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Howard Levitt: Flawed Contracts Still Come with a Hefty Price Tag for Employers

posted 1 year ago

Last year we wrote about an Ontario Court of Justice decision which offered employers some comfort. In the case, a company called Cannon Design was not penalized for a poorly drafted termination clause. Arguably, it was rewarded.

In 2016, Farah Rahman signed a written employment contract providing her an annual salary of $185,000, plus benefits and a bonus. Cannon ultimately fired her without cause four years later, at age 61 years.

Cannon tried to rely on an arguably defective termination contract and only pay Farah the equivalent of four weeks of her regular wages. She claimed that she was owed additional payments beyond what was required by the Employment Standards Act, which was all that her contract afforded her.

Justice Sean Dunphy decided that Rahman was not entitled to any further payments beyond that contractual amount. He found that Rahman and Cannon Design had equal bargaining power at the time that Farah had signed her employment agreement because she had received legal advice before signing.

It is not unusual for employees to speak to a lawyer before entering into an employment contract. We encourage this. Employees should understand the terms of their agreements before entering into them. But prudent practice is not intended to serve to the employees’ disadvantage, especially if their contract is invalid because of the employer’s poor drafting.

Justice Dunphy’s decision was significant. He deviated from a pivotal employment law decision in 2020, Waksdale vs Swegon North America. Waksdale created costly consequences for employers who used poorly drafted contracts by nullifying them entirely, a significant price for employers whose employees would have happily signed contracts to the same effect if they had only been properly drafted. After all, to the eyes of 99 per cent of employees, the differences would be indistinguishable. We have advised employers since to tread accordingly carefully in revising their agreements.

It is interesting that Benjamin Waksdale’s termination provision limiting his entitlement for a without cause termination was invalidated because the termination “for cause” provision was invalid. The Ontario Court of Appeal found that any invalid provision of an employment contract voids the entire termination provisions. The Waksdale case found that a contract saying an employee could be fired “for cause” without severance was below the provision of the Employment Standards Act because that Act only permitted termination without severance for employees who were guilty of a small subset of cause, including “wilful misconduct or wilful neglect of duty.” Some “causes,” such as gross incompetence, are not wilful so allowing termination for no severance for any “cause” was illegal thereby invalidating even the “without cause” provisions.

Rahman appealed Justice Dunphy’s decision. On appeal, the court invalidated her employment contract with Cannon Design based on the “with cause” termination section just as Waksdale called for. In other words, the decision of Waksdale remains good law and employers should review and revise their existing employment contracts, almost all of which, more than two years old, have the same language which Waksdale declared invalid. The sensible comment by Justice Dunphy that Rahman intended and clearly understood the contract she signed, having received legal advice, was for nought.
 
This contractual error cost Cannon Design much more severance than was agreed or contemplated and considerable legal fees, all easily avoidable by a well-drafted termination section.

Employers should learn from this. Update your contracts but, once updated, do not let them remain untouched. They should view their employment contracts as living documents which must be updated periodically to keep up with developing laws. Notably from this case, higher earning employees, such as Rahman, may have access to independent legal advice but courts still will not reward poor contract drafting.

Employees can also learn from this decision. Engaging a lawyer before signing a contract will educate employees as to what they are accepting. Rahman’s case suggests that there are unlikely to be any adverse consequences to obtaining such advice. There is no excuse for signing a contract without legal advice, especially after Rahman’s tale.

BY HOWARD LEVITT AND HAMI SHAMSI

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Hani Shamsi is with Levitt Sheikh.

THIS ARTICLE ORIGINALLY APPEARED HERE: https://financialpost.com/fp-work/howard-levitt-flawed-contracts-still-come-with-a-hefty-price-tag-for-employers

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