OCA Distinguishes Employee Rights v Shareholder Rights :

In Mikelsteins v Morrison Herschfield Ltd. ( 2019 ONCA 515) the Court of Appeal revised a trial decision where an executive was given 26 months notice. The Plaintiff, in addition to his salary, was a shareholder in this private company and as such received dividends from time to time. The Shareholders Agreement also had a section which said as follows:

A Shareholder whose association with the Corporation and its Affiliates ceases by reason of termination by the Corporation of his/her employment with the Corporation and its Affiliates shall, immediately after such termination, be deemed to have given a Transfer Notice covering all of the Shares held by him/her on a date which is 30 days from the date he/she is notified of such termination by the Corporation.

The trial judge interpreted this clause to mean that the ” termination of his employment ” had to mean his lawful termination, in other words at the end of the 26 month notice period.

The Court of Appeal disagreed. They said that it was an error of law to incorporate a common law employment analysis to a corporate document like a Shareholders Agreement.

      With respect, contractual rights differ from common law rights. Contractual rights depend on the terms of the contract to which the parties have agreed. The principle enunciated in Love, and reiterated in Evans, is that there is a difference between what a dismissed employee is entitled to as damages in lieu of notice upon termination of the employment contract and what the employee is entitled to under the terms of more specific contracts.

What is the policy reason referred to by the Court  for this distinction ?

Similarly here, the Shareholders’ Agreement uses the cessation of Mr. Mikelsteins’ employment as the triggering event for the process to transfer his shares. The termination occurred on October 26, 2017. There is a very plain and obvious reason why a corporation, that is employee owned, and which has terminated an employee who also happens to be a shareholder, would wish to commence the process of repurchasing the employee’s shares the moment that employee is told of his or her dismissal, rather than at the end of the notice period. Understandably the corporation would not wish an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.

This case follows another Court of Appeal case called Love v Acuity Investment Management , ( 2011 ONCA 130) in which a share repurchase agreement was interpreted the same way.

My Comments:

The policy reason set out by the Court seems odd. Of course the Company, aka the Employer, would want to avoid paying dividends to an employee they illegally fired. So what ? Why not ask what the the shareholder, aka the employee, would like ?

Since when is what one party likes a ground for interpreting a contract?

Since the plaintiff’s entitlement to even be a shareholder was tied to him being an employee, why make this artificial distinction between common law employment rights and contractual rights ?

Why do contractual rights override common law rights?

It seems that if instead of being a shareholder per se, the plaintiff had a a provision in his employment contract that his bonus would equal the dividend paid to shareholders, the Court would have allowed him to receive dividends throughout the notice period.

It is important to note that both in  this case and in Love that the employees were shareholder in privately held companies, not publicly traded ones.

Perhaps I could suggest a different rationale for why Courts seem to treat these cases of repurchase agreements differently than the employee owning stock options in public companies type of cases where it is clear that the termination date is the lawful termination date, not the actual date .

  1. Private companies require certainty in who the owners are at any given time more than public companies. If the repurchase date were at the end of the notice period then no repurchase could take place until a Court determined that date. This could take years and what shareholder rights would the dismissed employee have during that time? The interests of a current employee/ shareholder are vastly different than those an ex-employee/ soon to not be an ex-shareholder.
  2. If the share price fluctuated wildly after the actual termination, then each party would argue the notice period that happened to favour their desired stock price. For example, if 3 months after termination the price dropped and continued to drop for the next 9 month, the plaintiff would argue the notice period was 2 months and the employee would say that the proper notice period was 12 months.

This case reminds me why I used to tell my plaintiff clients not to be enthralled with the idea of being a minority shareholder of their employer. If you want a share of the profits, negotiate a profit sharing arrangement without the necessity of actually being a minority shareholder.

This case accentuates the advantage of being an employee over being a powerless minority shareholder.

 

 

 

Do All Arbitration Clauses in Employment Agreements Violate the ESA?

