Introduction
Disputes over wrongful termination of employment arise on a daily basis. Employers rarely provide employees with actual working notice for a reasonable period of time – as is their legal obligation. Once an employer decides that an employee should go, there is rarely an appetite for the employee to work out a reasonable notice period.
This creates a dispute.
The employee has (assuming no just cause) a valid claim for damages for breach of contract, sometimes referred to as “wrongful dismissal” damages, and perhaps other related claims such as:
1. “debt” claims which might include:
a. arrears of regular pay for service up to last day worked;
b. arrears of bonus for service up to last day worked;
c. reimbursement of expenses; and
d. earned vacation pay for service up to last day worked;
2. “tort” claims which might include, for example:
a. defamatory statements about the dismissed employee; and
b. interference with contractual relations claims against entities related to the employer;
3. “statutory claims” against the employer, which might include:
a. Employment Standards Act entitlement after dismissal, based on length of service;
b. claims based on discrimination based on the BC Human Rights Code;
4. “statutory claims” against others which would eventually cost the employer money, such as:
a. claims for work related injuries under the BC Workers Compensation Act.
In a best case scenario, the employer and employee enter into negotiations and settle. Usually, a good settlement resolves all outstanding legal issues between the employer and the dismissed employee. In rare situations there might be a cause of action that is intentionally left open for future resolution (eg. a bonus that cannot then be quantified), but not often.
Lawyers and judges often refer to settlements as involving “accord and satisfaction”. That is a technical term generally used to describe what ordinary people would think of as an agreement to settle a dispute.
Many potential pitfalls face employers trying to effectively settle claims of dismissed employees.
What is the role of a Release?
An effective settlement can be concluded without any particular formalities. The agreement could be entirely oral, with nothing set down in writing at all. The agreement could be recorded in a written document, or a series of connected documents like letters, emails, or even text messages.
The Release is best viewed as a document which, if properly used, effectively extinguishes potential causes of action on the part of the releasing party. Thus, in employment situations, the Release is usually a written record of the intention of an employee to relinquish claims of all sorts against the employer.
Imagine a typical settlement process after a dismissal without notice. The employer and employee negotiate, and settle on an amount which will be paid to the employee. Perhaps the terms are set down in a written agreement, but normally the settlement agreement does not clearly explain what the employer gets. In particular, without language clearly delineating the employee’s abandonment of causes of action, uncertainty might arise as to whether only certain claims are settled, and others open for the employee to continue.
That is the role of the Release. To clearly set out what claims (causes of action) the employee is giving up. This language can be in a separate document (usually entitled a “Release”.) but it could also be incorporated in what the parties might refer to as a settlement agreement.
Essential Conditions for a Release to be Effective
An effective release is valid and binding contract. For a release to be effective, it must be capable of being set up as an answer to an employee’s subsequent action. The employer must be able to prove that the employee contracted out of his or her claims (be they contractual, statutory, or tort based).
Typically, employees would challenge the validity of a Release on the grounds that courts recognize as defences to contract actions, such as:
1. the agreement should not be construed (i.e. interpreted) as extending to the claim the employee wishes to advance;
2. no “meeting of the minds”;
3. failure of consideration;
4. unconscionability.
Construction/Interpretation – Release ineffective because it did not apply to the particular claim
It is imperative that when an employer settles an employee’s claim that a form of Release be prepared and executed, as part of the negotiated compromise, with language which clearly extinguishes all of the employee’s potential claims.
Employers have been surprised on occasion, when, after entering into a settlement that it thought extended to all claims, an employee has successfully sued for a cause of action that was found to survive.
Cases where this occurred include:
1. National Bank of Canada v. Canada (Minister of Labour) 1998 CanLII 8077 (FCA), where the Federal Court of Appeal decided that an employee could advance a claim under the Canada Labour Code based on “unjust dismissal”, even though the employer had settled the employee’s claim for wrongful dismissal damages.
[4] Notwithstanding the thoughtful submissions of counsel for the Appellant, we are all of the view that the motions judge made no error in his interpretation of sections 168 and 240 of the Code and their relationships with a settlement reached between an employer and an employee upon dismissal. Section 168 protects the right of an employee to complain of an unjust dismissal even if that employee has signed a contract by which his or her employment is terminated. Indeed, it is not difficult to envisage a situation where an employee could, after having signed such a contract, realize that the termination of his or her employment is not the result of a legitimate business restructuration as he or she was led to believe, but is instead a coloured or disguised attempt at wrongfully dismissing her or him. This shows the wisdom of the Code in protecting an employee’s access to the remedies against unjust dismissal notwithstanding the signature of a termination contract between the parties.
The employer had not in this case required the employee, as part of the settlement negotiation, to execute a Release that would have relinquished claims under the Canada Labour Code. If he had, the action would not have succeeded.
2. Abundance Marketing Inc. v. Integrity Marketing Inc., 2002 CanLII 23605 (ON SC) where a court refused to bar an employee’s action in court for wrongful dismissal damages although the employee has signed a very generally worded release (albeit in the context of a commission claim advanced under the Ontario. (summary dismissal rejected)
The release was very generally worded, and might have been thought to apply to all possible claims
[36] The first paragraph sets out the money to be received by Gina and Michael, “the consideration”. The release is to Abundance in all its forms and with respect to all its principals. What is being released is “any and all actions, causes of actions, contracts and covenants, whether express or implied, claims and demands for damages, indemnity, costs, interest, loss or injury of every nature and kind whatsoever and how so ever arising which the Releasor may heretofore have had, may now have, or may hereinafter have in any way relating to the hiring of and the termination of the employment of the Releasor by the Releasee.“
2) General Principles of Interpretation of Contracts
[10] The starting point for interpreting any document is the meaning attributed to the actual words employed by the author. If a contract is essentially the work of a single author, any ambiguity or confusion is construed against the author. (the doctrine of contra proferentum)
[11] Extrinsic evidence is not admissible if a document is clear and unambiguous on its face. There may be pristine examples of drafting which may be so described, however, the verbiage of many documents can lead to confusion and ambiguity. Today “words do not have immutable or absolute meanings, they take their meanings from their context.” ref. S.M. Waddams. The Law of Contracts, 3rd edit. (Toronto, Canada Law Book) at p.215.
