Tuesday, September 24, 2013

Employment Contract Interpretation: A Different Approach

Wrongful dismissal actions often involve an argument as to the interpretation or enforceability of a written employment contract, most often dealing with the amount of notice or pay in lieu owing.

So I'll sign a written contract saying that the employer can terminate me on notice calculated in accordance with a certain formula, which is probably significantly less than reasonable notice (which is a major reason why the employer asked me to sign the contract in the first place), and then eventually the employer terminates me.  The employer says that it owes me notice as calculated on the basis of the contract; I say that I'm entitled to pay in lieu of reasonable notice, or I might advance a different interpretation of the contractual term.  (Or recall the Bowes case where the employee successfully argued for payment in accordance with the contractual term, after having quickly obtained replacement employment.)

However, in rare cases, you'll see employees availing themselves of different processes where it's simply a question of contractual interpretation.  Such was the case in the recent case of Vaudry v. Commerx Computer Systems Inc.:  Instead of bringing an action, the employee brought an application, a more summary process which usually puts you in front of a court much more quickly.  It's available in cases where material facts are unlikely to be in dispute; that was the case here.

The Facts

Vaudry was President of Commerx from May 5, 2009 until September 24, 2012.  It took a while to work out the details of the contract, but ultimately in March 2011 they agreed on a contract including, retroactively, commissions on the basis of 30% of the company's quarterly profit, including a pro-rated portion for the quarter in which employment ended.

The actual text of the contract isn't reproduced in the decision.  Mention is made of an email by Vaudry in February 2011 clarifying the commission structure, and indicating that he would take responsibility for quarterly losses by applying them against net profit calculations in subsequent quarters.  It does not appear that this made its way into the contract in any meaningful way.

The contract also provided for termination pay:  The employer could terminate him without cause on the basis of 12 months' pay, calculated by looking at his base pay at the time of termination and his average annual commission over the last three years of his employment.

From September 25, 2009 to December 31, 2011, his overall commissions were nearly $150,000.  In 2012, however, the company started to take losses.  In the last two quarters of the 2012 fiscal year (ending in June), there was a loss for which Vaudry's share would be over $70,000.  So when the company terminated him in September 2012, the question arose as to how to account for the loss.

Vaudry argued that the language in the contract is clear:  The commission portion of his termination pay is to be calculated by looking at his average commissions over the previous three years, with no mechanism for accounting for losses incurred prior to termination.

Commerx, by contrast, advanced a 'fairness'-based argument that Vaudry was understood to be responsible for a portion of the loss, and that they should be permitted to apply this loss against the 'earned commissions' for the purpose of calculating his termination pay.  They paid him a year's salary plus $26,524.59 in respect of commissions, which I take to be the average of his commissions earned less 'his share' of losses.  Vaudry, by contrast, argued that he was entitled to another $34,000.  I'm not clear on how, exactly, this number was calculated.  (I'm guessing that the employer did apply the earned 2013 fiscal year commissions against the prior loss...but even if one assumes that Vaudry was entitled to that commission payment and an averaging based only on the positive quarters in the last three years of his employment, my calculations would suggest that he would be entitled to just shy of $30,000.)

The Decision

The court agreed with Commerx.

Firstly, he made the interesting observation that the contract was negotiated over the course of years by sophisticated parties with the assistance of legal counsel, and therefore the usual rule of 'contra proferentum' (i.e. that ambiguity is to be resolved against the interest of the drafting party) doesn't apply.

In employment law, it's very common for ambiguity to be resolved against the interest of the employer, but the language of contra proferentum is seldom invoked, so there might be some question as to whether or not employment contract interpretation is quite aligned with the doctrine of contra proferentum.  I believe that employment law should be generally consistent with broader doctrines of contract law, and accordingly I agree with Justice Brown's refusal to apply the doctrine in this case.

However, Justice Brown also found the language of the contract to be clear - there was no ambiguity to be resolved.  This raises some questions in my mind about how the case is ultimately decided, but I'll come to that in a moment.

Justice Brown found that the contract's reference to "annual commission" meant "earned commissions" based on net profits; but for the termination of his employment, the losses in the third and fourth quarters of 2012 would have been factored into his "earned commissions".  Vaudry agreed that he always understood that a loss would be accounted for against his future income.  Justice Brown therefore took the following approach:
"So the question becomes: is the termination pay future income."
I have concerns about this.  It is not at all clear to me where the language of "future income" arises, but it looks to be something that simply came up in how the parties described it in their evidence, as opposed to arising from the contract itself.  On the decision's description of the February 2011 email, it looks to me that the parties contemplated that losses would be taken out of his future commission income - i.e. it is not the case that his base salary would be docked for 30% of company losses.

