How to repudiate a contract and end up ahead…

Repudiation

In contract law, the concept of Repudiation was developed where one of the parties to a contract by actions, words, or inaction expresses to the other party its intention to no longer be bound by the contract to which they are a party.

A repudiation of a contract is a form of termination of the contract, however, it goes further in that a party that repudiates the agreement is signaling to the innocent party their intention to no longer be bound by the contract and to no longer perform.

The innocent party faced with a repudiation, can demand continued performance and then bring a court claim for damages or specific performance (ie. compelling the offending party to do the things they promised to do in the contract) if performance does not follow, or they can accept the repudiation, at which point all parties are relieved of further performance, however rights accruing under the contract prior to the repudiation remain.

Recently however, the Ontario Court of Appeal ruled in a way that would appear to be rewarding a repudiating party (in this case a law firm).  In the case of Miller, Canfield, Paddock and Stone, LLP v. BDO Dunwoody LLP, the Court of Appeal considered a contingency fee retainer agreement contract (the “Agreement”) between a law firm (MCPS) and the client (BDO).  The Agreement would call for BDO to pay an agreed percentage of funds recovered in a matter to MCPS as fees.  If MCPS was unsuccessful in recovering funds, there would typically be reduced or no fees at all.  The Agreement in this case contained an early termination clause requiring BDO to pay certain fees to MCPS in the event BDO were to terminate MCPS’s services prior to completion of the matter or recovery of funds by MCPS.

An early termination provision is common in contingency fee matters as it acts as a disincentive for clients to switch law firms prior to recovery of funds, and ensures that the law firm recovers some of its costs incurred in representation to the date of an early termination.

In this case, MCPS declined to retain (and pay) a third party appeal counsel to conduct an appeal of the matter.  BDO took the position that this refusal was in fact a repudiation of the Agreement by MCPS and BDO then accepted the repudiation which ended the relationship.

At the lower level court, the court found that BDO was entitled to accept the repudiation of the Agreement by MCPS and was relieved from further performance under the Agreement, and particularly the early termination provision requiring BDO to pay MCPS fees to the date of termination.

The Court of Appeal however went a very different direction and determined that while MCPS may have repudiated the Agreement, and BDO was entitled to accept the repudiation, BDO would still have to pay fees to MCPS to the date of acceptance of the MCPS’s repudiation because the act of accepting the repudiation was in fact a termination of the Agreement as contemplated by the early termination provision in the Agreement.

The way I see it (and I am no doubt swimming against the tide of old contract law on this one), is that if MCPS repudiates the Agreement, and the repudiation is accepted by BDO, the Agreement is being terminated by MCPS, not BDO.  Accordingly, the early termination provision that acts to compensate MCPS if BDO terminates early, ought not to be applied.  Essentially, MCPS as the breaching party ought not to be able to enforce a termination provision of the very Agreement they declined to abide by (in effect they terminated first).

It seems to be a very odd result that the offending party MCPS ought to be able to repudiate its own Agreement (that they likely drafted), refuse to perform, and effectively terminate the Agreement, and then in the result find an entitlement to fees from the innocent party for purporting to trigger a termination.

While I understand basic contract law concepts, I sometimes find myself in situations like this on the sidelines scratching my head at how a repudiating party ended up ahead on this.  While the result may be legally correct, it leaves something to be desired in the justice department.

Published by D. Jared Brown – Lead Counsel – Brown Litigation

Phantom Contractors

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In an era where organizations increasingly engage consultants, independent contractors, and short term employees, there is a new reality where the contingent workforce of a company can become a nameless faceless entity.

Working from home and remote connection only increase the risk that a company loses track of its workforce.

Both companies and 3rd party organizations that provide contingent workforce management must rise to meet the challenge posed by this disparate, decentralized, and increasingly mercenary workforce.

Thorough onboarding, management, tracking, and checks and balances should be integral components of the normal payroll function.

Take the scenario mentioned by the National Post in the article linked below.  A spanish employee found there wasn’t much for him to do at his job so he simply stopped showing up. He collected wages for 6 years until he managed to win an award for long service. Problem is… no one could find him to present the award.

While potentially a more damning condemnation of government as a competent employer, all large organizations should take heed.

http://www.nationalpost.com/m/wp/news/blog.html?b=news.nationalpost.com/news/world/a-spanish-man-didnt-report-to-work-for-six-years-and-no-one-noticed-until-he-won-an-award&pubdate=2016-02-14

Posted by D. Jared Brown – Lead Counsel

 

Lawyers and Customer Loyalty

The Supreme Court of Canada has just released its decision in the case of Canadian National Railway Co., v. McKercher LLP and found unanimously that the law firm should not have accepted and directed a class action lawsuit against its client CN while still representing CN on other unrelated matters.