[12] There are going to be degrees of clarity and lack of ambiguity, and the evaluation of such cannot be taken without a contextual approach. To do otherwise could lead to absurd situations in which factually disconnected issues are allegedly resolved.
[13] In Hill v. Nova Scotia (Attorney General) 1997 CanLII 401 (SCC), (1997) 1 S.C.R., 69, 142 D.L.R. (4th) 230, Justice Cory relied on the observations of LaForest J.A. (as he then was) in White v. Central Trust Co. (1984)84 N.B.R.(2d)293 (C.A.) for the principle that “in determining what was contemplated by the parties, the words used in a document had not been looked at in a vacuum. The specific context in which a document was executed may well assist in understanding the words used. It is, accordingly, perfectly proper and indeed may be necessary to look at the surrounding circumstances to ascertain what the parties were really contracting about.” (as paraphrased by Wilmington J. in (Cinabar Enterprises Ltd. v. Bertelson (2000) S.J. No.337 (Sask. Q.B.) at para 47).
[14] Context is defined by Justice Lane in Trans Canada Pipelines Ltd. v. Potter Station Power Ltd. Partnership (2002) O.J. No.42 (Ont. Sup. Crt.) para 35; “Context consists of two elements: the background, business purpose analysis; and the context of words within which the difficult passage is found.”
[15] Context or factual matrix can be derived from;
a) the exchange between the parties leading up to the creation of a document, whether orally or in printed form (ie. correspondence or e-mails);
b) the actual creation of the document, was it a product of consultation and review;
c) the conduct of the parties before, during and after the execution of the document;
d) any personal circumstances of a party which would impact upon comprehension or understanding, for example, education, business or legal acumen.
[16] This contextual analysis, in so far as it touches upon the intentions and expectations of the parties, must be an objective one. Lord Wilberforce in Reardon Smith Lime Ltd. v. Hansen-Tangen (1976) 3 All E.R.570(H.L.) at page 574 stated:
“When one speaks of the intentions of parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim or object, or commercial purpose, one is speaking objectively of what a reasonable person would have in mind in the situation of the parties.” (as quoted by Wilkinson J. in Cinabar Enterprises Ltd. v. Bertelson, Ibid. para.51).
[17] Justice Iacobucci in Eli Lilly and Co. v. Novopharm Ltd. Eli Lilly & Co. v. Apotex Inc. (1998) S.C.J. No.59 echoes this admonition against the use of the evidence of a party as to his or her subjective intention. To hold otherwise leads to potential mischief, and undermines the ability of parties to resolve matters contractually.
4) Releases
[22] A release, as the name suggests, is intended to liberate once and for all, a party from any liability or obligation to another party arising out of particular circumstances. Releases vary with the imagination and preferences of the author. A release can contain recitals, or it may contain details sufficient to announce to the world at large that the “action” or “chose” is over, or resolved. There are standard preprinted releases. A release invariably is general in nature.
[23] La Forest J.A. (as he then was) in White v. Central Trust Co., (1984) 7 D.L.R. (4th) 236 (N.B.C.A.) remarked that releases are like any other documents in that context is important, but so are the words employed. “This is particularly important to bear in mind in construing releases, the operative parts of which are often written in the broadest of terms. Thus reference is frequently made to the recitals to determine the specific matters upon which the parties have obviously focused to confine the operation of the general words. As Lord Westbury stated… in Directors of London & South Western R.Co. v. Blackmore (1870) L.R.4 (H.L.)610 at p.623, “The general words in a release are limited always to that thing or those things which were specifically in the contemplation of the parties at the time when the release was given.” (at p.247-248)
[24] Presumably, the more general the release the more important the context or factual matrix of the document becomes.
Analysis
[63] The context in which the release of February 16, 1999 was prepared and executed was that of a claim under the Employment Standards Act for unpaid commissions. That is what the correspondence leading up to the attendance of Gina and Michael at the office of Sherk focussed on. That was still the case after the execution of the releases.
[64] There was no discussion between Sherk and Gina and Michael or Linda Taaffe, their apparent agent, of any other issue before the execution of the release. Indeed, Sherk admitted he did not want to put ideas in anyone’s head.
[70] All in all, the only way the release would eclipse the particular Counterclaim would be if one ignored the context in which the release was produced. That cannot be so, and accordingly the motion for summary judgment is dismissed.
The lessons from the Abundance case are clear. If an employer wishes to obtain a comprehensive release that covers all of the employee’s possible claims, it will always be better off employing a carefully worded and comprehensive release that describes the categories of compromised claims in general terms, but also with specific types of claims being released.
3. Hannan v. Methanex Corp., 1998 CanLII 6476 (BC CA)
This case involves survival of a claim for a bonus earned for work provided before termination, but quantified much later. The Release was construed not to catch the future bonus.
[25] The company sent the plaintiff a letter dated 25 November 1994 containing these figures and enclosed a release for his signature. The plaintiff signed the release that day and again, on 2 December 1994 before a witness. The relevant part of the release reads as follows:
KNOW ALL MEN BY THESE PRESENTS that I, Brian N.B. Hannan, of Vancouver for and in consideration of the payment to me by or on behalf of Methanex Corporation of the sum of $2,438,886.00, less required withholdings, (the receipt of which is hereby acknowledged), and other good and valuable consideration (the “severance package”), do … hereby remise, release and forever discharge Methanex Corporation … of and from any and all actions, causes of action, claims debts, demands and damages howsoever arising which I now have or which hereafter I can, shall or may have for or by reason of or arising out of any cause, act, deed, matter, thing or omission existing up to the execution of these presents and in particular, but without limiting the generality of the foregoing, arising out my employment, or dismissal therefrom with Methanex Corporation, and more specifically, without limitation, any and all claims for damages for termination of my employment, constructive termination of my employment, loss of position, loss of status, loss of future job opportunity, loss of opportunity to enhance my reputation, the timing of the termination and the manner in which it was effected, loss of bonuses, loss of benefits including, without limitation, long-term disability and life insurance, and any other type of damages.
