The perils of ambiguous language in employment contracts

The importance of precise language in employment contracts cannot be overstated. Ambiguity in a contractual provision, especially when it comes to bonuses and other forms of compensation, can create significant unintended liability for employers.

The case of Kenny vs. Weatherhaven Global Resources Ltd. in 2017 illustrates the perils of imprecise language. The plaintiff in that case was awarded a significant bonus payment after persuading the BC Supreme Court to reject his employer’s claim that it retained discretion over whether it would pay him a bonus.

The facts

After being dismissed without cause, Karl Kenny claimed unpaid bonuses not only for preceding years of employment, but also for the 12-month notice period immediately following the termination of his employment. Kenny’s claims were based on contractual terms first put in place when he was promoted to chief operating officer of the company. He argued that those terms guaranteed him a minimum bonus of 20% of his base salary for the periods in dispute.

The key contractual term Kenny relied on stated that he would “be eligible to receive a minimum of 20% and up to 60% of the base salary annually, as a performance bonus…, less applicable tax withholdings required by law, based on the achievement of corporate objectives and personal objectives as mutually agreed to by the Company and the Executive.”

The employer disputed Kenny’s claim, arguing that Kenny was not unconditionally entitled to the bonus; rather, he was merely eligible for a bonus and it was in the employer’s discretion to determine whether he should receive a bonus, and in what amount, based on the achievement of various “metrics,” which measured such things as individual performance, sales and corporate profitability.

The decision

While the employer may have intended to retain discretion over whether to pay out a bonus to Kenny, the language it had drafted did not reflect that intent. Rather, the court found that there was ambiguity in the contractual provision in question and resolved that ambiguity in favour of Kenny, awarding him a 20% bonus for the disputed time periods, which Kenny valued at approximately $169,000.

In reaching its decision, the court applied the following principles, which employers should keep in mind when drafting employment terms.

•The goal of contract interpretation is to determine the mutual intention of the parties.

•The court will consider the “plain language and ordinary meaning” of the words used, having regard to the context of the contract as a whole.

•Where it is of assistance, the court may examine the circumstances the parties knew or reasonably ought to have known at the time the contract was formed to determine the objective meaning of the words they used in the contract.

•Every clause should be given some meaning, and a contract will not be interpreted in such a way as to make one or more of its provisions ineffective.

•Any ambiguity should be resolved so as to achieve a result “consistent with commercial efficacy and good sense, as informed by considerations of reasonableness and fairness.” In the context of employment agreements, this may include the protection of vulnerable employees in their dealings with their employers.

• Finally, if a contractual term remains ambiguous after a review of the foregoing principles, the court may apply the doctrine of contra proferentem, which requires resolution of ambiguity in favour of the party that did not draft the term. In other words, when an employee signs off on an ambiguous employment contract prepared by the employer, a court will usually apply the interpretation that favours the employee.

Applying these principles, the court rejected the employer’s interpretation.  

The court concluded that the bonus payment was not discretionary, but rather an integral part of Kenny’s compensation. The employer’s only discretion was in determining the amount of the bonus within the 20% to 60% range.

Notably, the court never really addressed the employer’s argument that it was not unfair to Kenny if he did not receive bonuses when those bonuses would not have been payable because either he did not meet his performance objectives or the company did not attain its economic goals.

Lessons for employers

It is critical that employers draft contracts that are crystal clear when it comes to employee entitlement to compensation. As demonstrated by the Kenny decision, the principles a court will apply to resolve disputes over ambiguous language skew in favour of employees. Fortunately, unintended liability for discretionary bonuses or other forms of compensation can be entirely avoided by ensuring that employment contracts are carefully drafted. Employers cannot be too clear in explaining when compensation will, or will not, be payable. •

Jennifer Russell is an employment, labour and human rights lawyer and a partner at Roper Greyell LLP. This article is for general information purposes only and does not constitute legal advice.