Friday, May 27, 2016

Employer's Failure to Pay Settlement Funds Does Not Repudiate Settlement

The vast majority of employment law settlements get paid out without much difficulty.  Most of the time, the employer has the funds to pay the settlement, and would rather get it done and over with.  In many of my settlements with '30 day payment' clauses, the cheque still comes in within a week, just to get the file closed.

But every so often, you run into a file where a struggling employer can't make the payment.  And that puts a plaintiff in a position of asking "What do I do now?"

Such was the case for Mr. Ball, following his dismissal from employment:  He was dismissed from employment on June 13, 2013, and quickly entered into a settlement (as of June 21, 2013) contemplating payment of three months' wages over six months, by way of 12 bi-weekly payments.  There were other aspects of the settlement, too, including the forgiveness of a large loan.  The settlement was ultimately very different from the termination entitlements set out in Ball's contract, which entitled him to 12 months' notice or pay in lieu.

After the first six payments, the employer stopped.  There was some email correspondence through 2014, with the employer basically saying "We don't have the money right now, but we're working on it."

In late 2014 and early 2015, Mr. Ball's counsel wrote to the employer, but received no response, so they commenced litigation in April 2015.  The employer didn't defend, so the plaintiff sought default judgment on the basis of the terms of his employment agreement - as opposed to merely enforcing the settlement terms.

The story is similar for Mr. Clark, who worked for the same employer, except that his settlement did not include forgiveness of a large loan - it was strictly a 'salary continuance' plus benefits type arrangement.

In two recent decisions (here and here), Justice Rasaiah awarded judgment to both plaintiffs based only on the settlement terms.  Ball was not entitled to treat the settlement agreement as never having been reached: No material misrepresentations induced him to enter into the agreement, there was no 'fundamental breach', and the employer had not *actually* repudiated the agreement., because they always expressed an intention to honour the agreement.

In the alternative, Justice Rasaiah indicated that even had the agreement been repudiated, she still wouldn't have awarded additional damages, because there wasn't evidence of damages.  (This, based on the limited description of the employment agreements, appears to be a very problematic conclusion, failing to consider the consequences of Bowes v. Goss Power and Howard v. Benson Group.)


In the course of litigation, a breached settlement has consequences which are fairly clearly set out in the Rules:  The non-breaching party can bring a motion to enforce the settlement, or alternatively the non-breaching party can continue the litigation as if no settlement had been reached.

Outside of litigation, it gets a little bit more complicated, but the practice is similar:  When a settlement is fundamentally breached, the non-party has two options:
It could have elected to affirm the settlement and hold the appellants to the performance of their contractual obligations. Or, it could have elected to accept the breach as a repudiation of the contract and proceed with the action.
Here's how it works:  When a party, by words or conduct, fundamentally breaches a contract and/or evinces an intention not to be bound by the terms of an agreement, the other party can elect to 'accept' the repudiation, releasing both sides from performance of the agreement, or alternatively the other party can seek to enforce the terms of the agreement.

Normally, your damages following repudiation of a contract are to put you in the position you would have occupied had the contract been complied with.  However, in the context of settlements, there's an additional hitch:  Because an accepted repudiation releases both parties from performance of obligations under the contract, the non-breaching party is no longer precluded *by* the settlement from pursuing the entitlements that the settlement was intended to resolve.

So, in practice, it is a very similar 'election' process to the in-litigation settlement breach options.  As a non-breaching plaintiff, I can seek to enforce the settlement, or I can irrevocably say, "Fine, you don't want to honour the settlement, I'm seeking my full entitlements."

And, what's more, from a policy perspective, this makes sense:  I entered into a settlement with the intention of achieving a final resolution to the original dispute.  If I compromised my original position at all in reaching that settlement (which is the case in pretty much every settlement), and I were held to that compromise even though the other side didn't honour the settlement, then I'm put in the position of still having to litigate to enforce my compromised position - exactly the thing I was trying to avoid having to do by compromising in the first place.

Suffice it to say that I have my concerns about the outcome here.

In both cases, the judge focused significantly on the requirement that fundamental breach deprive the non-breaching party of "substantially the whole benefit of the contract".  In Mr. Ball's case, this allowed her to look at the very substantial benefits he received in the form of a forgiven loan, as well as having received more than half of the financial settlement, and conclude that he received "substantially what he bargained for".

In Mr. Clark's case, the judge found that simply providing approximately 60% of the amount of the settlement amount constituted "substantial performance of the obligations in the settlement agreement".  (This "substantial performance" language is interesting.  The phrase is not typically used in this context, but has a very particular meaning in construction lien law:  A contract is deemed to be substantially performed when the improvement being made or a substantial part thereof is ready for use, and any outstanding work is only worth a certain percentage of the contract price - the formula caps at 3%.)