AND IT IS HEREBY AGREED that neither the payment of the severance package nor anything contained herein shall be deemed to be an admission of liability on the part of Methanex Corporation …
AND IT IS FURTHER AGREED AND UNDERSTOOD that I have read this document and fully understand the terms of this settlement, and that I voluntarily accept the severance package for the purpose of making a full and final compromise and settlement of all claims against Methanex Corporation … which I now have or which hereafter I can, shall or may have for or by reason of or arising out of any cause, act, deed, matter, thing or omission existing up to the execution of these presents and in particular, but without limiting the generality of the foregoing, arising out of my employment, or dismissal therefrom, with Methanex Corporation.
[emphasis added]
[26] I have underlined the passages to which the company gave emphasis in its argument that the plaintiff released all further claims on his employment.
The Court of Appeal’s analysis upholding the decision at trial is found in:
Release
[37] The learned trial judge did not give effect to the company’s defence based on the release because he found that the bonus did not form part of the subject matter of the release. He was guided by the leading case on the subject of releases cast in broad terms. I quote from his reasons at paras. [82] to [84]:
[82] The applicable principle was set out by Lord Westbury in London and South Western Railway v. Blackmore (1870), L.R. 4 H.L. 610 at 623 as follows:
The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given. But a dispute that had not emerged or a question which had not at all arisen, cannot be considered as bound and concluded by the anticipatory words of a general release.
[83] This principle recognizes that general releases are commonly written in very broad terms, and that it may be necessary to look beyond the wording of the document to the circumstances surrounding its execution in order to determine what the parties intended.
[84] Applying this principle to the facts of the present case, the question is whether on consideration of the wording of the document and the circumstances surrounding its execution, I am satisfied that that parties did not intend to release Dr. Hannan’s claim for the 1994 cash performance bonus.
London & South Western Railway was recently applied in this Court in Privest Properties Ltd. v. Foundation Co. Ltd. 1997 CanLII 11546 (BC CA), (1997), 145 D.L.R. (4th) 729 at 736 to 738.
[38] The learned trial judge held that neither the plaintiff, John Woods, the human resources director with whom he negotiated, nor Mr. Newall, the Chairman of the Board, had the performance bonus in mind when the matter was settled.
[39] The chief attack on this aspect of the judgment was the contention that the learned trial judge erred in relying on the subjective intentions and beliefs of the parties regarding the effect of the release. This is said to be contrary to Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.) per Lord Wilberforce at 241. In White v. Central Trust Co. reflex, (1984), 7 D.L.R. (4th) 236 (N.B.C.A.), La Forest J.A., as he then was, said at 247-8:
Before entering into an examination of the particular releases involved in this case and the circumstances under which they were executed, it may be useful to make some general remarks regarding the manner in which releases are to be construed. Like other written documents, one must seek the meaning of a release from the words used by the parties. Though the context in which it was executed may be useful in interpreting the words, it must be remembered that the words used govern. As in other cases, too, the document must be read as a whole. This is particularly important to bear in mind in construing releases, the operative parts of which are often written in the broadest of terms. Thus reference is frequently made to recitals to determine the specific matters upon which the parties have obviously focused to confine the operation of general words. As Lord Westbury stated in the House of Lords’ case of Directors of London & South Western R. Co. v. Blackmore (1870), L.R. 4 H.L. 610 at p. 623: “The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given.”
By referring to what was in the contemplation of the parties, Lord Westbury was, of course, not opening the door to adducing evidence of what was actually going on in their minds, still less to making inferences about it. Such considerations are relevant solely to issues such as undue influence, mistake, fraud and the like which have no application here. What the statement quoted means is that in determining what was contemplated by the parties, the words used in a document need not be looked at in a vacuum. The specific context in which a document was executed may well assist in understanding the words used. It is perfectly proper, and indeed may be necessary, to look at the surrounding circumstances in order to ascertain what the parties were really contracting about. For authority for the foregoing propositions, see in addition to the cases to which I expressly refer, those cited in Halsbury’s Laws of England, 4th ed., Vol. 9, pp. 412-3, and Vol. 12, p. 642. [emphasis added]
The underlined portion was quoted with approval by Cory J. writing for the majority in Hill v. Nova Scotia (Attorney General), 1997 CanLII 401 (SCC), [1997] 1 S.C.R. 69 at 79.
[40] In this Court, Mr. Justice Cumming referred to the objective nature of the evidence going to the parties’ intentions when he said in MacMillan Bloedel Ltd. v. British Columbia Hydro & Power Authority 1992 CanLII 2287 (BC CA), (1992), 72 B.C.L.R. (2d) 273 at 283:
In the absence of ambiguity words in a contract are to be given their literal meaning: North Eastern Railway Co. v. Lord Hastings, [1900] A.C. 260 (H.L.). Words of ordinary use in a contract must be construed in their ordinary and natural sense: Matsqui (Municipality) v. Western Power Co., reflex, [1934] A.C. 322, [1934] 1 W.W.R. 483, [1934] 2 D.L.R. 81 (P.C.). The paramount test of the meaning of words in a contract is the intention of the parties: Grand Trunk Pacific Coast Steamship Co. v. Victoria-Vancouver Stevedoring Co., 57 S.C.R. 124, 1918 CanLII 32 (SCC), [1918] 3 W.W.R. 450, 43 D.L.R. 231. The intention of the parties is to be determined in the objective sense by reference to the surrounding circumstances at the time of signing the contract: Wenzoski v. Klos, reflex, [1940] 1 W.W.R. 523, [1940] 2 D.L.R. 195 (Man. C.A.).
