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

Unpaid Bonus Limitations – some thoughts…

Print

Our client had been employed over a few years by a successful family operated business.  Notwithstanding that his compensation consisted of a base salary and large potential bonus, he did not receive bonuses on the level that he anticipated.

Our client did not receive anything in writing from the employer that would allow our client to determine the entitlement to a bonus or how bonuses were being calculated by the employer during his employment or after.

Our client was ultimately terminated without cause.

On bringing claim for the unpaid bonuses and wrongful dismissal, the employer brought a motion seeking to have a portion of our client’s claim for unpaid bonuses dismissed as falling outside the two (2) year limitation period.

The employer’s position was that because the claim was brought more than two (2) years after the date on which the bonus payments ought to have been made, the claim was out of time.

While we brought forward a number of factual issues that we believed made the employer’s position untenable (including the lack of clarity as to when the bonuses ought to have been paid, fraudulent concealment etc.), in our analysis of the case we were immediately struck by how these same facts would have supported a claim for constructive dismissal had the employer not ultimately terminated our client.

Any lawyer consulted with an unpaid bonus situation akin to this one (prior to the ultimate termination) would have likely advised the client of the ins and outs of the law of constructive dismissal, with the usual warning that such claims are very difficult to establish.

However, in examining the caselaw on unpaid bonuses it was interesting that almost all of the jurisprudence were in the context of constructive dismissal claims [Ilkay v. Acadia Motors Ltd., (2006), 276 D.L.R. (4th) 762 (N.B.C.A), Piron v. Dominion Masonry Ltd., 2013 BCCA 184 (CanLII), Landry v. 1292024 Ontario Inc., (2006) O.J. No. 1832 (Ont.S.C.J.].

Further, we understood that the limitation period for a constructive dismissal claim runs, not from the independent act(s) of repudiation by the employer, but rather on acceptance of the repudiation by the employee and their departure from the relationship

In light of this, it became immediately apparent that the employer’s intent to apply a two (2) year limitation period from the point that each individual bonus payment was not made would be manifestly unfair if a different result would be available to our client if the claim was one of constructive dismissal (ie. without an overt termination by the employer).

Using this approach we successfully persuaded the motions judge, and ultimately the Divisional Court on appeal, that consistency and fairness required that our client’s claim for bonuses unpaid potentially more than two (2) years prior to the claim should not be found to be outside the limitation period.

While it may very well be that this approach is ultimately not favoured at trial, in the context of a summary judgment motion and motion seeking leave to appeal, we managed to enlist support for what we believed to be the proper approach on these claims.

D. Jared Brown – Lead Counsel