Friday, February 10, 2012

Wrongful Dismissal and Restrictive Covenants

Here's an interesting decision from the Alberta Court of Appeal, released last August:  Globex Foreign Exchange Corporation v. Kelcher, which discusses, among other things, the effects of wrongful dismissal upon restrictive covenants.  So suppose I sign an agreement that I will not solicit clients of my employer within two years after the end of my employment, and then my employer eventually fires me without cause and without notice.  What happens to that non-solicitation agreement?

I think it's important to highlight, at the outset, the definition of "wrongful dismissal":  You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.

The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.

The conclusion the Court comes to is this:  An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants.  They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.

There doesn't appear to be much jurisprudence on the point.  A similar, but not quite the same, argument has been raised in respect of termination clauses:  Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice.  The general conclusion is that this argument must fail:  When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.

But restrictive covenants are different.  Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee.  So the jurisprudence on termination clauses essentially says:  Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were.  For this restrictive covenant case, the logic runs much differently:  Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.

Pretty simple when you think about it that way.

The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice.  The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract.  The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.

The logic underlying this case isn't automatic, however:  Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach.  There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive.  (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)

My Thoughts

This is a close one.  Justice Slatter has some very good points - it's hard to deny his logic.  (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)

The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look.  The first two are from other British jurisprudence; the third is an addition of their own.

(1)  Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant.  This is true, and concerning, but not solved by the majority's approach here.  The unfairness is not caused by the wrongfulness of the termination.  Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract.  Thus, the majority's solution...isn't a solution.  Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.

(2)  Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant.  This one doesn't seem right:  If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment".  If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration.  The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant.  Still seems wrong.  Contracts are whole entities.  You don't need separate consideration for each and every covenant in a contract.  If there were, it isn't necessarily true that the employee would be denied it.  ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.")  Even if the consideration were tied to the termination of employment...well, let's run with this for a second.

Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant.  Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants.  You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment.  I answer, "Well, it will be harder for me to find a new job in a different field.  I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months."  We agree on those terms, and you later fire me without actual notice.

Okay, so I've lost the benefit of the extension of the notice period, right?  No, still wrong.  Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant.  That still smells like consideration to me.

(3)  Mitigation.  This is actually a good point, and the first thought that came into my head.  The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment.  To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.

But it isn't the only solution.  Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.

Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial.  It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.


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.

No comments:

Post a Comment