Monday, December 16, 2013

Another Limitations Case: Commissions

Last month, I looked at a decision from the Divisional Court about the effect of the Limitations Act on a claim for unpaid bonuses.

This month, the Court of Appeal released a decision relating to the effect of the Limitations Act on unpaid commissions.  The case is Ali v. O-Two Medical Technologies Inc.

The facts are fairly simple.  Ali worked as a mechanical engineer for O-Two from 2002 to September 2007.  There was also a 'side agreement' involving Ali selling O-Two's products in Iraq on a commission basis.  He got his commissions after the products were delivered and paid for.

On December 5, 2006, Ali negotiated a significant sale to the Iraqi Ministry of Health.  On December 12, O-Two unilaterally changed the terms of the commission arrangement, reducing the rate of commission.  Ali rejected the change, and his lawyer wrote a letter insisting that payment be made at the higher rate.

In October 2007, the Iraqi Ministry started making payments; Ali became entitled to receive his commission in November 2007, and he was paid commission at the reduced rate.  Ali issued a statement of claim in September 2009.

The Limitations Act

In Ontario, most actions - there are a few exceptions, which is one reason that it is always important to get prompt legal advice on any given issue - must be commenced within two years of the event giving rise to them.  The limitations framework is pretty firmly set in stone - there is a relatively narrow range of scenarios in which the Courts can relieve against the limitations period.

However, there is frequently an argument as to precisely what started the clock running.  The basic rule is that the clock starts when the cause of action arose - or more precisely when the plaintiff discovered or (acting reasonably) ought to have discovered it.

A 'cause of action' - i.e. a tort, or a breach of contract - is required, in most cases, in order to sue.  All elements of the cause of action have to exist in order to succeed in an action.  Consider, for example, malicious prosecution.  Under the law as it presently stands, it is a core element of the tort of malicious prosecution that the prosecution in question have terminated in the plaintiff's favour.  So if I'm charged with an offence, even maliciously, I don't have a case for malicious prosecution until I successfully defend the charges.  So until the charges are dismissed, or dropped, or stayed, it would be premature for me to bring a malicious prosecution action, and I would generally have two years after the dismissal of the charges to commence an action.

(The 'discoverability' of the cause of action is often the issue, but that isn't relevant here.)

When is a Contract Breached?

This is a nuanced area of contract law, because the interactions between parties can take many different forms.

At a glance, a breach of contract occurs where a party fails to comply with its contractual obligations - i.e. by doing something that the contract prohibits, or omitting to do something that the contract requires.

If that were the extent of it, though, it could have some undesirable consequences.  Because there are times when parties become aware, in advance, that the contract is not going to be performed, and such a strict doctrine would require the 'non-breaching' party to go through with its obligations up until the non-performance by the other party, even where it's in everybody's interests to acknowledge that the deal's dead and try to salvage the situation otherwise.

As a result, we've developed a doctrine of "anticipatory breach":  If I 'repudiate' the contract - i.e. I firmly tell you that I have no intention of complying with my obligations of a contract we've entered into, then you may elect to accept my repudiation, treat the contract as at an end, and pursue damages based on my repudiation.

However, under many circumstances, you may also elect to reject my repudiation, and to treat the contract as still being alive, and carrying on with your obligations thereunder and insisting on my compliance.

So while the simplistic way of asking when the Limitations clock starts is by asking "When was the plaintiff first able to sue?", that doesn't capture the dynamics of an anticipatory breach, where the plaintiff has the option of treating the contract as already being over (and suing) or not, because if the plaintiff rejects the repudiation, then no cause of action actually arises until the defendant's later failure to comply with its contractual obligations.

Analysis of this Case

The motions judge (decision here) regarded O-Two's alleged breach of contract as being the imposition of the new contract, to which O-Two then adhered.  Ali objected to it, obviously knew about it and understood it to be a violation of what he felt his contractual rights to be, and yet did not bring the action until more than two years afterward.