In ruling against the law firm, the court found at paragraph 52 that:

Finally, it was reasonable in these circumstances for CN to expect that McKercher would not act for Wallace. I agree with the motion judge’s findings on this point:

The solicitor and client had a longstanding relationship. CN used the McKercher Firm as the “go to” firm. Although there were at least two other firms in Saskatchewan that also did CN’s legal work, I accept the testimony of Mr. Chouc, that the McKercher Firm was its primary firm within this province. . . .  The lawsuit commenced seeks huge damages against CN and alleges both aggravated and punitive damages, which connote a degree of moral turpitude on the part of CN. Simply put, it is hard to imagine a situation that would strike more deeply at the loyalty component of the solicitor-client relationship. [para. 56]

In other words, it was reasonable for CN to be surprised and dismayed when its primary legal counsel in the province of Saskatchewan sued it for $1.75 billion.

Most clients would be surprised to find that the rules over conflicts of interest in the legal profession are far from clear.  While some law firms (including Brown Litigation) observe strong loyalties to their clients and their respective interests, loyalty from one’s law firm is not always to be expected.

In an era of consolidation and mergers in the legal profession, the opportunity for larger law firms to find themselves in conflict with an existing client increase.

Further, the pressure on lawyers within those larger law firms to generate business and billings while faced with increasing opportunity for conflict with existing clients, creates a situation where client loyalty may become subordinate to the lawyer or law firm’s business interests.

While conflicts can arise unexpectedly, we work to avoid conflicts, and further strive to demonstrate and observe loyalty to our clients.

We believe that client loyalty creates greater long-term opportunity than the short term financial benefits that might accrue to moving against our client interests.

Posted by: D. Jared Brown – Lead Counsel

Some thoughts on Private (in)Equity from the New Yorker

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I have been sitting on this article from the New Yorker for some time (since January 2012), but am increasingly receiving inquiries from clients frustrated with the role of private equity in their businesses.  The reasonable expectations of a private equity firm holding shares in a business can be very different from that of other shareholders.  Understanding the reasonable expectations of different classes of shareholders allows for better planning and business decision-making, and minimizes risk of shareholder claims (oppression etc.).

Interesting read.

US Private Equity

Can settlement negotiations be binding?

Settlement is an integral aspect of most litigation.  The majority of court claims commenced in Ontario are settled by the parties at some point.

When negotiating a settlement agreement with another party, be very careful what you say.  Parties can be unpleasantly surprised when what they thought were simply part of ongoing negotiations have been found by the courts to be a binding component of a concluded settlement agreement.

Situations in which negotiations can be elevated to the level of a concluded settlement agreement include when the parties are negotiating by correspondence, email, or telephone, or where there is no single document which defines all of the terms of the alleged settlement.  In these situations, the courts will look at all of the documents and evidence of negotiations to determine whether the parties have reached consensus.

The end result is that you could be locked into a binding agreement which was not your intended bargain or final outcome, and may not be in your best interests.  This is true even if you have not executed settlement documentation.

In Olivieri v. Sherman (2007 ONCA 491), the Ontario Court of Appeal found that in order to determine whether a binding contract exists, the court must consider whether the words and action actions of the parties show that they had a mutual intention to create a legally binding contract, and reached an agreement on all of the essential terms.

You can protect yourself in these situations.  Retaining a lawyer can ensure your interests are protected, that negotiations remain non-binding, and that concluded settlements are representative of your interests and intentions.  If you don’t have a lawyer, it is recommended that you ensure both parties work from one master settlement document during discussions and that any amendments in the context of negotiations are clearly identified as such (including marking them “without prejudice” as required).   Restrict any statements, either verbally or in writing, outside of the master document to ensure that they are not inadvertently relied upon by the other party.

The commercial litigators at Brown Litigation tenaciously represent the interests of our litigation clients, and can assist you with negotiating resolutions of all manner of disputes.

Posted by D. Jared Brown – Lead Counsel Continue reading

GOVERNMENT PROPOSED NEW LEAVES FOR ONTARIO WORKERS

The Ontario government recently proposed a new piece of legislation, titled the Employment Standards Act (Leaves to Help Families).   If passed, the three new leaves would be:

Family Care Leave

Under this leave, an employee would be entitled to a maximum of 8 weeks of unpaid leave in a given year.  The aim of the leave is to allow an employee the opportunity to provide care and support to a family member with a serious medical condition.  To be eligible, the employee would be required to produce a doctor’s note certifying that the applicable family member of the employee has a serious medical condition.