Normally, when we're arguing about 'fundamental breach', it's because of an arguably technical breach, or because one party, in the course of completing its obligations, got a detail wrong.  It's pretty unusual that an ongoing non-payment of financial obligations under a contract was the subject of such a debate.

But perhaps that's because of the other side of the repudiation test:  Because, typically, when you aren't paying your bills, that's said to evince an intention not to be bound by the terms of the contract.

Justice Rasaiah got around that issue by pointing out that the employer never said they weren't going to was just taking a while.

She considered it a total non-starter that their breach required them to engage a lawyer and pursue legal action.  This, according to Justice Rasaiah, is not a factor when assessing whether or not the parties got what they bargained for.

A lot of settlements don't have a fixed timetable for payment.  In that case, you might argue about at what point a 'breach' has even occurred, much less a fundamental breach.  But in these two cases, where they stalled for several months, and then totally ignored a lawyer's letters with the outstanding settlement amounts more than a year in arrears, with no payment forthcoming approaching three years after the settlement was reached, it's really difficult for me to see how such conduct does not evince an intention not to be bound.

My concern about this is that it undermines an already-dubious element of dispute resolution:  The Payment Plan.  When you have a party who is in a difficult financial position, and you agree to settle the claim based on paying a reduced sum over an extended period of time - because you'd rather get paid something than nothing - then Justice Rasaiah's reasoning really leaves zero incentive for the payor not to breach the payment plan after a little while:  As long as you still got *something* that isn't insignificant out of the payment plan, and the payor keeps feeding you "The cheque's in the mail" types of responses, all you can do is try to enforce the settlement as you made it in the first place, and the defendant can say "Tell you what, I'll give you half of that, and save you the trouble of having to litigate."  (Believe it or not, I've seen this happen.)

In particular, there are many such cases where there is really not much controversy about how much the plaintiff is owed.  I might have a more-or-less airtight case for x, but enter into a settlement for 2/3 of x, paid over several months, for the sole reason that it's better than having to pursue formal legal action and obtain and enforce a judgment.  Yes, in that case, by being required to take it to court, I have been denied substantially the entire benefit of the agreement that I was to obtain by entering into it, and I think that Justice Rasaiah is likely giving the 'legal fees' issue too short of shrift by dismissing it in such a manner:  I've contracted for finality, for the bird in hand, and I don't have the bird in hand.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Wednesday, May 11, 2016

Small Claims Court Can Order Production of Documents

In the recent case of Burke v. Lauzon Sound and Automation Inc., the plaintiff sought an order for production of documents from the defendant.

The defendant, by contrast, took the position that the Small Claims Court has no power to order production of documents, outside of a settlement conference.  There were a couple of earlier Small Claims Court decisions reaching that conclusion, including a decision by Deputy Judge Winny finding that motions for production of documents would "import a discovery process that is neither contemplated by nor intended under the Small Claims Court Rules."

However, Deputy Judge Lepsoe in Burke declined to follow those cases.

On a careful summary of the applicable Rules, and specifically the broad 'catch-all' language giving the Small Claims Court powers analogous to the Superior Court as to matters not specifically touched upon in the Small Claims Court, the Deputy Judge concluded that he did have power to order production, and proceeded to do so.


This issue does arise from time to time.

Unlike the Superior Court, which as part of its ordinary process requires production of all documents that are arguably "relevant" to the matters in issue, the Small Claims Court only requires that parties disclose the documents upon which they intend to "rely".  If I have a document that will help you, there's nothing automatic in the Small Claims Court rules that requires me to produce it to you.

When I was an articling student (quite some time ago - before either of the cases relied upon by the defendant were decided), I was carrying a wrongful dismissal file at Small Claims Court, where the employer alleged cause, based on pretty technical allegations of breach of policy.  I put together a lengthy demand for productions - on the whole, it looked pretty excessive for the Small Claims Court, but the reality is that all the documents I was insisting upon were justifiable as being important to the matters in issue - because of the nature of the allegations the employer was making, it was hard to see how we could get a fair trial without having the opportunity to explore these records.

Opposing counsel argued that there was no mechanism for discovery of documents, but I reviewed the Small Claims Court Rules at the time and came to the same conclusions as Deputy Judge Lepsoe:  It didn't make sense that the Small Claims Court didn't have any jurisdiction to order production of documents, but it probably would make sense that the scope of such production should be limited to bear in mind the mandate of the Small Claims Court itself.  (Eventually, the matter settled, and we never needed to argue the issue of the proper scope of discovery.)

Particularly with the Small Claims Court jurisdiction at $25,000 these days, procedural protections become more important:  Maybe we don't want to order voluminous productions in a case that's only worth a couple thousand dollars, but when we're arguing over $25,000, some requirement for productions is certainly appropriate.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.