[emphasis added]
[41] On my reading of the learned trial judge’s reasons, which were exhaustive on this point, I conclude that he relied on both subjective and objective circumstances in ascertaining the factual matrix in which the release was concluded. It may have been an error for him to have considered what the parties thought about what they were doing, but there was in my opinion, a solid foundation of objective evidence supporting his finding. I refer particularly to the solicitor’s opinion letter in which he discusses the problem areas in calculating the termination payment, and the performance bonus is not mentioned. The letter recommends the execution of a release to bring to an end any differences of interpretation which might later arise. If, for example, the plaintiff made a further claim in 1994 for a larger annualized payment based on the bonus given to other executives (1.85 x Target) he would have been barred by the release because he compromised the issue in the settlement process.
[42] The learned trial judge was also entitled to consider the evidence that none of the persons involved in the process addressed themselves to the bonus, except in the limited sense that in calculating the annualized salary a notional bonus had to be postulated, but the actual 1994 bonus, whether it would be paid and how much, was not discussed. In further support of the learned trial judge’s finding was the fact that any discussion about the actual bonus would have been premature because bonuses depend on year-end results which were not known by the parties when the release was signed.
[43] Mr. Newall’s in-court statement (para. 34, supra) that had the plaintiff not resigned from the new position at short notice, he would have been paid the full bonus notwithstanding the release, is on the borderline between objective and subjective evidence. But coming as it did from the chairman of the defendant’s Board, the learned trial judge was entitled to consider it in rejecting the company’s position that the release should be read as encompassing all aspects of the performance bonus.
[44] I accept the argument on behalf of the plaintiff that if the reference to bonuses in the release were examined in a vacuum it might appear to end any further claims in that connection. But when the words are considered in the light of what the parties were actually negotiating about, those words must be given a meaning limited to the calculation of annualized earnings.
[45] If the parties truly intended to bring all claims related to the plaintiff’s employment to an end in the release, then it was entirely inconsistent with that intention for the company to pay him $33,000 in December for salary and vacation pay which had accrued up to 30 November 1994. For reasons which follow, I think the learned trial judge was entitled to consider it in rejecting the company’s position that the release bonus had accrued as well.
[46] In summary, I am of the opinion that there was an objective basis of fact supporting the learned trial judge’s conclusion that the parties did not intend to include performance bonuses in the release. It follows that I would not disturb his decision rejecting the release defence.
The decision in Hannan v. Methanex underlines the importance of a Release that is carefully worded to capture all claims that the parties mutually intend to release.
No “meeting of the minds”
This category of defence is one which more often would apply where there is a settlement agreement, but no Release. There might be a negotiation that led, in the eyes of the employer to an enforceable settlement. But then a dispute arises when an employee tries to advance a claim that he or she felt was not released. Because there is no formal Release, crafted to exclude all possible claims, uncertainty can arise as to what was agreed, and if a court finds that there was not really a “meeting of the minds” on all essential points, no concluded settlement will be found.
In Sivakolunthu v. Royal Bank of Canada OSCJ) January 18, 2001, an employer and an employee via their respective lawyers entered into discussions that the employee characterized as a settlement of a wrongful dismissal claim. But, soon after the supposed settlement was concluded, the employee indicated that he had been advancing a human rights complaint that he wanted to continue with. The employer took the position that no effective settlement occurred, because there was no agreement on all necessary terms. The omitted agreement, according to the employer, and as viewed by the court, was on the scope of the Release. As there had been no agreement about Release of all of the employee’s claims, and that was an important part of the issues between the parties, no contract was formed.
The court wrote:
“However, the Cellular case in fact distinguishes between the spirit and terms of a concluded settlement on the one hand and the mere form of the release on the other. By citing this case, the plaintiff merely begs the central question of whether the parties were ad idem. In fact, the trial decision (at para. 20, citing Fieguth v. Acklands Ltd. (1989) 59 DLR (4th) 114 at 121 (BCCA)) affirms the proposition that insisting upon new terms and conditions which have not been agreed upon or are not reasonably implied in these circumstances demonstrates an unwillingness to be bound by the agreement. Browne, too, follows Cellular insofar as the terms of release must reflect the agreement between the parties. Sinanan likewise held in favour of upholding the actual concensus between the parties, which in that case had neglected to mention mutual releases. It seems to me that these cases boil down to the proposition that once the parties are ad idem, one of them cannot wriggle out of a settlement agreement by quibbling over the documentation. Here, by contrast, there was a genuine substantive issue that remained unresolved.”
This case’s lesson is that it is better practice for negotiations to include a well worded Release, so that there will not be any disagreement later as to the scope of the claims the employees gives up.
Fieguth v. Acklands Ltd. 1989 CanLII 2744 (BC CA) is a BC case where a settlement agreement was enforced in spite of disagreement over a Release, which had not been settled as part of the negotiations. In that case Acklands offered a release that contained “unusual covenants and indemnities”. The court wrote:
[36] The next stage is the completion of the agreement. If there are no specific terms in this connection either party is entitled to submit whatever releases or other documentation he thinks appropriate. Ordinary business and professional practice cannot be equated to a game of checkers where a player is conclusively presumed to have made his move the moment he removes his hand from the piece. One can tender whatever documents he thinks appropriate without rescinding the settlement agreement. If such documents are accepted and executed and returned then the contract, which has been executory, becomes executed. If the documents are not accepted then there must be further discussion but neither party is released or discharged unless the other party has demonstrated an unwillingness to be bound by the agreement by insisting upon terms or conditions which have not been agreed upon or are not reasonably implied in these circumstances.
Still, litigation to the Court of Appeal was required because the parties had not negotiated the terms of a suitable Release as part of the settlement process.
Failure of consideration
Effective contracts require an exchange of consideration. Dismissed employees are typically owed pay for service between the date of his/her last paycheck and the termination date, vacation pay, and one week’s pay for each year of completed service (up to a maximum of 8 weeks’ pay) as statutory severance pay.
Problems may arise when an employer tries to obtain a Release from an employee, when all the employee is receiving is amounts he is otherwise entitled to.
If a Release is prepared on the basis that the employee receives monies earned or already entitled to receive, a successful attack could likely be launched on the basis of failure of consideration.
Unconscionability
This heading will open a discussion of the most serious pitfalls for employers when seeking to effectively settle employee claims.
