[:en]Alberta – court gives drafting advice for key-person retention and incentive agreements available in arbitration – #098[:]

[:en]Ostensibly an employment law dispute, Palmer v. Acciona Infrastructures, 2018 ABQB 462 shines rare light into back-office arrangements for large claim commercial arbitrations and how to retain and incentivize individuals necessary to manage a party’s case. In analysing claims made by an executive following termination of his employment, Madam Justice Janice R. Ashcroft’s dutifully provides many employment law updates and statements such as what constitutes a valid resignation and how an employer’s notice can and ought to be given. The reasons also deliver essential drafting points for commercial arbitration practitioners negotiating with individuals tapped to lead a party to success.
Plaintiff, Mr. William Palmer, claimed that his employer, Acciona Infrastructure Canada Inc. (“AIC”), (a) had terminated his employment without proper notice or severance in lieu of notice and (b) owed him specific employment benefits including two types of bonuses.

A chartered quantity surveyor, Plaintiff is a high-ranking executive with extensive experience quantifying the value of construction work and negotiating the amounts. He worked initially for Acciona Infraestructuras SA (“AIS”), the Spanish parent company of AIC, in Hong Kong from October 2001 to June 2006 and for AIC in Calgary from July 2006 to February 2013. AIC operates only in Canada, with a head office in Vancouver and a Calgary office to which Plaintiff relocated from Hong Kong July 1, 2006 to assist with business development. Plaintiff signed an employment agreement with AIC effective July 1, 2006 (“Executive Employment Agreement”).

AIS had been involved in a construction project in Hong Kong between 2003 and 2012 governed by a construction contract with the Hong Kong Government’s Special Administrative Region (“HKGSAR”). In June 2009, AIS served a Notice of Arbitration to HKGSAR claiming that AIS had not been paid by HKGSAR for its work. The sums in dispute, expressed in Hong Kong dollars, are significant. For example, AIS’s main claim of $1,186,689,644.00 HKD amounted to $201,504,573.54 CAD. KKGSAR responded that (a) the work was not completed and (b) significant defects in the work required it to hold back sums owing until the work was corrected.

A key paragraph early on in Ashcroft J.’s reasons disclose, at a high level, the preparations undertaken by AIS with AIC’s assistance and the oversight assigned to Plaintiff in order to successfully present AIS’ case.

[10] The Plaintiff was recruited to lead the arbitration process in Hong Kong on behalf of AIS. In August, 2009 he commenced work on the arbitration taking a lead role in coordinating AIS’s participation in the arbitration including selecting and recruiting a team of lawyers, experts and support staff that would be working on the arbitration for AIS. The Plaintiff was also responsible for organizing a dedicated office in Hong Kong to conduct operations for the arbitration.

Shortly after the June 2009 commencement of the arbitration, Plaintiff accepted being seconded to AIS in Hong Kong as of August 2009 where he remained until February 2013. The secondment required Plaintiff to relocate from Calgary to Hong Kong. The parties began to negotiate the terms of his secondment only after he relocated to Hong Kong.

Initially termed as a “transfer” agreement, draft terms of an agreement were prepared and discussed beginning December 2009. After negotiations and modifications, Plaintiff and AIC signed an agreement March 26, 2010 which they had renamed a “Relocation Agreement”.

The Relocation Agreement gave Plaintiff no authority to settle the arbitration but a benefit if it terminated by either an award or a settlement. The terms included a completion bonus, called a “Success Fee” throughout the reasons, calculated on the basis of five (5) agreed upon variables. While Plaintiff was away on vacation between July 6 and July 28, 2018, AIS and HKGSAR settled their disputes, eventually signing a settlement agreement (“Settlement Agreement”). See paras 120-121 regarding AIS’ motivation to settle eventually and implicit confirmation that the Relocation Agreement did not conflate Plaintiff’s management of the arbitration with a personal ability to effect settlement.

The case is fact-specific in several respects and much turns on whether Plaintiff resigned (Aschroft J. held that he had not) and whether AIC failed to give sufficient notice or payment in lieu thereof (Aschcroft J. held that it had). The case should still be of particular interest to commercial arbitration practitioners given how Ashcroft J. approached the wording of the Relocation Agreement and how AIS’ and HKGSAR’s Settlement Agreement impacted the calculation of the Success Fee.

