Thursday, July 4, 2013

Court of Appeal Interprets Employment Contract as ESA-Compliant

There's a short decision recently out of the Ontario Court of Appeal, Dimson v. KTI Kanatak Technologies Inc., dealing with poorly drafted language and questionable ESA compliance.

Dimson occupied a Vice President position with KTI, for just under six years, with an annual salary of $165,000, various benefits, and significant variable compensation components, until his employment was terminated without just cause.  If he was entitled to common law pay in lieu of notice, then he was likely looking at damages measured in six digits.

However, his employment agreement provided as follows:

18(c)   In addition, KANATEK may terminate this Agreement at its sole discretion for any reason, upon providing Employee all payments or entitlements in accordance with the standards set out in the Ontario Employment Standards Act, as may be amended from time to time.
(d)      If at any time KANATEK provides you with a bonus, it will not be included in the calculation of payment for the purpose of this Article or as otherwise agreed to or required by the Employment Standards Act.
Dimson took the position that 18(d) attempted to contract out of the Employment Standards Act, voiding the termination clause.  KTI argued otherwise, that the language in 2(d) preserved statutory entitlements.

On a motion for summary judgment, Justice Lederman found that the language complied with the ESA.  The Court of Appeal upheld the finding.

Before I get into the analysis, allow me to say that, though I've seen a few of them, I consider ESA-only termination provisions absurd for senior management.  At that level, a person should be consulting a lawyer before signing the contract, and in many cases should be getting advice to try to negotiate a better exit package.  I made some comments about this in an earlier entry.  ESA notice caps at 8 weeks, for an employee with over 8 years of service, whereas, to paraphrase Justice Sproat in a recent seminar, anyone with a 'real job' can reasonably expect it to take a minimum of 3 months to replace that job.  For long-service senior managers, that number generally goes up.  ESA minimums provide a person with essentially no job security, and leave the person at risk of a significant period of uncompensated unemployment.

It's irresponsible for a senior manager not to get legal advice on an employment contract, it's often unwise to accept such language , and frankly, I don't know why an employer would even want a senior manager who would accept such a clause.

The Meaning of "Or"

Obviously, the language of 18(d) is poorly drafted.  What do the "or"s mean?  That's really the question.  On the construction of the sentence, they don't appear to mean much.

When you use the word "or", you're often abbreviating a clause to avoid redundancy.  "I can walk or drive" means "I can walk or I can drive".  In a kind of mathematical distribution, the "I can" gets applied to both sides of the disjunction.  As in this case, when you're dealing with a negation, it's similar, except that when you extend it out, you have to reverse the disjunction to a conjunction:  "Do not jump or dive" becomes "Do not jump and do not dive."

So I'm looking at 18(d) and asking what's abbreviated, trying to construct the sentence otherwise.  And I really can't do it in a meaningful way - it's a really awkward construction.  I can see where the plaintiff gets his interpretation, being to the effect that a bonus will not be included in calculations under this article, and will not be included as otherwise agreed to, and will not be included as required under the ESA.  The trouble is that it is kind of absurd to say that something won't happen even if we agree otherwise that it will.  It doesn't really make sense.

Contracts tend to be interpreted to avoid absurd outcomes, and this is why the Court tended away from this interpretation.  (To me, the easiest way of making the provision make sense is by supposing that the first "or" was meant to be "unless".)

On the other hand, there were equal problems with the defendant's position, who argued that the provision in some way stood to affirm ESA rights:  Contracts also tend to be interpreted to give meaning to its terms - language is presumed to do something, and what does 18(d) actually do if it merely affirms the rights already asserted in 18(c)?

With 18(c) alone, one would conclude that, if a bonus isn't required to be paid under the ESA, then it wouldn't need to be paid under the contract.  And that if it is required to be paid under the ESA, then it would be paid.  So if you interpret 18(d) as saying "A bonus won't be paid unless the ESA requires it to be paid", then you're just restating a portion of 18(c).