There are many instances in Canadian courts where employers have managed to obtain clear settlement agreements, and well worded Releases, yet employees have been able to overturn the settlement and advance successful claims in court.
Our law has developed to the stage that courts will not enforce bargains where it would be “unconscionable” to do so.
The meaning of “unconscionability” has been developed and refined over time by judges, often in the context of employment law settlements.
The leading Canadian case on the subject is Cain v. Clarica Life Insurance Company, 2005 ABCA 437 (CanLII) where the court wrote:
[31] The tests for unconscionability at common law or in equity are not always stated the same way, or even firmly, especially in England. I have looked carefully at Canada’s undoubted leading case, Morrison v. Coast Finance reflex, (1965) 54 W.W.R. 257, 259 (B.C. C.A.). It was approved by the majority in Norberg v. Wynrib 1992 CanLII 65 (SCC), [1992] 2 S.C.R. 226, 248, 138 N.R. 81, 98-99 (para. 30), and in C.I.B.C. v. Ohlson (1997) 209 A.R. 140, 146 (para. 20) (Alta. C.A.). Those cases are very instructive. See also Calgary v. N. Constr. Co. 1985 ABCA 285 (CanLII), [1986] 2 W.W.R. 426, 442-3 (C.A.); Brewery Bev. & S.D.W. v. Labatt’s Alta. Brewery (1996) 184 A.R. 162, 170-71; Adams, “Misrepresentation and Fraud”, in 31 Hals. Laws, para. 854 (4th ed. 2003 reissue).
[32] Those authorities discuss four elements which appear to be necessary for unconscionability. (Some cases state some of the four as exceptions to be disproved by the alleged oppressor, but nothing turns on onus in this case.) The four necessary elements are
1. a grossly unfair and improvident transaction; and
2 victim’s lack of independent legal advice or other suitable advice; and
3. overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
4. other party’s knowingly taking advantage of this vulnerability.
[33] No reported case has come to my attention which upset a contract in the absence of one of these four elements, let alone all of them.
In Cain, at the trial level, a bargain had been set aside as unconscionable. The decision was overturned on appeal. The court of appeal did not find that any of the 4 elements were established. The plaintiff was a lawyer, the settlement was carefully negotiated, not patently unfair or unreasonable, and there was no overwhelming imbalance of bargaining power.
Other employers have not fared as well in the face of a plea of unconscionability. For example:
3. Lambert v. Digital Rez Software Corp. 2002 BCSC 481 (CanLII) where the Honourable Judge Maczko of the BC Supreme Court held that:
[8] The plaintiff argues that she was told by her employer that she was entitled to 3½ weeks and that she did not know that she might be entitled to more. When she found out that she could be entitled to more she commenced this action.
[9] I am persuaded that the plaintiff did not make a contract to accept 3½ weeks of severance pay in full satisfaction of her legal rights and that if there was a contract it was unconscionable.
The plaintiff made it clear that she would rather be terminated than laid off. The employer was prepared to accommodate her.
[11] Both parties thought the plaintiff was entitled to severance pay. When the time came, the defendant simply informed the plaintiff that she was entitled to 3½ weeks and she made no response. There was no discussion or meeting of the minds by which the plaintiff accepted the 3½ weeks’ pay as full satisfaction for giving up all her legal rights. The plaintiff did not know what legal rights she had until approximately six months after she left her employment.
[12] I find that there was no contract because the plaintiff did not accept or reject the terms of the severance. Indeed, she did not even put her mind to it.
[13] Even if there was an agreement, I find that it was unconscionable. The elements of unconscionability were set out in Stephenson v. Hilti (1989), 63 D.L.R. (4th) 573 (N.S.S.C.), at 578-9: …it seems to me that a transaction may be set aside as being unconscionable if the evidence shows the following:
(1) That there is an inequality of bargaining position arising out of ignorance, need or distress of the weaker party;
(2) The stronger party has unconscientiously used a position of power to achieve an advantage; and
(3) The agreement reached is substantially unfair to the weaker party or, as expressed in the Harry v. Kreutziger case, it is sufficiently divergent from community standards of commercial morality that it should be set aside.
[14] There was here clearly an inequality in bargaining power. The plaintiff was ignorant of her rights at common law.
[15] An unconscientious use of bargaining power does not require malice on the part of the employer. This element can be met if an employer is reckless or cavalier about the plaintiff’s rights.
[16] Here, the employer told the plaintiff what she was getting. There was no attempt to have a discussion or bargain about the appropriate amount of severance. Although there is no evidence of malice, the employer imposed his will on the plaintiff who was ignorant of her rights.
[17] The agreement (if there was one at all) was substantially unfair to the plaintiff because what she received was substantially less than she was entitled to at common law.
4. Blackmore v. Cablenet Ltd. 1994 CanLII 9078 (AB Q.B.)
The court described the facts underlying a successful plea of unconscionability in face of a clearly worded Release:
[45] The Plaintiff was confronted with notice of his termination abruptly and without warning. At the initial meeting, the Defendant presented the Plaintiff with the settlement agreement. No negotiation took place regarding the amount of settlement. The Plaintiff did not sign the release immediately, waiting eight days. However, he was not given the back pay that he was owed, the references he was promised, nor the amount offered in severance. He was told that he would not get the severance package if he did not sign the release. He was not given any of these items until the release was signed. While the Plaintiff had the opportunity to contact counsel, there is no evidence that he did. The only advice it appears that he received was from the Labour Standards Board telling him that since he was a commission salesman, he should “take what he could get”. The facts clearly show that the Plaintiff was under a great deal of mental and financial distress. Even on the day the Plaintiff signed the release, the facts indicate that he was more concerned with keeping his job with the Defendant than protecting his rights to adequate notice. These facts show that an unequal bargaining position existed between the Plaintiff and the Defendant and that the Defendant used its position to obtain the release.
