Can an Employer Enforce Onerous Clauses in an Employment Agreement?

The recently-decided case of Battiston v. Microsoft Canada Inc. is a useful reminder to employers to specifically draw a prospective employee’s attention to clauses in a proposed employment or related agreement that might later be found by a Court to be unusually onerous.

In this case, Battiston was employed by Microsoft for almost 23 years until his employment was terminated without cause in 2018.

Every year, in addition to his salary, Battiston had received benefits such as pay increases, bonuses, and stock awards.

When he was terminated, Microsoft took the position that Battiston was no longer entitled to the vesting of any stock awards that were granted but had not yet vested.

While the lawsuit involved several issues, the one of particular interest has to do with whether or not Microsoft’s position on the unvested stock awards was justified. Battiston took the position that he was entitled to all previously-granted stock awards that would have vested during the notice period had proper notice been given.

The stock awards were an integral part of Battiston’s compensation. In considering whether the loss of that benefit was recoverable, the Court pointed out that a two-step analysis is required. Firstly, the Court will determine the employee’s common law right to damages for breach of contract by assessing the amount to which the employee would have been entitled had proper notice been given. Secondly, the Court will consider the terms of the relevant employment agreement or plan to determine whether any clauses are taking away what would otherwise be the employee’s common law rights.

In this case, Microsoft issued Stock Award Agreements annually. They provided for stock awards vesting in various increments each year. At the date of his termination, Battiston had over 1,000 awarded but unvested shares. Had he been given proper notice, they would have vested during that time period.

The Stock Award Agreements included a provision that, in the event of the termination of Battiston’s employment, his right to unvested stock awards would terminate and would not be extended by any contractual or other notice period

At trial, Battiston testified that he did not read these Agreements, nor did Microsoft draw his attention to the termination provisions in them. He stated that he had been under the impression that he would be eligible to cash out his granted but unvested stock awards in the event of a termination without cause.

Microsoft relied on the termination provisions in the Stock Award Agreements, arguing that they specifically removed Battiston’s common law entitlement to the unvested stock awards.

The Court found that without a doubt, the provisions excluded his right to vest his stock awards following termination. However, that is not the end of the story. The Court referred to a number of Court of Appeal cases decided over the last number of years in which exclusion clauses in contracts were found to be unenforceable because the party submitting the document for signature failed to draw to the other party’s attention to terms that the Court would consider to be harsh and oppressive.

This philosophy applies to employment relationships, as well.

In this case, the Court determined that the termination provisions in the Stock Award Agreements were harsh and oppressive. They had not been brought to Battiston’s attention. For that reason, they could not be enforced against Battiston and he was entitled to damages in lieu of the unvested shares.

Unfortunately for employers, it is not always easy to predict what provisions will be found to be harsh and oppressive by a Court. Given that, presumably, stock awards are granted as an incentive to an employee to do what they can to increase company profits, there would be some logic behind Microsoft’s position in this case. Nevertheless, this case is a reminder to employers that, if an employment contract or plan document extinguishes the right of an employee to benefits immediately upon termination, very serious consideration should be given to specifically pointing out those provisions to the employee at the outset of the relationship.

Consumer Contracts and Arbitration Clauses: As Usual, the Devil is in the Details

Some time ago, I wrote a blog post about contracts that include arbitration clauses that make it a practical impossibility for a complainant to assert his or her rights. For example, when the arbitration clause specifies that the arbitration will take place in some far away country.

In consumer contracts, such clauses are often included in the vendor’s terms and conditions. While I have never done a survey, I am fairly confident in saying that the vast majority of consumers never read a vendor’s terms and conditions, even though they are available to be read. Most consumers simply click on the box that confirms that they are prepared to proceed with the transaction under those terms and conditions without a second thought. If those terms include an arbitration clause, which in turn provides for something that makes it a practical impossibility for the consumer to press forward with a complaint, the consumer will be left without a remedy unless the Court can be convinced to ignore the arbitration clause.

In the recent decision of a US Court in Nicosia v. Amazon.com, Inc., a United States Court of Appeals considered an appeal from a lower court judgment requiring a consumer with a complaint against Amazon to proceed by way of arbitration rather than through the court system. The Court of Appeal affirmed that decision.