The termination pay is certainly "future income", but the question needs to be much more nuanced:  Is the commission portion of the termination pay properly considered "future commission income", and I don't think the answer to that would necessarily be the same.  The contract specified a formula for calculating the commission portion of termination pay which was altogether different from the one calculating his commissions during his employment.

Indeed, to me, the important question on these facts is whether or not 'earned commissions' can be negative.

As I said, the contract language isn't reproduced, but from its description in the decision it appears that 'earned commissions' are to be calculated and paid on a quarterly basis based on net profits in that quarter.

While the decision notes several times that he was "responsible" for the company's net profit or loss position, that appears to be a reflection of his position of responsibility, and not a reflection of any legal liability.  Without looking to the February email, I see no basis in the description of the contract for an assertion that the employer was entitled to apply previous losses against subsequent quarterly gains.

If the contract speaks only to net profits, but not net losses, and a quarterly calculation, then the result would be that quarters with a profit would yield a positive figure for earned commission, whereas the earned commission in quarters with a net loss would be zero.  There would be commercially rational reasons for creating a commission structure either way.

If the language of the contract was clear, as the judge found, then the February email becomes "parol evidence", which should not be considered in interpreting the clear provisions of a contract.  (If the plain language of the contract leads to a single interpretation, then that's the meaning of the contract.  That the parties may have understood or intended otherwise at the time of execution will not generally permit a court to interpret the contract otherwise.  Where the language of the contract can just as easily bear multiple different meanings, that's where other interpretation doctrines come into play - a court can look at external evidence as to the intentions of the parties, apply the contra proferentum rule, etc.)

So, quite frankly, I have my doubts as to whether or not the employer was really entitled to apply quarterly losses against subsequent quarterly profits at all, despite the understanding of the parties otherwise.  Even if they were, it's still not clear to me that this has the effect of yielding a negative figure for 'earned commissions' (which one would expect to result in a docking of base salary, or a debt obligation, which is clearly not the case), as distinct from simply negating commissions to be earned subsequently, which is what the February 2011 email seems to imply.

In advocacy, it's widely understood that there are two components to legal submissions:  Firstly, you need to convince a judge that it is fair and just to give your client the relief you're seeking.  Secondly, you need to convince the judge that the law permits the result you're asking for.  This is a case where the employer was very successful in the first aspect.
It tortures the language of this contract and offends commercial principles and good business practices to find that Vaudry should undertake responsibility and accountability for the financial performance of the company throughout the term of his employment and walk away from that responsibility with a windfall from leaving Commerx to bear the entire cost of losses that occurred on his watch.
This is where you come to understand why the judge ruled the way he did.  And also where the 'fairness'-based argument clearly breaks down.

Vaudry did not "walk away".  Vaudry was dismissed, and the relief he was seeking was relief only available upon dismissal.  If the contract was interpreted in accordance with Vaudry's submission, then it was simply a matter of choice for the employer to trigger its own termination obligations in circumstances where Vaudry was left with a "windfall" (if it is, in fact, a windfall, which is not at all clear to me).

Moreover, reading that paragraph, you would think that the commission structure was a partnership arrangement, or a joint ownership arrangement.  It was not.

It is, in reality, very strange to call it commercially unreasonable that an employee - even a very senior employee - should not have to share in the losses of the employer.  The business venture, and the risks associated with it, belong to the employer.  The employer will continue to try to build the business which Vaudry operated for over 3 years, and if it turns out that Vaudry built a solid foundation for immense future success, then Commerx will not be further beholden to Vaudry because of it.  Conversely, if Vaudry built the business into a house of cards, vulnerable to collapse at the slightest wind, Commerx will probably not have any remedies against Vaudry for such a thing.

Indeed, the interpretation sought by Vaudry would be the normal approach.  It's very common that bonuses - including, depending on the contract language, post-employment obligations - are calculated on the basis of company profits during a given period (often a fiscal year), without any accounting for subsequent or prior losses during a bonus calculation period.

Despite its relatively low dollar value, I wouldn't be altogether surprised to see an appeal in this case.  I would be interested to see how the Court of Appeal deals with the issue.


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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