[46] The question that has to be resolved is whether, in all the circumstances, the settlement is substantially unfair to the Plaintiff. The letter given to the Plaintiff on his termination indicates that the amount of severance paid was based on notice of 7.25 weeks. The Plaintiff was employed by the Defendant for three years and two months. It is sufficient to note that none of the Defendant’s Authorities support a notice period as short as 7.25 weeks. The range of notice, as shown by the Plaintiff’s Authorities, could easily extend up to a year depending on the circumstances. In any event, a notice period of 7.25 weeks is substantially unfair to the Plaintiff. I set aside the release and replace the settlement with a reasonable period of notice – four months.
5. Rubin v. Home Depot Canada Inc., 2012 ONSC 3053 (CanLII)
[13] Can Eric Rubin bring himself within each of these four elements?
1. Was the transaction grossly unfair and improvident?
[14] It is said that this transaction was grossly unfair because the payment offered, while said in the letter of termination to exceed the obligations of the company, represented only one or two days more pay than the statutory requirement. (The offer was for 28 weeks; the Employment Standards Act, 2000 required 27 ¾ weeks.) It was submitted that the benefits provided left Eric Rubin in a worse position than had he refused to sign the release. This idea is based on the fact situation as it developed in Brito v. Canac Kitchens, supra. In that case, the benefits were terminated at the conclusion of the period imposed by the Employment Standards Act (eight weeks). It was only after that the employee became incapacitated. As a result of the determination of the judge that a longer period of notice was called for, the liability of the employer to provide the benefits was extended and a finding in favour of the employee made. As counsel for Eric Rubin sees it, his client was in a worse position than he would have been if he had not signed the release. If the same misfortune had befallen him, as occurred in Brito, he would have had no recourse, given the presence of the release.
[15] In my view, these arguments do little assist the Eric Rubin. The question is not how much more than the statutory value the offer represents but whether, in the circumstances, it is so unreasonable as to be grossly unfair. This comes from the measure of the situation as a whole. In Titus, the offer that was accepted included a payment that represented three month’s salary in lieu of notice. The trial judge concluded that the appropriate notice period was ten months. The Court of Appeal held that the fact of the latter does not make the former grossly unfair. It observed that there were other factors involved. In that case: “if the respondent accepted the offer, he would receive the money immediately, he would have an opportunity to mitigate his damages by seeking new employment (in fact, the respondent obtained a new position within two weeks of his termination) and, importantly, he would avoid the delay, costs and uncertainty of litigation” (see: Titus v. William F. Cooke Enterprises Inc., supra, at para. 41). It should be said that not all of these considerations apply in the present case. Any payment required to be made, pursuant to the Employment Standards Act, 2000, is made upon termination regardless of whether a release is signed or the employee determines to proceed to exercise his or her common law rights.
[16] Insofar as the value of the benefits is concerned, it may be that had Eric Rubin become ill more than eight weeks after his termination, the signing of the release would have foreclosed any claim he might have made, but this is the sort of calculation made in any settlement. One may do better to wait, but there can be advantages in accepting the payment offered even with the incumbent risk. The fact remains that, in Brito, the employee had not signed a release.
[17] To my mind, the question is simpler than the submissions made on behalf of Eric Rubin suggest. Eric Rubin spent his entire working life in the business of retail hardware. He was employed by Home Depot and its predecessor for nineteen years and eight months (December 2, 1991 to July 28, 2011). From about October 22, 1994 to the day of his termination, he worked, full-time, as a Competitive Price Shopper. In this role, it was his responsibility to visit the stores of competitors to compare prices. He would then prepare reports for management based on the information he had collected. Nothing much was said about this in the material that was filed, but it stands to reason that, while this job would not entail specialized skill or training, the employer would benefit from Eric Rubin’s many years of experience in the industry and in the position. The explanation given for his termination was an “organizational change” being undertaken by the company. Whatever this may mean, it makes clear that Eric Rubin was not being terminated for cause and there was no evidence to suggest that this was brought on by any economic concerns within the employer. Finally, I observe that, on the day he was fired, Eric Rubin was sixty-three years old. It must have been obvious that, given his age and the narrowness of his experience, that he could have difficulty finding new employment. The question is whether, in the circumstances, the notice provided is grossly inadequate; that is to say, in the circumstances, would this award be sufficiently divergent from community standards that it ought to be set aside? I find that it is. The idea that, in the modern day, a twenty-year employee, moving to the end of his expected working life, who is fired without cause, for reasons reflected in an internal re-organization of the company, would receive only six months’ notice, is far removed from what the community would accept.
[18] It is not clear to me that the community response to this factor can be understood definitively, independent of the other three considerations referred to in Titus v. William F. Cooke Enterprises Inc., supra. Certainly, it is easier to make the determination bearing those factors in mind. A consideration of them serves only to underscore the conclusion.
2. Victim’s lack of independent legal advice or other suitable advice
[19] The importance of obtaining legal advice was addressed in Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at para. 32, where the Court pointed out that many employees are simply unaware of their legal rights:
…the fact that many individual employees may be a unaware of their statutory and common law rights in the employment context is of fundamental importance. As B. Etherington suggests in ‘The Enforcement of Harsh Termination Provisions in Personal Employment Contracts: The Rebirth of Freedom of Contract in Ontario’ (1990), 35 McGill L.J. 459, at p. 468, ‘the majority of unorganized employees would not even expect reasonable notice prior to dismissal and many would be surprised to learn they’re not employed at the employer’s discretion.
[20] The affidavit of Stephen Fraser, among other things, indicates that, after reading the letter of termination, Eric Rubin commented that “he was happy that his benefits would be continued by Home Depot.” This understanding was not correct. The termination letter is, at best, ambiguous. It does say: “In no case will your benefits be discontinued prior to the end of the statutory notice period.” However, this sentence is followed immediately by: “So there is no misunderstanding all other benefits and insurance coverage ceases on your last day of employment”. For these statements to be read consistently, it must be that the first sentence refers to the listed benefits and the second to benefits the letter does not refer to. This being so, AD&D coverage was withdrawn. As counsel for Eric Rubin understands this, it was only re-instated after the demand letter of August 5, 2011 had been delivered. There is no suggestion that Stephen Fraser, upon hearing the comment of Eric Rubin, made any attempt to explain the situation or, alternatively, if Stephen Fraser was unclear as to what was intended, to inquire, within Home Depot, as to meaning of the letter.