Ashcroft J. first had to resolve AIC’s objection to Plaintiff’s entitlement to two bonuses for a single employment position. Having accepted that the parties had agreed that Plaintiff’s salary under the Executive Employment Agreement had been replaced and modified by payments under the Relocation Agreement, Ashcroft J. disagreed with AIC’s claim that only one bonus could be granted or that the bonus was discretionary.

Ashcroft J. determined that the Success Fee was in addition to the annual bonus granted in the Executive Employment Agreement signed before Plaintiff relocated. She held that the parties’ Relocation Agreement had not eliminated the Executive Employment Agreement bonus.

Ashcroft J.’s summary of the applicable law in employment contracts is spot on advice for commercial arbitration practitioners. It should be heeded if one party wishes to pay only one bonus when offering a new bonus for service in support of the arbitration. Offering a new bonus does not automatically cancel an earlier bonus.

[62] The jurisprudence supports that any change to the bonus structure must be clearly stated. Where the bonus scheme was found to be an integral part of the compensation package and the employee was terminated prior to the end of the fiscal year, the court stated that the employer must make known to the employee that the bonus was conditional on continued employment: Lloyd v Imperial parking Ltd., (1996), 192 AR 190, 1996 CarswellAlta 1036 para 52 citing Daniels v. Canadian Tire Corp. (1991), 1991 CanLII 7342 (ON SC), 39 CCEL 107 (Ont. Gen. Div.,) at para 57 .

[63] Similarly, the Court in Jivraj v. Strategic Maintenance Ltd., 2014 ABQB 463 (CanLII), 2014 CarswellAlta 1437 at para 67 stated that the “parties can agree to forfeiture of accrued employment benefits provided they do [so] in clear, unambiguous language.”

Ashcroft J. also noted that discretionary wording does not always lead to discretionary decisions. If discretion rests on applying a formula, the mention of “discretion” may misdirect expectations.

[72] Where an employer awards regular bonuses and calculates bonuses according to well-known formulas, the bonuses are seen as less discretionary: Christine v. CitiFinancial Canada Inc., 2015 ABQB 487 (CanLII), 2015 CarswellAlta 1455 citing Rosscup v. Westfair Foods Ltd., 1999 ABQB 629 (CanLII), 1999 ABQB 629 (Alta.Q.B.). Further, any denial of a discretionary bonus must be exercised reasonably: Lippa [v. Can-Cell Industries, 2009 ABQB 684] at para 47 citing Leduc v. Canadian Erectors Ltd., (1996), 19 C.C.E.L. (2d) 216 (Ont. Gen. Div.,) at para 47.

Ashcroft J. then spoke to the specific situation of how such additional bonuses work when the executive is already drawing a bonus for employment and how oversight for an arbitration draws its own bonus.

[75] The Defendant argues that the Success Fee was to reward Palmer for his work on the arbitration and it would be double counting, and an unreasonable exercise of discretion to provide Palmer with both a bonus and compensation under the Success Fee in the years 2012 and 2013, for essentially working on one project.

[76] However, I find that the arbitration was a unique situation with a one-time completion bonus which could attract additional compensation. The annual bonus, as noted above, in contrast, was part of an overall compensation package for employment with AIC, which was reflective of yearly work on the arbitration as well as other work for AIC. Further, the evidence provided by Palmer and various emails, as well as the testimony of Davidson and Palomar, all support that Palmer did additional work for AIC in Canada during the time of the secondment, including work on the Royal Jubilee Hospital contract.

Having salvaged the Success Fee as a distinct, concurrent bonus which should be paid, despite discretion, in addition to and not in lieu of any bonus under the Executive Employment Agreement, Ashcroft J. then proceeded to apply the actual terms of the Relocation Agreement to the facts. To do so, she examined the terms of the five (5) variables provided at Clause Seven: Remuneration of the Relocation Agreement. The detailed wording is worth reproducing in full:

[81] The Success fee is set out under clause seven of the Relocation agreement as follows:
Clause Seven: Remuneration