In Rhinehart v Legend 3D Canada ( 2019 ONSC 3296) Justice Sanfilippo was faced with a motion by the defendants to stay the action as the employment contract had an arbitration clause that said as follows:

All of us at Legend are very excited about you re-joining our team and look forward to a beneficial and fruitful relationship. However, should any dispute arise with respect to your employment or the termination of that employment, we both agree that such dispute shall be conclusively resolved by final, binding and confidential arbitration in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association (AAA) in San Diego, rather than by a jury, court or administrative agency.”

This agreement was signed by the Plaintiff when he worked in California for the US parent. He was then was moved to Ontario and employed by the Canadian subsidiary, but he never signed an agreement with the Canadian company.

The judge ruled on a number of issues:

  1. As there was no arbitration agreement between the Plaintiff and his Canadian employer, it was not applicable to his termination of employment from the Canadian company .
  2. It is for a Court, not the arbitrator,  to determine the validity of the arbitration clause because the court shall only stay arbitration proceedings that flow from a valid arbitration agreement . ( Heller v UBER Technologies 2019 ONCA 1, appeal pending to the SCC) .
  3. As the arbitration clause purports to cover all claims arising from employment , this offends the Employment Standards Act which provides for a complaint and enforcement process that cannot be contracted out of. ( see Heller).

The action was therefore not stayed.

I find the third reason very interesting. The clause in question refers to purporting to  oust  the jurisdiction of any ” administrative agency “.

The same logic would seem to apply to invalidate this type of clause in the following situations:

  1. A complaint under the Human Rights Code.
  2. A complaint under the Labour Relations Act
  3. A complaint under the Occupational Health & Safety Act

All of these statutes have administrative complaint procedures that cannot be contracted out of, thus an arbitration clause that purports to deny access to these tribunals would be additional grounds for invalidating an arbitration clause.

Almost every arbitration clause in an employment contract that I have ever seen would seem to have this fatal defect. Does this mean that they are all null and void?

How  does one  avoid this issue ?

I suppose one way would be to try to limit the arbitration clause only to those matters that would otherwise be determined by a court and not purport to cover those items covered by administrative tribunals or the types of statutes that I referred to above.

 

Costs Award Reduced from $171,000 to Zilch:

In Evans v Paradigm Capital, ( 2019 )NSC 3046) Gans J was called upon to reconsider his trial award of costs after the Court of Appeal reduced the Plaintiff’s damages from $137,000 to $57,000.

At trial the Plaintiff was awarded costs of $171,000 plus disbursements . On the reconsideration of costs, for reasons which are not all that clear, Justice Gans said as the results were mixed, there would no order as to costs.

So originally the Plaintiff the Plaintiff won a total of $308,000.

After her failed  appeal, she is only getting $57,000.

In other words by appealing, she lost over $250,000.

Remember the  old adage:

Quit when you are ahead.

 

Failure to Repeat Termination Clause after Multiple Promotions Voids Clause:

In McKercher v Stantec Architecture ( 2019 SKQB 100) Justice Elson had a situation where at the time of his hiring as a staff architect , the plaintiff signed an enforceable contract limiting his notice to a maximum of 3 months.

When he was terminated 11 years later, he had been promoted a number of times and ultimately  held the position of Business Centre Sector Leader, reporting to a VP.

Applying the change in substratum argument, the judge had this to say :

Further, and as informed by the longstanding authority in Bardal v Globe & Mail Ltd. (1960), 24 DLR (2d) 140 (Ont H Ct) [Bardal], the period of reasonable notice increases with, inter alia, the length of service and the level of responsibility. In my view, it necessarily follows that where an employer wishes to rely on a comparatively short notice limit in the original employment contract, it must take reasonably consistent and meaningful efforts to protect the limit’s enforceability. This means that where an employee advances to higher levels of compensation and responsibility, it is incumbent on the employer to reassert its reliance on the contractual notice limit and to ensure that the employee both understands and accepts the employer’s position.