[21] Prior to signing the release, Eric Rubin did not have any legal or other advice. It is true that the letter or termination did state that the release was to be signed within a week of the meeting, meaning that it was open to Eric Rubin to take the offer with him and seek that advice. The affidavit of Stephen Fraser does nothing more than point out that the termination letter does contain this proviso. The affidavit recounts that Eric Rubin read the termination letter and the release. He asked about his options regarding the possibility of apportioning funds towards his RRSP. Stephen Fraser recounts that, in response, he reiterated what was in the letter and release and that “… Mr. Rubin had two options: he could either accept the package as it was, or direct a portion of the settlement monies towards his RRSP’s”. There is no suggestion that Eric Rubin was advised he could take a week to think about, or obtain advice, as to which option he wished to select. More importantly, in indicating that the release need not be signed until August 4, 2011, the letter attached the execution of the release to the payment of the money. It said:
The payment will be made to you by a lump sum (less statutory deductions) provided you sign the release below by August 4, 2011.
[22] This says that, before he was paid, Eric Rubin would have to sign the release. This puts the August 4, 2011 date in a different context. If he delayed signing, the receipt of these funds by Eric Rubin would be, similarly, delayed. If he did not sign by August 4, 2011, the implication is that he would not be paid at all. This was, at best, misleading. The payments required by the Employment Standards Act 2000, including the 27 3/4weeks salary, would have to be paid regardless of whether any release was ever signed.
[23] If Eric Rubin had obtained legal advice, doubtless this would have been explained to him. As it was, he did not. As it is, Home Depot took advantage of that situation.
3. Overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other disability
[24] In Lloyds Bank Ltd. v. Bundy, [1975] Q.B. 326 (C.A.), Lord Denning addressed the general principles relating to unconscionability and said, in part:
Gathering altogether, I would suggest that through all these instances there runs a single thread. They rest on ‘inequality of bargaining power’. By virtue of it, the English law gives relief to one who, without independent advice, entered into a contract upon terms which are very unfair or transfers property for consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.
(Lloyds Bank Ltd. v. Bundy, supra, at p. 339, as quoted in Waterman v. Frisby Tire Co. (1974) Ltd., 1995 CanLII 7283 (ON SC), [1995] O.J. No. 1877, 13 C.C.E.L. (2d) 184, at para. 63)
[25] The imbalance in bargaining power between an employer and employee is inherent in the relationship:
[T]he relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power. In its inception it is an act of submission, in its operation it is a condition of subordination.
(P. Davies and M. Freedland, Kahn-Freund’s Labour and the Law (3rd ed. 1983), at p. 18, as quoted in Slaight Communications Inc. v. Davidson, 1989 CanLII 92 (SCC), [1989] 1 S.C.R. 1038 at 1051-52 (Dickson C.J.) and repeated in Wallace v. United Grain Growers Ltd., supra, at para. 92)
[26] “The unequal balance of power led the majority of the Court in Slaight Communications, supra, to describe employees as a vulnerable group in society (see p. 1051). The vulnerability of employees is underscored by the level of importance which our society attaches to employment”… “Thus, for most people, work is one of the defining features of their lives. Accordingly any change in a person’s employment status is bound to have far-reaching repercussions.” … “The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection (see: Wallace v. United Grain Growers Ltd., supra, at paras. 93, 94 and 95).
[27] The imbalance is intrinsic to the termination of an employee:
There is an inherent imbalance in bargaining power between an employer and an employee when the former terminates the employment of the latter. The employer’s business will continue, the employer will be there, and the employee will be gone.
(Titus v. William F. Cooke Enterprises Inc., supra, at para. 46)
[28] The impact of the imbalance of power is demonstrated by the response of Eric Rubin to the situation he confronted upon being handed the letter of termination and being told: “Eric, this is your last day”. In his affidavit, Eric Rubin deposed:
I was completely caught off guard when Mr. Fraser informed me that Home Depot was terminating my employment. I had worked for Home Depot for almost 20 years. Prior to joining Home Depot I had only worked at two companies in my life and there had not been a single day when I did not have a job. I had never been unemployed before. When Mr. Fraser told me I was losing my job I felt like I had just been hit by a truck. My mind started spinning and my heart began to race.
[29] The fact that, as Stephen Fraser saw it, Eric Rubin took his time to read the termination letter and release, commented that he was happy that his benefits were being continued and had the composure to ask about his options in respect of his RRSP, does not detract from the power imbalance between the employeeand the representative of the employer. The observations, made by Stephen Fraser, that Eric Rubin appeared cordial throughout the meeting and that his demeanour was not one of a person in shock cannot be interpreted to indicate the power imbalance did not exist. People respond to stress differently. To my mind, Eric Rubin should be in no different position because he chose not to show his concern, confusion or surprise. It is the situation and the nature of the relationship which speaks to the power imbalance, not the personality of the person whose life is being changed.
[30] In Titus v. William F. Cooke Enterprises Inc., supra, the Court of Appeal acknowledged that the “…generalized vulnerability of all terminated employees…” is not the only consideration in examining the power imbalance. In that case, it was argued that this “starting point of vulnerability at the moment of termination” was magnified by the recent death of the father of the employee and his high debt load. The Court found that “…these aspects of general andspecific vulnerability…” did not create “an overwhelming imbalance in bargaining power in this case”. In fact, the “generalized vulnerability” was “diminished in this case by the fact that the respondent was a senior, knowledgeable lawyer particularly well-versed in contract and employment law, including the law relating towrongful dismissal” (see: Titus v. William F. Cooke Enterprises Inc., supra, at paras. 47-50).