3) Success Fee:
Upon the completion of the Arbitration Services, the Executive will be entitled to receive a one-time bonus.
-The onetime bonus will be calculated as a variable percentage of the net result of the arbitration in the following manner. (hereinafter the ‘Success Fee’).
-A net result cumulative will be established which will be calculated from the aggregate sum of the following amounts (the ‘Net Result Cumulative’)
-The total amount of the Income shall be added together, this being;
A The gross amount certified by the Engineer as at Certificate (IPC no 76) in the sum of HKD (Hong Kong Dollars) 1,186,689,644 (One thousand one hundred and eighty six million six hundred and eighty nine thousand six hundred and forty four)
To which shall be added
B Any additional amounts paid or payable by Highways Department or the Government of the HKSAR to Acciona Infraestructuras SA subsequent to IPC no 76 arising out of or connection with the execution of the Project or the Arbitration
To which shall be added
C Any amounts consequent upon an Award by the Arbitrator or amounts resulting from an offer of settlement of the Arbitration Issues by the Government of HKSAR to Acciona Infraestructuras SA arising out of the Arbitration
-From which shall be deducted the Expenditure being:
D The Total costs of executing the Lai Chi Kok Project which for the purposes of establishing the Net Result Cumulative shall be deemed to be HKD (Hong Kong Dollars) 1,728,585,673 (One thousand seven hundred and twenty eight million five hundred and eighty five thousand six hundred and seventy three)
E The Total costs of the Arbitration at Project Site Level as recorded in the Acciona Infraestructuras SA Hong Kong Branch P & L statement;
-Thus the Net Result Cumulative shall be the aggregate sum of A plus B plus C minus D minus E.
A base line will be used to derive the Net Result for Arbitration from which the Success Fee shall be calculated. The base line will be the Project Result already established by Acciona Infraestructuras SA as at the end of December 2009. The amount of this base line shall be deemed to be a negative (loss) of HKD (Hong Kong Dollars) 541,896.029 (Five hundred million eight hundred and ninety six thousand and twenty nine).[2] (The ‘Base Line’)
The Net Result for Arbitration shall be calculated to be the difference between the Base Line and the Net Result Cumulative

[82] The Relocation Agreement then sets out a chart wherein a range of potential outcomes are used to calculate the amounts payable to Palmer.

Despite accepting Plaintiff’s view that the Success Fee and the employment bonus could co-exist, Ashcroft J.’s careful analysis at paras 84-126 obliged her to agree with AIC in its reading and application of Clause Seven: Remuneration. She held that no Success Fee was warranted. Her analysis of the “variables” lead her to examine components which typically arise in similar disputes and serves to guide commercial arbitration practitioners. She examined the following in order to complete her analysis:

(1) are AIC’s tax write offs Included in the Success Fee calculation under variable C – paras 84-107 (Ashcroft J. held ‘no’);

(2) whether HKGSAR’s Counterclaim should be considered under variable C – paras 108-109 (Ashcroft J. held ‘no’);

(3) whether any other “operating income” should be included in variable C – paras 110-112 (Ashcroft J. held ‘no’); and,

(4) whether arbitration costs are included in the Success Fee – paras 113-126 (Ashcroft J. held ‘no’).

For ease of reference, Ashcroft J. summed up her analysis of the variables in a single paragraph:

[127] In sum I find:
• Variable A is $1,186,689,644 (agreed upon)
• Variable B is $409, 511 (amount payable by HKSAR TO AIS subsequent to IPC no 76 or the difference between IPC no. 76 and 78)
• Variable C is the Settlement Sum of $272,982,642.59 HKD[3] (amount as set out in the Settlement Agreement)
• Variable D is $1,728,585,673 HKD (agreed upon)
• Variable E is $176,169,261 HKD (Total cost of the Arbitration at Project Site Level as recorded in the AIS Hong Kong Branch Profit and Loss Statement)
[128] The above calculation results in a Net Result Cumulative of $-444,673,136.41. The difference between the Net Result Cumulative for arbitration and the Baseline is $97,222,893.59 This amount does not meet the minimum threshold level under the Success Fee formulation. Accordingly, the Plaintiff is not entitled to a Success Fee.

Ashcroft J. expressly recognized AIS’ appreciation for Plaintiff’s contribution but noted that, when such detailed bonuses were disputed, the court had to take a decision. See paras 125-126. She effectively held the parties to the deal struck and not the deal one party favoured once an unanticipated scenario occurred.

While describing Plaintiff as “an experienced negotiator, savvy in the world of contracts and international arbitration including the possibilities of particular outcomes”, Ashcroft J. disagreed with Plaintiff. Her reasons to disagree should guide other arbitration practitioners drafting similar Success Fee agreements. For example, her reasons analyse the roles of costs and legal fees and how such amounts could have been incorporated, but were not, in calculating the Success Fee. For further example, at the time of negotiating the Relocation Agreement, because HKGSAR had not yet filed a Counterclaim, neither party included provision of any Counterclaim and no provision was expressly included for legal fees. Many scenarios considered but not every scenario.

