlawful encroachment on the assets of a pension trust fund as long as the employer did not commit to bear these expenses itself and the expenses are bona fide, necessary and reasonable.

DB Contribution Holidays

The SCC found that while the 1965 plan amendments were valid and explicitly included actuarial discretion thus fitting within the tests for valid DB contribution holidays enunciated in Schmidt, even the 1954 plan provisions implied the notion of actuarial discretion since such discretion was called for to determine "such amounts [of employer contribution] as will provide" for the benefits. Accordingly, the SCC found DB contribution holidays were permitted under the plan terms.

DC Contribution Holidays

On the issue of the use of surplus by the employer to fulfill its DC contribution requirement, two justices would have ruled that such contribution holidays were unlawful. The main point of divergence consists of a disagreement over the nature of the plan. The majority agreed with the OCA that there was a single pension plan at issue, while the minority concluded that there were effectively two distinct pension plans.

The Majority

The majority concluded that the DB and DC components were part of a single plan for the following reasons: (1) on the facts it found that there was an intention that there be a single plan, (2) nothing in the PBA or at common law prevents a plan with DB and DC components, (3) trusts may have different classes of beneficiaries, (4) the case law relating to plan mergers, which the employees argued provides that commingling of assets from two separate plans was not permitted, was not applicable since the addition of the DC component did not result from merger and there was a unified category of plan members — employees of Kerry or its predecessor.

The majority also concluded that the PBA regulations do not prohibit taking a DC contribution holiday. It found support for the proposition that DB surplus can be applied to DC contribution holiday in subsection 7(3) of the PBA regulations. The SCC also ruled that a retroactive plan amendment is permitted by subsection 13(2) of the PBA and so the remedy proposed by the Tribunal was lawful. The majority ruled that the proposed plan amendment could be distinguished from the "re-opening" of a closed pension plan which was criticized in the Buschau line of cases. Like the OCA, the SCC concluded that the pension trust in the instant case was not for a closed group of plan members and it was within Kerry's power of amendment to add the DC plan members as beneficiaries of the pension trust fund.

One issue the majority does not seem to focus on in detail is how the DC funding vehicle is to be held. The court focuses on the plan amendments which are sufficient to allow the DC contribution holiday and does not prescribe how the DC funding vehicle is to be held.

The Minority

The minority would have ruled against the DC contribution holiday and would have required Kerry to contribute to the trust fund an amount equal to the foregone contributions for the following reasons: (1) there were two distinct plans and two distinct trust funds, (2) the notion of surplus is foreign to a DC plan, (3) the only instance in which the PBA allows a contribution holiday is on a full plan conversion (pursuant to subsection 7(3) of the PBA regulations), (4) the DC contribution holiday violates the "exclusive benefit" provisions of the trust agreement as there is no discernible benefit to the DB members (which, the minority concluded, remain the sole beneficiaries of the DB trust fund), (5) the amendments which purported to effect the addition of the DC members as beneficiaries of the trust fund were invalid despite the PBA provisions allowing retroactive amendments because to allow this would violate the exclusive benefit clause, and (6) even if the amendments were valid, there would still be an impermissible transfer of assets out of the pension trust fund to the DC funding vehicle which would constitute an unlawful revocation of the trust.

Costs

The SCC upheld the Tribunal's decision that it had no authority to order costs from the pension fund since it has only the power afforded by its constating statute and can only order costs payable by a "party" before it. As the pension trust fund was not a party before it, the Tribunal concluded it could not order costs payable from it.

On the issue of the cost award against the employee group, the SCC upheld the OCA's order and rejected the employee group's assertion that costs should be payable from the pension trust fund. The SCC based its ruling on a number of points but most importantly found that where the proceedings are not merely aimed at the "due administration of the pension trust fund" and may be characterised as "adversarial", that cost awards should not be paid from the trust fund and should follow the normal rules of costs to the successful litigant. The court characterised the proceedings in Kerry as adversarial since not all beneficiaries would have a common interest or take the same position (e.g. here the DC members would not seem to benefit from the relief requested by the DB members).

Conclusions to be Drawn

With respect to DC contribution holiday issue, provided that (i) there is a single, ongoing pension plan with both a DB and a DC component, (ii) the members of both components are beneficiaries of the same pension trust fund, and (iii) the employer may lawfully take contributions holidays in respect of the DB component, it is not unlawful under the PBA or the common law to also apply the surplus in the trust fund to the employer's contribution obligations under the DC component.

With respect to expenses, the absence of any reference to some or all expenses in the original plan and trust documentation allows the employer to 'clarify' its precise payment obligations. Whether plan documentation can be amended where there is no such gap is unclear. The payment of expenses by the pension fund does not amount to a revocation of trust even where such payment is made to the employer for in-house administrative services.

As for the ability to amend a plan to change responsibility for payment of plan expenses, it is difficult to say how this decision may apply. The OCA's statement that an employer that has undertaken to pay expenses must do so "unless that undertaking was validly amended" suggests that it may be possible to provide for the payment of plan expenses by the pension fund even where the plan documentation was not originally silent on the point. The general power of amendment typically reserved in the plan documentation may be sufficient to allow this if, as in some of the cases reviewed by the SCC in Schmidt, the power of amendment is broad and subject only to the proviso that no amendment may reduce members' entitlement to accrued benefits.

The way that the SCC distinguishes Markle⁵ suggests that it may be possible to use a broad power of amendment to have future "employer" costs paid from the fund, particularly if actual payment of each expense remains "subject to the approval, of the trustee". However, this issue remains far from settled and the answers will turn on the facts of each case.

Footnotes

1 Large portions of this update are based on "Pensions: Limited Clarity Concerning The Payment of Pension Plan Expenses" by Lorraine Allard, also of McCarthy Tétrault LLP.

2 Kerry (Canada) Inc. v. DCA Employees Pension Committee (Kerry), 2009 SCC 39.

3 Schmidt v. Air Products of Canada, (1994), 115 D.L.R. (4th) 631

4 Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services), [2004] 3 S.C.R. 152.

5 Markle v. Toronto (City) (2003), 63 O.R. (3d) 321.

Supreme Court of Canada - RBC Dominion v. Merrill Lynch

On October 9, 2008, the SCC overturned the decision of the BC Court of Appeal, and reinstated the trial decision in its most significant aspect.

This decision deals with the duties owed by employees to their employer when in the process of leaving to join a competing business. The Supreme Court of Canada held that even non-fiduciary senior management employees had signficant duties to avoid orchestrating a wrongful mass departure to a competitor, and that in the event of breach, substantial damages might be required.

The reasons are at RBC v. Merrill Lynch