In this case, Amazon’s conditions of use included an arbitration clause. The question before the Court was whether or not the plaintiff was bound by it in the face of his evidence that he had never read the clause, received notice of it, or demonstrated through his conduct that he agreed to it.

The Court ruled that the fact that the plaintiff denied ever reading the terms and conditions, including the arbitration clause by making his purchases, was irrelevant. The Court ruled that as in the case of paper contracts, to be bound to an arbitration clause, an internet user does not actually have to read the terms and conditions or click on a hyperlink that makes them available as long as the consumer has notice of the existence of the terms and conditions.

From the perspective of a consumer, this decision makes clear that there is a risk involved in simply ignoring the terms and conditions put forward by a seller in any transaction of any materiality.

When is a Settlement not a Settlement?

The recent decision of the Ontario Court of Appeal in Deschenes v. Lalonde provides an example of one of those very rare occasions when a party to a settlement can obtain an order setting the settlement agreement aside.

As one might expect, a party to a settlement who is merely stricken by “buyer’s remorse” because he or she thinks that a better deal could have been achieved is not going to be able to undo a binding settlement agreement.

However, there are circumstances in which a settlement can be set aside.

In this case, Ms. Deschenes alleged that she was sexually assaulted as a child by a priest in the early 1970s. She sued the priest and the local diocese, claiming it was vicariously liable for the priest’s actions and also liable in negligence for failing to prevent the assaults. The diocese insisted that it had no knowledge of the priest’s prior abuse of others until many years after the assaults on Ms. Deschenes had ended. A finding that the diocese had or should have had knowledge of prior misconduct was critical to a successful claim in negligence. Therefore, given this representation by the diocese and the uncertainty of the law on the issue of vicarious liability, Ms. Deschenes felt that she had no choice but to settle the action in 2000 for a payment by the diocese of just $100,000.

In 2006, it came to light that in the early 1960s, the diocese had received police statements alleging that the priest had assaulted several girls long before Ms. Deschenes was assaulted. Shortly after this information came to light, Ms. Deschenes commenced a new action against the diocese asking that the original settlement agreement be set aside. The parties brought the matter to a motion judge seeking summary judgment to determine the enforceability of the settlement agreement.

The motion judge agreed with Ms. Deschenes and set aside the settlement agreement. The Court of Appeal has now affirmed that decision.

It is a well-established matter of public policy that settlement agreements and the releases typically signed upon settlement should be enforced unless doing so creates a real risk of injustice. The courts place a great deal of emphasis on the need for finality in litigation.

In this case, in order to establish that the diocese failed to take reasonable steps to stop the priest from committing these assaults, Ms. Dechenes would have had to establish that the diocese knew or ought to have known of the priest’s past misconduct, and done nothing to stop it from happening again. Her claim for vicarious liability was highly problematic because an employer is generally only vicariously liable if the employee’s conduct is within the scope of the employment.

Throughout the documentary and oral discovery process, the diocese maintained that it had no idea that there was a problem and that there was no basis upon which it could be said that it ought to have known that there was a problem. The motion judge was satisfied that Ms. Deschenes relied upon this representation in her ultimately agreeing to the settlement. He accepted that she would not have settled had she known about the earlier police statements, which clearly proved that the diocese did have knowledge of the priest’s pattern of sexual misconduct.

The motion judge was satisfied that while the denial by the diocese of this knowledge amounted to a misrepresentation, it was innocent in nature. Nevertheless, he concluded that this was a material misrepresentation, upon which Ms. Deschenes had relied in entering into the settlement agreement.

The law is clear that a party has the right to rescind a contract for a false or misleading representation that induced him or her to enter into the contract. The misrepresentation must relate to a matter that is relevant and material and the innocent party must show that he or she did rely on the misrepresentation, at least in part. This is true even if the misrepresentation is made innocently, that is, by a party who believes that the incorrect statement is actually true.

While it is true that there are public policy considerations that favour the finality of settlements, there are overarching considerations of fairness and justice that take precedence.