The Value of Saving Language

What clinched it for the defence, however, is the fact that the language of 18(c) stood as a guarantee of compliance with the ESA, therefore the plaintiff's interpretation of the provision created an internal inconsistency in the language - which, again, is to be avoided - whereas the defendant's interpretation was harmonious on the face of the contract.

Ambiguity and Clarity

Justice Lederman and the Court of Appeal both concluded that the language is clear and unambiguous.  This is important, because ambiguity gives rise to certain presumptions - namely, that the ambiguity should be resolved adversely to the party who drafted it (generally the employer).

I have a lot of respect for Justice Lederman, and the panel on the Court of Appeal, and in general if they all unanimously say something, I'm reluctant to disagree.  However, I'm no lightweight when it comes to English grammar, and in this instance, I simply can't agree with them, as a result of my above analysis:  18(d), as constructed, does not make sense.  If you change the first "or" to "unless", it makes sense.  But in order to do that, you need to first conclude that there's ambiguity or an error in the language to be resolved.

Impact of this Decision

In my view, the most important aspect of this case is the treatment of the saving language, the inclination of the Court to read other provisions as being ESA compliant because of a blanket statement that ESA entitlements will be paid out.

Nonetheless, the treatment has to be more nuanced, because there absolutely are cases where language clearly contravenes the ESA, despite a blanket statement elsewhere that the ESA will be complied with.  These can be difficult cases.  The general rule is that the specific prevails over the general, when there are two seemingly-contradictory provisions.  For example, if one part of a contract says that no company equipment can be used for personal purposes, then another part of the contract allows for limited personal use of the company cell phone, then the likely interpretation will be that the latter creates an exception to the general proposition.

And that's what I see the plaintiff's argument as suggesting is the case here, that 18(d) qualifies that the payments in 18(c) will not include any calculations for bonuses.  And, in general, it's a bad idea to qualify ESA-minimum provisions, because at best the qualification is - as here - meaningless.  If you actually back anything out of the ESA minimum, you've rendered the provision void.

But this is something I see periodically:  Contractual language which sets out a formula for entitlements on termination, which seem to have some pretty clear ESA deficiencies, and then a saving clause that says something to the effect of "In no case will your payment be less than the ESA minimum."

As much as this decision may stand in support of this kind of language, I consider the language to be deeply problematic.  Let's imagine a clear-cut scenario, where the formula is inherently deficient:

(Disclaimer:  The following language is for the sake of argument only.  It is NOT sample contract language, and should not be used in contracts.)

  1. We may terminate your employment at any time, without just cause, on provision of two weeks' notice or pay in lieu thereof, and no other notice or pay in lieu shall be owing.
  2. In no case will your payment on termination be less than your minimum entitlement under the Employment Standards Act.

Clause 1, on its own, is generally unenforceable.  Pretty academic at this point.  Even if you're dismissed after 6 months of work, where your minimum entitlement is one week, the clause itself can't be enforced because the language itself stands in contradiction to the requirements of the ESA.

So what's the effect of clause 2?  Does it save the language in clause 1?  I don't think so.  The only way of reconciling the two clauses is by concluding that the contract asserts that one's minimum entitlements can never exceed two weeks, which is simply untrue.  The real litmus test, in my mind, is this:  What happens if an employee with over three years of service is dismissed?  Clause 1 says you get two weeks only, but that's not enough.  Clause 2 respects the fact that clause 1 doesn't give you enough, and so provides...what?  Does it create a 'bump-up' to the ESA minimums?  I don't think so.  That's exactly the kind of effect that the Supreme Court has said an employer can't expect.  So, in my mind, the language is clearly going to be void for an employee whose ESA minimums exceed two weeks, and will probably be similarly void in other cases too.

The impact of the Dimson decision, I expect, will be that Courts will use saving language to help interpret language which might arguably be construed as being non-compliant with the ESA.  However, a formula that is simply not ESA-compliant will not be rendered compliant, or interpreted as being compliant, or have language read into it to create compliance, simply because another provision guarantees compliance.


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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