Having failed to this, the Judge found that the termination clause was unenforceable and awarded reasonable notice of 12 months.

There are three ways that an employer can avoid this from happening :

  1. Include a clause in the original contract that the  termination clause continues to apply throughout the employment period notwithstanding any change in position or compensation.
  2. Include a line in all promotion and compensation letters reconfirming the termination clause.
  3. Have a termination clause which is more reflective of common law reasonable notice.

Laying of Criminal Charges After Dismissal Does Not Delay Limitations Period :

In Sosnowski v McEwan Petroleum ( 2019 ONSC 1860) Macleod-Beliveau J. had a situation where the following chronology applied:

November 2009 – Plaintiff fired for cause

July 2010- Plaintiff charged with theft by Crown

August 2010 – Plaintiff convicted and sentenced

November 2014 – Conviction set aside on appeal

July 2015 – Plaintiff starts civil action for wrongful dismissal

The Court found on a summary judgement motion that the 2 year limitation period started when the plaintiff was fired in 2009 and was not delayed or “tolled” because of the subsequent criminal proceedings.

$30,000 for Aggravated Damages For Not Being “an Indigenous Canadian.”

In Torres v Vancouver Native Health Society ( 2010 BCSC 523) Justice Murray awarded 24 months notice to a 58 year old Project Manager with 20 years service.

The Court also awarded $30,000 for aggravated damages for the following reasons:

1) Abruptly and without notice terminating his employment when, as Mr. Demerais testified at his examination for discovery, there was no reason to do so;
2) Immediately escorting him from the office;
3) Sending out an email to the entire DTES social services community advising that he was no longer employed by or associated with them, leaving the impression that the plaintiff had been engaged in some wrong doing or impropriety;
4) Having him served with an intimidating lawyer’s letter demanding that he cease and desist communicating with any of the defendant’s employees and threatening legal action instead of talking to him about their concerns;
5) Making baseless allegations about the plaintiff to the LRB to justify their actions; and
6) Deceiving him about the true reason for his dismissal. It was only during the trial that the plaintiff learned the true reason for his termination. As outlined above both Mr. Demerais and Ms. Vermette conceded in cross-examination that the plaintiff was actually terminated because he was not an Indigenous Canadian.
Why didn’t the judge also award damages for breach of the Human Rights Code ?
52      I pause to note that whether firing the plaintiff for not being Indigenous is discriminatory or contrary to the Human Rights Code, R.S.B.C. 1996, c. 210, is not an issue before me. The import of this evidence in this trial is that it shows that the defendant was dishonest with the plaintiff and the LRB about why his employment was terminated.
One wonders how much more would have been awarded for the human rights component if it had been properly pleaded.

Plaintiff Wins Substantial Indemnity Costs of $175,000 for a 3 Day Summary Trial :

In Menard v The Centre for International Governance Innovation ( 2019 ONSC 2467 ) Justice Gray noted that the Plaintiff beat two his own Offers to Settle, one of which was made at the beginning of litigation.

The Plaintiff claimed substantial indemnity costs of $217,265 for two lawyers. The Defendant claimed its own substantial indemnity costs were only  $120,031.

This wasn’t the sort of case where the judge despised the defendant’s behaviour. In fact this is what the judge had to say about the Plaintiff:

” While I did not find that the plaintiff’s conduct to be sufficient to amount to cause for dismissal withoiut notice, neverthelessI I found that the plaintiff had committed serious misconduct , and wrote a letter before commencing proceedings to an attempt to blackmail the defendant ”

Lessons to be learnt :

  1. The cost to the defendant of this Trial was as follows:

Judgement of 12 months notice :  $175,000

Costs to Plaintiff                               $175,000

Defence Costs to Own Lawyer      $120,000

Total                                                   $470,000

We don’t know what the plaintiff’s very first offer was but it was less than $175,000. Thus the employer paid at least  $300,000 more than it could have if it had settled in the beginning.

