James Anthony Manastersky (hereinafter “Mr. Manastersky”) was employed with RBC Dominion Securities, in its RBC Capital Partners Unit (hereinafter “RBC”) as a director for the Mezzanine Fund. After being terminated and the offer from RBC was refused, litigation began. The Trial Judge determined that RBC owed Mr. Manastersky 18-months in reasonable notice, and that they owed him an additional 5 months (as RBC had already paid Mr. Manastersky 13 months in reasonable notice) in damages for lost opportunity to earn additional compensation from investments, and that the exchange rate of the payment should be based on the foreign exchange rate at the time of the investment, rather than at the time of its withdrawal. RBC did not dispute the 18-months notice finding, however they chose to appeal the amount of damages awarded.
Mr. Manastersky was recruited in 2001 to work for the Mezzanine Fund, which was managed by RBC. During his employment with RBC, Mr. Manastersky participated in a profit-sharing plan called “carried interest plans” (hereinafter “Mezzanine CIP”). The key purpose of the Mezzanine CIP was to incentivize participating employees, such as Mr. Manastersky, to maximize returns on its investment portfolio, which would subsequently result in compensation payments once the portfolio was fully vested.
Under the Mezzanine CIP, investments would be placed into portfolios for established investment periods. Each fund would represent a portfolio. During the course of Mr. Manastersky’s employment, he played a significant role in the complete vesting of both Fund 1 and Fund 2. In Article 9.3 Mezzanine CIP documentation, the creation of a third fund, which would be known as Fund 3, was contemplated but not guaranteed. When Mr. Manastersky was terminated without cause, litigation ensued which would seek to establish the reasonable notice period and the damages that were owed.
The Trial Judge found that Mr. Manastersky would be entitled to 18 months’ notice upon termination. RBC chose not to appeal this finding. The Trial Judge awarded Mr. Manastersky: (i) the sum of $953,392.50 due to the lost opportunity to earn entitlements under the Mezzanine CIP during the 18-month notice period; and (ii) the amount of $190,789 in respect of Mr. Manastersky’s share of investments proceeds under the Mezzanine CIP from 2005-2013. RBC chose to appeal both damages awards. With respect to the first award, RBC stated that there was no obligation to start Fund 3, and therefore Mr. Manastersky did not lose any opportunity to earn further entitlements. With respect to the second award, RBC stated that the rate at which Mr. Manastersky should have been paid his share of investment proceeds using the foreign exchange rate at its withdrawal, rather than the rate at its investment.
ONTARIO COURT OF APPEAL’S DECISION
Two issues were at the heart of this appeal between Mr. Manastersky and RBC:
- whether the Trial Judge erred in finding 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; and
- whether the Trial Judge erred that the methodology with respect to the disposition of the investments should be based on the foreign exchange rate at the date of investment.
Ms. Manastersky’s Entitlement
Both the Trial Judge and The Court of Appeal relied on Taggart v. Canada Life Assurance Co.,  O.J. No. 310 (C.A.) (hereinafter “Taggart”) to begin their analysis. When considering a claim by a terminated employee for damages in respect of benefits payable during the period of reasonable notice, Taggart employs a case-specific two-step inquiry that a court should undertake:
- consider the employee’s common law right to damages for breach of contract; and
- consider whether the terms of the plan alter or remove a common law right.
The Trial Judge awarded Mr. Manastersky significantly more than he was entitled to without identifying any terms in the Mezzazine CIP that allow such a payment beyond the allocated share of profits in Funds 1 and 2. Despite Mr. Manastersky at trial testifying that he was not entitled to an allocation of points in respect of a potential Fund 3 that could have been established during the notice period, the Trial Judge awarded Mr. Manastersky an amount that effectively established a third fund that would have existed up until the notice period came to an end. Ultimately, instead of asking what Mr. Manastersky would have earned with the Mezzanine CIP if the contract had not been breached, the Trial Judge wrongly concluded that Mr. Manastersky was presumptively entitled to common law damages due to the fact that payments to him under the Mezzanine CIP had historically constituted a significant form of compensation.
Foreign Exchange Rate Methodology
The Trial Judge accepted Mr. Manastersky’s reason that the disposition of the investment should be based on the foreign exchange rate at the date of investment. In the absence of an express foreign exchange methodology provision in the Mezzanine CIP, it would place an undue burden and expectation on the participant to bear the risk of exchange fluctuations. The Trial Judge further stated that, in addition to the fact that the Mezzanine CIP was silent on the foreign exchange issue, this approach would be inconsistent with the underlying goals of the Mezzanine CIP, which was to incentivize investment professionals to maximize returns on their portfolios.
The Court of Appeal agreed with the above reasoning of the Trial Judge. Furthermore, although Mr. Manastersky was not a Chartered Professional Accountant, he had decades of experience operating with investments. Therefore, it was safe to rely upon the reasoning provided by Mr. Manastersky with respect to the exchange methodology. Finally, The Court of Appeal took note to point that in Article 9.2.1. of the Mezzanine CIP, it stated that written consent would be required from a participant to affect any change that could materially and adversely affect the amount paid out to the participant. At no point did Mr. Manastersky consent to using the “exit rate” methodology proposed by RBC. Taken together, the support to uphold Trial Judge’s reasoning was firm.
The Court of Appeal decided in this case that in employment contracts that make use of an incentive compensation plan, one cannot establish a prima facie expectation of future payments that would be awarded as damages in accordance with the notice period. This is ultimately a reasonable decision. Simply because an individual historically receives compensation under such a structure does not suggest that this is guaranteed – especially when the establishment of the plan itself speaks to the lack of guarantee. Furthermore, the very nature of the Taggart analysis is that the approach will be case-specific in every instance, with the incentive plan itself requiring an analysis. Specifically to this case, given that Mr. Manastersky did not personally plead that the creation of Fund 3 was inevitable, the Trial Judge suggesting that Mr. Manastersky was nevertheless owed a reward contrary to Mr. Manastersky’s own position was an incorrect application of the Taggart principle. Finally, given that the application of the Taggart principle is meant to be an analysis into the plan itself, it naturally follows that a review of the provisions, which indicate that a participant would not be entitled to any common law damages beyond those vested in Funds 1 and 2, is clear enough to show the judgment of the Trial Judge was beyond the scope.