 Critically Ill Child Care Leave

Under this proposed leave, an employee may be entitled for up to 37 weeks of unpaid leave to provide care or support to a child who is critically ill.  This could be in addition to any Family Care Leave which the employee might have taken.  However, to qualify, the worker must have been employed by his or her employer for at least six consecutive months in order to be entitled.

Crime-Related Child Death and Disappearance Leave

Here, an employee may be entitled to up to 52 weeks leave of absence without pay, where the employee’s child has disappeared, as a result of a crime.  Where the child had died as a result of a crime, the employee would be entitled to up to 104 weeks of leave without pay.  One notable qualification in this section is that the employee would not be entitled to the leave if he or she is charged with the crime.  The leave would also not be available where it has been determined that the child was a party to a crime.  Also, like the Critically Ill Child Care Leave, the employee must have been employed with the employer for at least six consecutive months.

The passage of the proposed amendments to the Employment Standards Act would provide workers with increased job security.  Employees would have the assurance that their absence from work, due to family emergencies, could not be used by an employer to justify their termination.  Employers who violate these provisions would be liable for sanctions under the Employment Standards Act, as well as a civil claim for damages based on wrongful termination.

If you have any questions regarding your rights as an employee, or employer, feel free to contact one of the employment lawyers at Brown Litigation.

Posted by D. Jared Brown Lead Counsel

Does the duty to mitigate apply to all dismissed employees?

While the application of common law reasonable notice remains central to the determination of damages in wrongful termination cases, written employment agreements, with termination clauses fixing notice entitlement in the event of termination, are becoming more common.

Employers, no doubt, resort to written agreements with the aim of limiting their exposure to damages upon an employee’s without cause termination.  Such written contracts may be attractive to the employer as they create a degree of certainty and predictability in terms of the employer’s liability in the event the employer ends the employment relationship.  However, unless carefully drafted, a written agreement might not necessarily limit an employer’s exposure to the extent desired.

For example, in Bowes v. Goss Power Products Ltd., 2012 ONCA 425 (CanLII),  the Ontario Court of Appeal recently considered the issue of an employee’s duty to mitigate in the face of a written employment agreement where the parties had agreed to fix the amount of notice payable upon termination.

Mr. Bowes worked for Goss Power for just over 42 months.  There was a written employment agreement, prepared by Goss Power.  The employee’s entitlement upon termination, without cause, was set out at paragraph 30(c) which provides that:

30. The Employee’s employment may be terminated in the following manner and in the following circumstances:

(c) By the Employer at any time without cause by providing the Employee with the following period of notice, or pay in lieu thereof:

Six (6) months if the Employee’s employment is terminated prior to the completion of forty-eight (48) months of service;

Following his dismissal, and in accordance with paragraph 30(c), Goss Power initially confirmed that Mr. Bowes would be paid his salary for a period of six months.  The employer also advised Mr. Bowes that he had a duty to seek alternate employment during the notice period, and to keep Goss Power updated on his mitigation efforts.  However, the employment agreement itself made no reference to mitigation.

About 12 days after his termination, Mr. Bowes found a new job paying him a salary equivalent to that which he was being paid at Goss Power.  Goss Power then ceased further payments on the basis that the employee had fully mitigated his losses.

The employee commenced an application under rule 14.5 of the Rules of Civil Procedures, R.R.O, 1990, Reg. 194, seeking a determination of his rights under his employment contract.  In support of his application, Mr. Bowes argued that, given that the notice period was fixed by terms of the contract, there was no accompanying duty to mitigate.  He argued, therefore, that he should be entitled to the full 6 months’ pay in lieu of notice, despite having found replacement employment.

However, the lower court agreed with the employer in finding that the Mr. Bowes was not entitled to any further payments, as he had fully mitigated his damages with his new employment.  The court found that this was consistent with the case law, and that absent an agreement to the contrary, a dismissed employee has a duty to mitigate.

In setting aside the lower court’s decision, the Court of Appeal states at paragraph 34 that:

An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.

The Court of Appeal points out that it was an error to consider employment contracts with fixed notice periods as being akin to damages in lieu of notice at common law.  According to the Court, the correct approach is that the fixed notice should be regarded as liquidated damages or a contractual sum, which is not subject to mitigation.  The Court also rejected the lower court’s view that a duty to mitigate applies unless the contract provides otherwise.  Instead, the Court of Appeal holds that where the employment agreement is silent on mitigation, the common law duty to mitigate will not be applicable.

Brown Litigation regularly advises and assists both employers and employees with respect to contracts of employment, and has traditionally recommended that the contracting parties specifically stipulate if any notice period is subject to mitigation or setoff.  The Court of Appeal has now confirmed the importance of proper planning and contract review.

Posted by D. Jared Brown – Lead Counsel