2. If the plaintiff makes an early and sensible Rule 49 Offer to Settle, the payoff can be considerable. Making ridiculous offers does not offer that benefit .

So next time you are close to settling a case at mediation and your client says ” Forget it. I am not paying a dime more or I am not giving up a dime off my last offer . Lets go to Court ! ” , show him or her this case.

Plaintiff’s counsel was Andrew Monkhouse and Stephen Le Mesurier of Monkhouse Law.

 

 

 

 

Mutual Release Set Aside Due to Fraudulent Misrepresentation :

In Markicevic v York University  ( 2018 ONCA 813) The Ontario Court of Appeal upheld the lower courts’ decision  to set aside a settlement with its ex-employee to whom they had paid 36 months severance pay only to find out later than he had actually ripped them off for a million dollars.

As part of the deal the parties signed a mutual release.

York first became aware of the accusations of the Plaintiffs’ dishonesty before they terminated him and before they settled . Even though they had sworn statements from other employees about this dishonesty, they said they believed the Plaintiff when he denied the accusations.The Court held that  his protestations of innocence constituted a fraudulent misrepresentation. The York representative said that if he had known the true story at that time, he never would have paid the 36 month severance package.

After York paid the Plaintiff his huge severance they investigated the allegations and found them to be true .

The Court said:

” A contracting party who is induced to enter into a contract as a result of a fraudulent misrepresentation is entitled to rescission, and restoration of the benefits conferred on the other party to the contract. The question of whether a contracting party did in fact rely on the misrepresentation, at least in part, to enter into the contract is a question of fact to be inferred from all the circumstances of the case and evidence at the trial.”

“The trial judge’s finding that York was induced to enter into the severance agreement by the appellant’s fraudulent misrepresentation that he was innocent of any financial dishonesty is supported by the evidence and no palpable or overriding error has been shown. It is difficult to imagine circumstances in which an employer acting responsibly would pay three years severance pay to an employee it knew had misappropriated large sums of money from it.”

I have a lot of concerns about this case.

First of all why did York give a mutual release?

In most wrongful dismissal actions only the plaintiff releases the defendant. Only where there is a potential of a counterclaim is a mutual release used. In other words only where there is a real concern by the plaintiff that the employer may have a claim against him  does the plaintiff have the right to ask for a mutual release.

In this case therefore, by agreeing to sign a mutual release, York should or must have known that the Plaintiff was concerned that the employer may have a claim against him and thus would want that claim extinguished.

Secondly, in my 40 years of practice, I have rarely seen an employee accused of fraud do anything other than deny it when confronted by their employer. Only a complete idiot would admit to such a thing and only a fool would rely on this claim of innocence without first conducting a thorough investigation  before, not after, the settlement.

Thirdly, this was an extremely sophisticated employer, containing  the best law schools in Canada ( I went to OHLS) . The fact that for some inexplicable reason York decided to pay this guy way more than any Court would ever order ( 36 months severance !!!!) should not give them an out because they later determined that it was a dumb decision.

In my opinion this case will lessen the willingness of parties to settle actions because it takes away the certainty of a release. The whole point of a settlement  is that, having done their due diligence, both parties have agreed to stop looking to the past and focus only on the future.

Anything that deviates from that sacred principle will only harm the important societal interest in settling disputes.

5 Years Doing Zilch Gets Lawsuit Booted for Delay:

In Lippa v Advanced Software Concepts ( 2019 ONSC 1873) Master Muir dealt with a wrongful dismissal action where the employee was fired in 2011. The lawsuit was started in 2013, two days before the expiry of the limitation period. The pleading were completed within one year and then nothing happened until 2018 when the Registrar dismissed the case for delay .

The Master refused to set aside the dismissal for the following reasons.

1) Neither the plaintiff nor his lawyer had any acceptable rationale for the delay. The lawyer said that she forgot to put this case into her reminder system.

2) There was a presumption of prejudice which the plaintiff did not overcome.

