Poorly Drafted Golden Parachutes

There's a recent decision from the Ontario Superior Court of Justice, in the Freudenberg Household Products Inc. v. DiGiammarino case, interpreting contractual language:

7.         In the case that the Company would decide to terminate the contract with the employee in the first 4 years after the signature, the Company will pay to the employee an indemnity compensation of two (2) years salary including the bonuses.  In the case the Company terminates the contract following employee’s behaviour that could put the company in financial/commercial danger as a result of illegal or dangerous act, this compensation will not be payable any more.  This indemnity will include any other compensation arising from normal labour regulations. 

After these 4 years, this indemnity compensation will be no more applicable and the potential separation will be regulated by normal Canadian labour regulations. [Emphasis added by the Court]

The golden parachute in the first subparagraph is significant and unusual.  Other comments in the decision suggest that Ms. DiGiammarino was a long-service employee, so I'm guessing that the golden parachute was offered to induce her to give up some other contractual entitlement, or to induce her to accept a transfer into a less secure position.  Either way, the drafting is simply terrible, for reasons I will touch on below.

The decision states that the contract was entered into in November 2011, but that is clearly an error, and it appears that the year was 2007.  In summer 2011, the employer decided that Ms. DiGiammarino wasn't performing to expectation, and they would terminate her employment.

However, to avoid the golden parachute, the four-year term was permitted to run its course.  This attempt was unsuccessful:  The Court found that the golden parachute was triggered by the decision to terminate having been made within the first four years, as opposed to the termination occurring within the first four years.  Because they decided within the first four years to terminate her employment, she gets the benefit of the golden parachute clause.

My Thoughts on the Decision

Unlike the Court, I see two possible face-value readings of the language.  There's structural ambiguity in the sentence itself.  The Court's interpretation is possible.  But so is the alternate interpretation:  Indeed, it's probably the more likely interpretation to call "terminate...in the first four years" a verb phrase, all subordinate to the large verb phrase starting with the word "decides".  (No, that's not legal jargon; it's linguistic jargon.  Mind you, it's been a number of years since I've taken a linguistics course, and while I was pretty good at it at the time, I'd welcome input from linguists.)

However, there's a rule of contractual interpretation that, when there are two possible readings, the Court reads the language in the manner which is least favourable to the party that drafted the contract.  So I'm of the view that the Court's correct here.  While one could certainly argue that the parties didn't intend the word
"decides" to be so heavily weighted - indeed, it looks like it was probably intended as empty verbage - I agree with the Court's analysis that there's no reason to protect the employer's right to arbitrarily fix a termination date that is more favourable to its own interests.

Poor Drafting

I have to say that I really hope this language wasn't drafted by a lawyer.

Firstly, there's the empty verbage.  Courts don't respect empty verbage.  Words are presumed to have meaning - to have some sort of effect on the overall meaning of the clause.  Yet it's common for lay people to try to use more language, and fancier language, to try to make a contract more impressive and legal-sounding, yet ultimately obfuscating the meaning of the contract, and detracting from its precision.  (Hint:  If you don't know how to properly use the word 'obfuscate'...just don't.)  The same issue occurs with the phrase "indemnity compensation".  It's clearly just an attempt to look fancy and formal, because the phrase doesn't really have any meaning.  An indemnity is a specific kind of compensation, and pay in lieu of notice isn't generally regarded as an indemnity.

Ironically, had it been a less formal contract, there would be more room for argument.  In an email, for example, empty verbage might be more acceptable when setting out terms.

Secondly, the second subparagraph is really, really weak.  Let's set aside the fact that there's a difference between labour law and employment law, and this one is the latter, and also the fact that this isn't in the Federal sphere...so "normal Canadian labour regulations" is wrong on pretty much every level.  Clearly, it's trying to say "You'll get only the statutory minimums".  But that isn't what it says.  Even if you read "Canadian labour regulations" as something like "applicable employment standards legislation" (which may be a bit generous), saying that a separation will "be regulated by" applicable legislation is simply empty language.  Of course a separation will be regulated by the applicable employment standards regime.  That's true regardless of whether or not the contract says so...because that's just what employment laws do.

In other words, while it looks like this is an attempt to limit the employee to the employment standards minimums, the case law is very clear that language like this simply doesn't cut it.  (To be fair, the employer seems to acknowledge that; they also asked the Court for a determination of the reasonable notice period, which the Court fixed - as an alternative finding - at 21 months.  Of course, there's still a huge difference between a 21 month reasonable notice period and a 24 month golden parachute:  Mitigation.  Remember Bowes v. Goss Power?  With contractual language of this sort, there's no obligation to mitigate, unless that obligation is specifically set out in the contractual language.

The lesson, for employers, as always:  Contracts are useful, but you need a good employment lawyer to do it.  Spending a few hundred dollars to make the contract a good one at the start of employment is worth the investment down the road, because it could easily save you tens of thousands of dollars (or more) in liabilities and additional legal fees at the end of the employment relationship.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.