Accordingly, the motion judge set aside the settlement agreement, and the Court of Appeal affirmed that decision. Clearly, the interests of fairness and justice prevailed in this case.

Settlement agreements are very rarely set aside, but it does happen.

Resolving Disputes During COVID-19: Considering mediation and arbitration

As Ontario litigants will have been told by their lawyers, and prospective litigants likely will have learned from news coverage, Ontario courts are now closed to all but demonstrably urgent matters. To a large extent, matters considered by the court to be urgent will likely relate to family law issues and rarely to commercial disputes.

In many cases, defendants in commercial litigation cases will consider this to be something of a silver lining around their situations generally. Most defendants are in no hurry to get to trial and will regard the procedural delay currently being experienced as something of an advantage. Indeed, in my experience defendants typically seek out ways of delaying what might be an adverse result in the hope, for example, that the party suing them will lose interest or go out of business before the final reckoning takes place.

However, there are cases in which both parties to a dispute have a genuine interest in getting to the finish line sooner rather than later. This may arise because business realities make it important that the dispute “comes off the books”, for example because one or both of them is interested in selling the business, seeking financing, or entering into some other business transaction that would be negatively impacted by the existence of a lawsuit. Alternatively, this situation may arise where both parties genuinely believe that they are going to win and have no particular reason to delay getting to a result.

One alternative available to parties in those circumstances is to proceed by way of arbitration. While the courts may be closed, arbitrators are still in business and there are many qualified arbitrators who are willing and able to conduct arbitration hearings using Zoom, WebEx, or some other such vehicle.

There are some disadvantages to proceeding in this manner. Aside from the fact that arbitrators, unlike judges, are paid by the parties to provide their services, the conduct of a legal proceeding by video is simply not as effective, from the prospective of counsel, as dealing with the matter in person. In my view, it is always going to be more effective for counsel to examine and cross-examine witnesses and make persuasive arguments in person rather than by video. This is particularly true where the matters in dispute involve significant credibility issues. In those cases, it is important for counsel and for the judge or arbitrator to be able to observe the demeanor of witnesses and the nuances in their behavior in as much detail as possible. While video may be somewhat effective in that regard, obviously it is inferior to an in-person attendance.

One dispute resolution technique which can be pursued just as effectively through Zoom as it would be by means of a personal attendance would be mediation.

Again, there are many qualified mediators who are more than happy to conduct mediations by video. If necessary, arrangements can be made through one of a number of court reporting services, such as Neeson’s Court Reporting, who now provide the appropriate video facilities. Arrangements can be made for the parties and their counsel to “meet” in a joint session and then split off into separate “rooms” so they can deliberate, both with and without the mediator attending, with the same element of confidentiality that they would enjoy in normal circumstances.

To some extent, litigation process in Ontario has been suspended. However, where both sides to a dispute are interested in seeing the matter concluded, other avenues are available to achieve that objective.

If you have any questions about the mediation or arbitration process or would like to begin a mediation or arbitration, please do not hesitate to reach out to contact me.

COVID-19 Legislation and Other Relief

Given the current circumstances, rather than publish another case comment, I thought it would be useful to set out a list of measures put into place by the Canadian and Ontario governments and others to provide assistance and relief for Ontario citizens as of today, March 23. I wish to extend my thanks to Josh Hersh, one of our firm’s excellent articling students, for his assistance with this.

COVID-19 Legislation

Federal Measures

Note: The Federal Government has announced an $82-billion aid package to help Canadians and businesses cope with the global COVID-19 pandemic. Parliament could be recalled as early as March 24 to pass legislation to bring in the fiscal measures. The following are the specific measures that will be enacted. Updates can be found at: https://www.canada.ca/en/department-finance/economic-response-plan.html and at the Canada Revenue Agency https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update.html.

Temporary Income Support for Workers and Parents

Employment Insurance – Effective March 15, 2020, the Government of Canada will waive the one-week waiting period for people who are in quarantine or have been directed to self-isolate and are claiming for Employment Insurance (EI) sickness benefits, at an estimated cost of $5 million. The Government is waiving the requirement to provide a medical certificate to access EI sickness benefits.