[31] In this case, the power imbalance was quite different. Eric Rubin was not a high-level employee with professional training. Those mitigating factors did not exist. The power imbalance was enhanced by the way in which the representatives of Home Depot dealt with the situation. In Titus, the employer told the employee to take the time he needed to deal with the situation (see: Titus v. William F. Cooke Enterprises Inc., supra, at para. 50). No such advice was provided to Eric Rubin. Providing a letter which is, at best, ambiguous and misleading, as well as beginning the substantive part of the conversation with the advice to the employee that this is your last day, exacerbated rather than remediated the problem.
4. Other party knowingly taking advantage of this vulnerability
[32] It is impossible to look into the minds of the various officials responsible for the acts of Home Depot to find proof that they set out to take advantage of the vulnerability of Eric Rubin. But it can be implied from their actions and approach to the termination. There was no negotiation or discussion as to how best to deal with the fact that a decision had been made to let Eric Rubin go. He was presented with a response to this decision that was prepared by, and shaped to respond to, the needs of the company. The offer was presented in a way that was directed to getting it signed. Eric Rubin was not presented with a choice calling on him to decide whether or not to accept the offer. The letter advised him that he was already being offered more than he was entitled to. The proposition was that, if he did not sign, he would not be paid. The letter did not say that the offer represented less than two days’ more pay than he was entitled to be paid whether or not he signed. There was no suggestion that he had common law rights that extended beyond the Employment Standards Act, 2000 to which the letter referred. Not only did the letter explain there were benefits that were being terminated immediately, but it also advised Eric Rubin that he should replace those benefits as they lapsed. While, at first, this seems like well-intentioned advice, it also makes clear that Eric Rubin had new responsibilities that he would have to pay for. Where would the money come from to do this; presumably, from the money received once the offer was accepted. It might be easier to accept this advice if the letter did not suggest that, among the benefits to be replaced, were some (particularly AD&D) that Eric Rubin was entitled to receive from Home Depot. The only practical choice that Eric Rubin was offered was whether he wished to direct any of the money he was to receive to his RRSP. Counsel for Eric Rubin referred to this approach as “presumptive selling”. There is a question that is asked, but the question presumes that the buyer, in this case Eric Rubin, has made a decision to accept the offer. The presence of “presumptive selling” is confirmed by a second reference to the August 4, 2011 deadline found in the termination letter. At the end of the description of what was being offered, the letter directs: “Check appropriate box below and return by August 4, 2011”. The letter presumes the release will be signed. No other option is offered. This approach, taken as a whole, is set to take advantage of the vulnerability of the employee. I find this was arranged in the expectation that it would direct, if not compel, Eric Rubin to sign the release.
[33] I find that this release should be struck and found to be unenforceable. I say this mindful of the policy considerations in favour of upholding releases. This is not the same as settlement at the courtroom door (see: Barr v. Pennzoil-Quaker State Canada Inc., 2007 CanLII 28526 (ON SC), [2007] O.J. 2859, 59 C.C.E.L. (3d) 89, at para. 54). That will occur after all the steps in the process leading to trial are complete and after both sides have had considerable opportunity to consider their positions. This happened when one of the parties had no knowledge of what was about to transpire. No negotiation was offered. Stephen Fraser gave the termination letter to Eric Rubin and said: “Eric this is your last day, the company is going in a different direction. This is the package the company is giving you”. [Emphasis added]. Eric Rubin did not agree to anything. He simply accepted what he was misled into thinking was his only option.
[34] This is not the only circumstance where the law allows for consideration of an imbalance of power where a contract was, seemingly, agreed to. If a term of a contract is ambiguous, it is to be interpreted against the interest of the person who insisted it be included (“contra proferentem” which means “against the offeror”). The Consumer Protection Act, 2002 S.O. Ch. 30, Sch. A provides four circumstances where various agreements can be terminated “without any reason …within 10 days after receiving the written copy of the agreement” (ss. 28(1), 43(1) and 51(1)) or “without any reason… within 10 days after the later of receiving the written copy of the agreement and the day all the services are available” (s. 35(1)).
[35] These reasons should not be taken, in any way, to detract from the right of parties to contract and be bound by their agreements. It simply confirms that employers cannot use their superior position to mislead an employee into an agreement that is unconscionable. It does nothing more than confirm the observation of Mr. Justice Echlin that Canadian employers must dismiss their employees with proper notice or pay in lieu thereof.
Summary and Practical Pointers – the “Paperwork” for a good Release:
- The Release should be drafted early on, and circulated to avoid later arguments that the form of Release was not required by the settlement agreement.
- The Release should refer to the consideration given by the employer. It is permissible, and good practice, to refer to the consideration by reference to an underlying written settlement agreement which sets out financial terms.
- The Release should be signed by the Releasor, and witnessed by an adult witness.
- The Release should contain operative language which has a general part with detailed specifics. Thought should be given in each case as to the sort of claims that the employee could advance, aside from the particular claim that has been the focus of the dispute, and all possible claims should be expressly released as examples of the general case.
Summary and Practical Pointers – avoiding a defence of unconscionability:
- Avoid finding of grossly unfair terms by ensuring the employee gets something for the release, over and above what he or she is owed for past service, and statutory entitlements
- Do not refuse to pay amounts due in any event, as a condition of the Release.
- Do not make any statements to the employee about the offer being a very good deal, or anything of the sort, unless it is clearly true. Misconstruing a meager offer as a good one is not a good idea.
- Treat employees with dignity and respect at the time of dismissal. Realize they will not be thinking clearly. Consider having a counselor ready to assist if the employee wishes to avail him or herself of this.
- Do not expect employees to rationally consider settlement terms at the time they are notified of dismissal.
- Expressly state in the settlement documents (provided with the Release) that the employee should take the time to obtain independent legal advice. Consider including language in the Release itself to the effect that the employee has obtained independent legal advice or on his or her own decided not to do so.
- Give the employee a copy of the Release to take away, and time to decide whether to sign. This should not be a short time, 3 days would probably be the minimum that would be advisable.
- Offer the employee the opportunity to ask questions during the period between severance and acceptance.
- Don’t trade a good reference for a Release. The employer should follow its policy of giving, or not giving references without reference to whether a settlement has been achieved and a Release obtained.