The plaintiff argued that O-Two's imposition of the 'new contract' was a repudiation, which the plaintiff rejected, and therefore that the 'original' contract was still in place, meaning that the breach only arose when the employer failed to pay the amounts owing under the original contract.

The motions judge rejected this argument, but the Court of Appeal saw it otherwise.

O-Two had some interesting arguments, the most compelling of which is that the commission structure was part of an employment contract, and that if the employer wasn't entitled to change the commission as it was, that would amount to a constructive dismissal as of the date the change was made.  The Court of Appeal, however, considered this argument to rely upon a 'mischaracterization' of the claim:  Ali didn't claim constructive dismissal; Ali "challenges the commission agreement in particular rather than his employment relationship with O-Two in general."  To me, this is a rather unclear way of addressing the argument.  In contract law, in general, you can sue on a specific breach of contract without treating the whole contract as being fundamentally breached.  If this differed in constructive dismissal law, as the employer's argument implies, then the Court of Appeal's response would be no answer to it.  (But, as I will explain below, the employer's reliance on constructive dismissal law is misplaced.)


I see the Court of Appeal as having it right here.  The motions judge's decision, to my mind, turns on the notion that the new 'contract' was, in fact, binding upon the plaintiff.  This would have to ignore the underlying principles of contract law - i.e. that a contract requires, among other things, acceptance.

It can be within an employer's rights to modify a remuneration package unilaterally, within limits.  But it's hard to imagine a scenario where a remuneration package might be modified retroactively (i.e. in respect of work which is already done), even if it's not sufficient in scale to generate a constructive dismissal.  Depending on the particulars of the arrangement, it might be completely cogent for the employer to argue that the lower rate of commission would be payable at a lower rate for a deal negotiated the day after the commission structure changed.  But for a deal signed prior, that's much more difficult, and there's little doubt that employee agreement would be necessary to give any legal meaning to a term purporting to make the modified terms retroactive.

Suppose that you and I have an agreement whereby you pay me 10% of the sales I make, and under that arrangement I make a million-dollar sale.  If you then say, "We're only going to pay you $50,000 of that", that doesn't establish a new contract.  It might be a repudiation, it might be a proposal, but unless I accept a repudiation or proposal, such a statement is completely empty and meaningless.  To quote Lord Asquith in the 1951 case of Howard v. Pickford Tool, "An unaccepted repudiation is a thing writ in water and is of no value to anybody: it confers no legal rights of any sort or kind."  The breach, in that case, will be your failure to pay the full amount owing on its due date.

So the Court of Appeal looks at essentially in terms of the 'first principles' of contract law.  But the employer suggests that the connection to an ongoing contract of employment changes it.

Employment law is a niche area of law, with a lot of sophisticated and well-developed common law doctrines.  However, most of the doctrine of 'constructive dismissal' is built upon, and adheres to, similar principles of repudiation of contract.

When an employer unilaterally and fundamentally changes a term of employment, an employee generally has three choices:  He may acquiesce and accept the change; he may - subject to his duty to mitigate - quit and sue for damages; or he may expressly reject the change but stay in the job, whereupon the employer may decide to terminate the existing contract (upon provision of appropriate notice, of course) and, if it pleases, offer new employment on the modified terms.  If, in the face of an express rejection of the modified terms, the employer permits the employee to continue carrying out his duties, the employee is entitled to insist on adherence to the terms of the original contract.  These options are well-established in the law at this point.  (Note well:  These options are very similar to those available to the recipient of an anticipatory breach - it isn't a variation of the general law, but rather a statement of how it applies in the employment context.  The first option is seldom described in context of anticipatory breach, but there is no doubt that it is available.)

The third option is seldom used, and even where it is it will seldom have much impact on the application of the Limitations Act, because most of the time a changed term of employment will have a more immediate impact.  (If you reduce my salary, my damages will start accruing on my next pay cheque.)

But in this case, even if you treated the employer's actions as amounting to a 'constructive dismissal', that wouldn't fundamentally change the fact that the employee rejected the modified terms, and therefore continued to be entitled to insist on the original contractual terms being fulfilled.


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.

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