Emergency Care Benefit – Administered through the Canada Revenue Agency (CRA), the Emergency Care Benefit will provide up to $900 bi-weekly, for up to 15 weeks to:

  • Workers, including the self-employed, who are quarantined or sick with COVID-19 but do not qualify for EI sickness benefits;
  • Workers, including the self-employed, who are taking care of a family member who is sick with COVID-19, such as an elderly parent, but do not qualify for EI sickness benefits; and
  • Parents with children who require care or supervision due to school closures, and are unable to earn employment income, irrespective of whether they qualify for EI or not.

Longer-Term Income Support for Workers

Emergency Support Benefit – Provided through the CRA, it will provide $5.0 billion in support to workers who are not eligible for EI and who are facing unemployment.

EI Work Sharing Program – Provides EI benefits to workers who agree to reduce their normal working hours as a result of developments beyond the control of their employers, by extending the eligibility of such agreements to 76 weeks, easing eligibility requirements and streamlining the application process.

Income Support for Vulnerable Individuals

Goods and Services Tax Credits – The government is proposing to provide a one-time special payment by early May 2020 through the Goods and Services Tax credit (GSTC). This will double the maximum annual GSTC payment amounts for the 2019-20 benefit year. The average boost to income for those benefitting from this measure will be close to $400 for single individuals and close to $600 for couples. This measure will inject $5.5 billion into the economy.

Canada Child Benefit (CCB) – The government is proposing to increase the maximum annual Canada Child Benefit payment amounts, only for the 2019-20 benefit year, by $300 per child. The overall increase for families receiving CCB will be approximately $550 on average; these families will receive an extra $300 per child as part of their May payment. In total, this measure will deliver almost $2 billion in extra support.

Indigenous Community Support Fund – The government will provide $305 million for a new distinctions-based Indigenous Community Support Fund to address immediate needs in First Nations, Inuit, and Métis Nation communities.

Canada Student Loans – Six-month interest-free moratorium on the repayment of Canada Student Loans for all individuals currently in the process of repaying these loans.

Registered Retirement Income Funds (RRIFs) – Reducing required minimum withdrawals from Registered Retirement Income Funds (RRIFs) by 25% for 2020. Similar rules would apply to individuals receiving variable benefit payments under a defined contribution Registered Pension Plan.

Reaching Home Initiative – Providing the Reaching Home initiative with $157.5 million to continue to support people experiencing homelessness during the COVID-19 outbreak.

Women’s Shelters and Sexual Assault Centres – Providing up to $50 million to women’s shelters and sexual assault centres to help with their capacity to manage or prevent an outbreak in their facilities.

Taxpayers

Filing Due Date Deferral for Individuals – The return filing due date will be deferred until June 1, 2020.

Filing Due Date Deferral for Trusts – For trusts having a taxation year ending on December 31, 2019, the return filing due date will be deferred until May 1, 2020.

Payment Deferral for Individuals – The CRA will allow all taxpayers to defer until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020. This relief would apply to tax balances due, as well as instalments, under Part I of the Income Tax Act. No interest or penalties will accumulate on these amounts during this period.

Payment Deferral for Businesses – The CRA will allow all businesses to defer until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020.  This relief would apply to tax balances due, as well as installments, under Part I of the Income Tax Act. No interest or penalties will accumulate on these amounts during this period.

Deferral of Audits for Businesses – The CRA will not contact any small or medium (SME) businesses to initiate any post-assessment GST/HST or Income Tax audits for the next four weeks. For the vast majority of businesses, the CRA will temporarily suspend audit interaction with taxpayers and representatives.

Electronic Signatures – Effective immediately, the CRA will recognize electronic signatures as having met the signature requirements of the Income Tax Act, as a temporary administrative measure. This provision applies to authorization forms T183 or T183CORP.

CRA Outreach Program – Through this service, the CRA offers help to individuals to better understand their tax obligations and to obtain the benefits and credits to which they are entitled. Traditionally available in-person, this service is now available over the phone and by webinar, where possible.

Mortgages

Mortgage Deferral – Canada’s large banks have confirmed that this support will include up to a 6-month payment deferral for mortgages, and the opportunity for relief on other credit products.