[117] In July 2012, the Plaintiff developed a series of scenarios as to how the arbitration could play out, for presentation to AIS officials. While Palmer testified that he did not envision a scenario where costs were not recoverable, he did in fact contemplate one outcome wherein the company would not recoup their arbitration costs.

[118] Palmer was a sophisticated negotiator, he knew at the time the Success Fee was calculated that AIS had complete authority to decide to settle and on what terms, including the possibility that AIS would bear, as part of any settlement, its own arbitration costs. Yet he did not negotiate this possible outcome in to the Success Fee formula.

[125] Clearly, AIS was happy with the work performed by Palmer. However, the parties had specifically set out a formula to compensate and reward Palmer for his work. Expressions of appreciation for a job well done can still co-exist with an interpretation of the Success Fee which in the end, may not result in additional compensation for Palmer.

In arriving at her own appreciation of the variables, Ashcroft J. had to determine if AIS had disentitled itself from deducting its arbitration costs by agreeing in the Settlement Agreement with KHGSAR that each party should pay its own costs. While the case depends on the wording of the Relocation Agreement, the reasons reflect drafting issues which will resurface in other commercial arbitrations and Ashcroft J.’s reasoning can find application elsewhere.

[114] The Plaintiff argues that because AIS agreed to bear their own costs in the settlement, AIS was disentitled to a deduction in the Success Fee calculation for costs pursuant to Variable E. The Plaintiff emphasizes that all reporting scenarios, save for one, contemplated a recovery of costs. The expectation, says the Plaintiff, throughout the entire process from an April 2009 meeting in Madrid to brief AIS as to how arbitrations were conducted in Hong Kong, through to reporting in July 2012 with more detailed scenarios, was that costs would be recovered.

[115] The Plaintiff explained to AIS that, in Hong Kong, the party who is ordered to pay money pursuant to an arbitration award is considered the losing party and pays some contribution to the other party for costs. The Plaintiff argues that by waiving the recovery of costs, AIS acted both “in a manner that substantially nullifies the contractual objectives” of the Relocation Agreement and “cause (d) significant harm to the other, contrary to the original purposes or expectations of the parties.”: Century 21 Canada Ltd. Partnership v Rogers Communications Inc., 2011 BCSC 1196 (CanLII) at paras 407-408 . The Plaintiff also relies on the Supreme Court’s findings in Bhasin v Hrynew, 2014 SCC 71 (CanLII) at paras 63, 65 and its principles of honesty in contractual performance and good faith.

As a bookend to the preparations announced in para. 10 of her reasons when AIS first retained Plaintiff, Ashcroft J. summarized the evidence supporting AIS’ good faith motivation to end the arbitration. AIS’ reasons no doubt sound familiar to many involved in dispute resolution.

[120] Valen Fernandez gave evidence that AIS decided to settle because they were almost four years into the arbitration process, the budget had doubled since approval had been given to proceed to arbitration, and the process had been divided and lengthened from one arbitration hearing to two hearings. Valen Fernandez stated that there was an expectation of having to pay tens of millions of Hong Kong dollars in addition to what AIS had already spent in arbitration. AIS engaged in an assessment as to what additional income it would receive in the arbitration and weighed this off against the expenses of the arbitration. AIS came to the conclusion it was reasonable to settle. Valen Fernandez stated that AIS did not demand to be reimbursed for legal and expert costs because it was not about who pays these costs, it was a final comprehensive figure.

[121] Valen Fernandez also testified that while the Plaintiff was on holidays when the settlement was negotiated and concluded, Palmer was never intended to be present in these meetings. Nor did Palmer ever have the authority to settle.

See also para. 105 regarding AIS’ tax expert’s opinion on the value of the final settlement.

Ashcroft J.’s reasons drew on eight (8) days of trial evidence with testimony from six (6) witnesses, (four (4) fact, two (2) experts) and resolved a dispute over the termination of employment and compensation due as a result. The case is of interest to arbitration practitioners. Unfortunately for the litigants, as is common in litigation undertaken either to assist arbitration or to challenge its results, confidentiality is lost.  Due to gaps in the wording adopted in the Relocation Agreement, disagreement led to disclosure of the internal workings of the arbitration preparations, settlement dynamics and tax implications. That disclosure was made in exchange for a court order of payment of: (i) Plaintiff’s salary from March 1, 2013 to and including May 15, 2013; (ii) a $59,415.00 CDN bonus for 2012; and, (iii) a bonus for 2013 pro-rated until May 15, 2013.[:]