3) As the employer was alleging just cause, and the plaintiff was alleging inducement and bad faith, merely preserving documents was not enough to overcome the presumption of prejudice.

Plaintiff Wins $114,082 but Pays Costs to the Defendant of $200,000:

In Colistro v Tbaytel ( 2019 ONCA 197) the Ontario Court of Appeal dismissed both the appeal and the cross appeal in the case of a plaintiff who was constructively dismissed when her employer rehired a manager who had sexually harassed her 11 year before.

She was awarded 12 months notice but because she had been on STD and LTD during this same period, her actual damages were only $14,082 . She was also awarded Honda or moral damages of $100,000.

Most plaintiffs’ counsel would have thought that an out come like this was a great win .

Not this plaintiff.

This is what the trial judgement said the Plaintiff was seeking :

  1. For constructive dismissal from employment $100,000.00, being 18 months’ salary,  plus “Wallace” damages of $250,000.00;

2.  For the intentional infliction of mental suffering:

                                i.            general damages of $1,000,000.00;

                              ii.            damages for past economic loss of $401,567.64;

                           iii.            damages for future economic loss of $680,666.25;

                           iv.            damages for past loss of housekeeping value of $64,533.70;

                              v.            damages for future loss of housekeeping value of $85,834.23;

                           vi.            aggravated damages of $500,000.00;

                          vii.            punitive damages of $300,000.00; and,

This totals $3,381,000 and change. As she recovered only $114,082, her recovery was about 3.3 % of what she was seeking.

When it came to costs, the OCA set out what the trial judge said .

      The trial judge held that, given the damages sought at trial by the appellant and the result achieved after trial, it was obvious that Tbaytel and the City were the substantially successful parties to the litigation, and were therefore entitled to an award of costs. While the appellant’s judgment was less favourable on its face than the financial terms of Tbaytel and the City’s 2015 and 2016 offers to settle, the trial judge chose not to invoke the cost consequences of r. 49.10(2) of the Rules of Civil Procedure. Instead, he chose “to fix costs in an amount which partially indemnified the defendants and which [he found] to be fair and reasonable taking into account all parties’ Bills of Costs, the terms of the 2015 and 2016 offers” and other relevant factors: costs endorsement, para. 36.

[63]      By order dated January 26, 2018, the trial judge ordered the appellant to pay costs to Tbaytel in the amount of $150,000 and to the City in the amount of $50,000.

The Court of Appeal, in refusing to overrule the trial judge on costs said as follows:

   The test for leave to appeal an order as to costs is stringent. Leave to appeal will not be granted save in obvious cases where the party seeking leave convinces the court there are strong grounds upon which the court could find that the judge erred in exercising his discretion: Carroll v. McEwan, 2018 ONCA 902 (CanLII), 34 M.V.R. (7th) 1, at paras. 58-59, application for leave to appeal to S.C.C. pending, 38514 (February 4, 2019).

[66]      I am not persuaded that the appellant has met this stringent test and would deny leave to appeal the costs order.

[67]      The appellant’s submissions suggest that the trial judge determined that she was entitled to her costs, subject to the application of r. 49.10(2). But he did not. He proceeded on the basis that Tbaytel and the City were the substantially successful parties and entitled to costs. Further, the record on appeal does not contain the settlement offers. The trial judge’s endorsement on costs suggests that Tbaytel’s second settlement offer did not include a “no admission of liability” clause. Finally, the trial judge acknowledged that the appellant argued that some of the amount of the settlement would have been taxable, but it is not clear that she quantified or substantiated that assertion and she does not do so before us.

My Comments :

In the past, there has rarely been a downside to reaching for the stars when claiming damages. It costs as much to issue a claim for $4,000,000 as it does for $40,000.

This case may stand for the proposition that there is a real risk to  seeking millions when the case is worth only thousands.

I have often thought that there should be a sliding fee scale for issuing a claim based on how much money the claim seeks. This might lessen the effect making million dollar claims in cases worth only thousands.