Insured Mortgage Purchase Program (IMPP) – The government will purchase up to $50 billion of insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC).

Businesses

Canada Account – The government is changing the Canada Account so that the Minister of Finance is able to determine the limit of the Canada Account to better assist in exceptional circumstances. The Canada Account is administered by Export Development Canada (EDC) and is used by the government to support exporters when deemed to be in the national interest.

Small Business Temporary Wage Subsidy – The government is proposing to provide eligible small employers a temporary wage subsidy for a period of three months. The subsidy will be equal to 10% of the remuneration paid during that period, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. Employers benefiting from this measure will include corporations eligible for the small business deduction, as well as non-profit organizations and charities.

Business Credit Availability Program (BCAP) – BCAP will allow the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) to provide more than $10 billion of additional support, primarily targeted to small- and medium-sized businesses. The near term credit available to farmers and the agri-food sector will also be increased through Farm Credit Canada.

Domestic Stability Buffer – The Office of the Superintendent of Financial Institutions (OSFI) announced it is lowering the Domestic Stability Buffer by 1.25% of risk-weighted assets, effective immediately. This action will allow Canada’s large banks to inject $300 billion of additional lending into the economy.

Bank of Canada – Lowered the interest rate to 0.75%.

Ontario Measures

Note: Ontario’s Minister of Finance will provide an economic and fiscal update on March 25, which will provide further measures.

Employees

Job-Protected Leave – Per the announcement on March 16, the proposed legislation would, if passed, provide job protection for employees unable to work for the following reasons:

  • The employee is under medical investigation, supervision, or treatment for COVID-19.
  • The employee is acting in accordance with an order under the Health Protection and Promotion Act.
  • The employee is in isolation or quarantine.
  • The employee is acting in accordance with public health information or direction.
  • The employer directs the employee not to work.
  • The employee needs to provide care to a person for a reason related to COVID-19, such as a school or day-care closure.

Childcare Centres – The Ontario government announced March 22 that it would be opening select child care centres across the province to help frontline workers. Included under health care and frontline workers eligible for child care are doctors, nurses, paramedics, firefighters, police, and correctional officers. The services will be free and covered by the government.

Termination Clauses in Employment Agreements: How a lack of care may lead to an unintended result

The recent decision of the Ontario Court of Appeal in Rossman v Canadian Solar Inc. provides an excellent summary of the law in Ontario on the enforceability of termination clauses in employment agreements.

Mr. Rossman signed an employment agreement with Canadian Solar containing a termination clause. The clause provided that the employer could terminate Rossman’s employment on giving notice for a period which is the greater of two weeks or that specified by the Employment Standards Act (Ontario) (ESA).

The clause went on to say that if the minimum statutory requirements at the date of termination provide for a greater benefit than as provided for in the employment agreement, those statutory requirements apply.

Strangely, the clause concluded with the following words “benefits shall cease 4 weeks from the written notice.”

Canadian Solar terminated Mr. Rossman’s employment less than two years later. Mr. Rossman sued, and both parties brought motions for summary judgment. The issue dealt with by the motions court judge had to do with the enforceability of the termination clause. He held that it was unenforceable and that Mr. Rossman was entitled to damages at common law. The matter then went to the Court of Appeal.

The Court of Appeal began by reiterating the well-known principle that an employer must provide reasonable notice of termination unless there is an employment contract clearly specifying some other period of notice. Parties are free to agree to any notice period in an employment agreement, but the agreed-upon period cannot be less than the minimum standard stipulated by the ESA. If it is, the clause will be void and the employee will be entitled to common law reasonable notice of termination. In other words, a termination clause in an employment agreement must provide a benefit that is at least equal to the applicable ESA standard.

If even one part of the termination clause contravenes the ESA, the entire clause will be considered void and unenforceable.

As a matter of overall context, the court pointed out that employment agreements are interpreted differently than other commercial agreements, both because work is a vital aspect of the human condition and also because employees are so vulnerable at the moment of termination.

As a result, among other things, the court will interpret a termination clause in a way that encourages employers to draft agreements that comply with the ESA, failing which the consequences will be serious.

Furthermore, and because employment agreements are interpreted in a manner that tends to be generous towards employees, any ambiguity in the termination clause will be construed in the employee’s favour. A termination clause must be clear and unambiguous. Employees are entitled to know at the outset exactly what their rights are in the event that their employment is terminated.

In this case, the Court of Appeal agreed with the motions judge that the termination clause was void because of its last sentence, which limited benefits to a period of four weeks. The Court of Appeal ruled that there were two reasons why this part of the provision rendered the entire clause void.

Firstly, it placed a four-week limitation on the amount of benefit that Mr. Rossman could expect in the event of termination. The ESA provides for a sliding scale of up to eight weeks in the case of an employee whose employment is terminated after eight years of employment. Therefore, capping the benefits at four weeks has the potential of providing the subsequently-terminated employee with less notice than that stipulated by the ESA.

Canadian Solar argued that Mr. Rossman’s employment was terminated before this last provision would be applied as he had worked for the company for less than two years. Accordingly, his ESA entitlement would not have been as much as four weeks.

The court dismissed this argument, pointing out that the validity of a clause is to be determined based on the situation at the time that the agreement is signed, not at the time that the employment is terminated. If a termination clause has the potential for contravening the ESA, that is enough to render it void.

Secondly, the court pointed out that the final words in the clause created an ambiguity. The clause stated initially that statutory benefits would govern if they provided benefits greater than otherwise specified in the clause. However, at the end of the clause, benefits are said to be restricted to four weeks. This is totally inconsistent with the earlier reference to the paramountcy of the statutory requirements.

As the clause was ambiguous, it would be considered unenforceable.

Accordingly, as the termination clause was struck down, Mr. Rossman was found to be entitled to common law notice.

The court concluded its reasons by reiterating that employees are entitled to know all of the conditions of their employment with certainty, and particularly their entitlement in the event of termination. Employees tend to be vulnerable when negotiating employment agreements with employers who hold unequal bargaining power in these negotiations. The purpose of the ESA is to protect employees and ensure that they receive fair treatment upon termination and, as a result, the court will be vigilant in striking down termination clauses that run afoul of the ESA.

There is no suggestion in the court’s decision that Canadian Solar acted deliberately in attempting to slip something past Mr. Rossman in the hope that he would not recognize the issue. However, even if one were to assume that the final words in the clause were inserted unwittingly, this case makes it clear that it is critically important for termination clauses to be drafted with the utmost care.

Can Amazon be liable for the sale of defective goods by third parties?

As we all know, Amazon.com, Inc. and its Canadian affiliate, Amazon.ca, are giants in the world of e-commerce. As most realize, the bulk of sales of products on the Amazon websites involve products produced by third party sellers and sold through Amazon as a sales vehicle. The interesting question is whether or not Amazon can be held liable if any of these products proves to be defective to the extent that the purchaser of the product suffers loss or damages.

In the United States, the issue appears to have been considered in at least six cases in various American states. In three cases, the courts ruled that Amazon is not a seller of products sold by third parties on the Amazon website. Accordingly, Amazon is not liable for damages caused by defective products. In another three cases, the courts reached the opposite conclusion.

The most recent decision on the point involved a blender purchased by a sushi restaurant on Amazon from a Chinese third party seller. The Chinese seller had paid Amazon for “Fulfillment by Amazon” services. When the purchaser placed the order, Amazon packaged the blender in an Amazon box and sent it directly from its Fulfillment Centre in Virginia to the restaurant. The blender allegedly started a fire, possibly because of a defect in the product.

Amazon moved for summary judgment to dismiss the claim against it. The court ruled that because Amazon had never actually taken title to the blender, it was outside the distribution chain. Furthermore, it ruled that Amazon owed no duty to the restaurant owner because it did not manufacture, sell, or distribute the blender.

Clearly Amazon did not manufacture the blender. The question as to whether or not Amazon may be considered to have sold or distributed it, however, it is obviously open to debate. The debate has not been resolved in the United States.

I have been unable to find any reported cases in Canada where the same issue was raised against Amazon.ca. Perhaps it is only a matter of time. Given the lack of consensus in American courts, it will be very interesting to see what position Canadian judges take on the point.