Legal Blog

Surprise (2)

In our last newsletter (October 2016), we recounted the sorry tale of a settlement gone wrong and the inability of the creditor to collect on a judgment arising out of that settlement (Finness Yachting Inc. v. Menzies 2015 BCSC). We can now report that the creditor appealed the decision to the British Columbia Court of Appeal and that the appeal was dismissed. In this newsletter, we report on another settlement gone wrong and an attempt by the creditor to undo the settlement and obtain judgment for the original amount claimed before he compromised his claimed amount in the settlement: Clark v. 189557 Ontario Inc., a 2016 decision of the Ontario Superior Court of Justice.

Settlement

A corporate employer terminated the employment of an employee. The employer and employee entered into a settlement agreement whereby the employer was to pay $31,250 USD bi-weekly over six months. The employer was able to pay the first scheduled payments totalling to $18,750, but was unable to make the remaining payments totalling to $12,500 USD.

The employee sued the employer for $145,000 CDN, claiming that the settlement agreement should be set aside and that he should receive the actual damages for his wrongful dismissal. In order to set aside the settlement agreement, the employee had to overcome numerous hurdles that he would not have had to overcome had the settlement agreement gone one step further and stated what would happen if the employer failed to make any of the required payments set out in the settlement agreement.

Fundamental Breach

The employee argued that the employer’s breach of the settlement was fundamental, allowing the employee the right to treat the settlement agreement as at an end. A fundamental breach is one that deprives the innocent party of substantially the whole benefit of the contract. There are five factors to consider in determining whether there is a fundamental breach; “they are: (1) the ratio of the party’s obligations not performed to that party’s obligations as a whole; (2) the seriousness of the breach to the innocent party; (3) the likelihood of repetition of such breach; (4) the seriousness of the consequences of the breach; and (5) the relationship of the part of the obligation performed to the whole obligation.”

The judge held that payment of 60% of the settlement amount was substantial performance of the employer’s obligations under the settlement agreement; the employee was not completely deprived of the very thing for which he bargained. Accordingly, the judge held that there was no fundamental breach.

We pause here to point out that the judge dealt with fundamental breach as if it were a stand-alone remedy. It is not. It is merely one reason why a contract should be rescinded (i.e. treated as if it were void from the start). There are, however, other reasons for rescission. The employee argued one other reason, set out below.

Misreps

The employee argued that the contract ought to be rescinded because the employer made false or misleading representations. He asserted that he would never have entered into the settlement agreement had he not relied upon the employer’s representations to him that it would meet its settlement agreement obligations. However, aside from that bald assertion, the employee never presented any evidence of the alleged representations. Worse yet, the evidence demonstrated that the employer had been attempting to make all of the payments, but, even at the time of the settlement, the employee knew that the employer was in a precarious financial situation. After the last payment, the employer simply had no funds to spare for any further payments.

Repudiation

In a last gasp effort of misplaced legal knowledge, the employee claimed that the employer repudiated the contract by indicating an intention not to be bound by it. Unfortunately, in dealing with this claim, the judge conflated repudiation with rescission. Repudiation is the means by which an innocent party, when faced with a breach of contract by the repudiating party, does not have to wait until the end of the contract to terminate its future obligations under the contract. For example, if a purchaser tells a vendor that he is not going to close a transaction on the date specified, that is a repudiation of the contract. It allows the vendor the option of either (a) accepting the breach, terminating the contract, and suing for damages or (b) refusing to accept the breach, waiting for the closing date, and then, possibly, suing for specific performance on a still-existing contract. Repudiation has nothing to do with rescission.

In this case, it was irrelevant whether the employer repudiated the settlement agreement because the employee had no future obligations under it and was simply suing for his damages. Regardless, for what it was worth, the judge held that there was no repudiation. The employer never refused to pay the remainder of the settlement monies; it merely said that, at the current time, it did not have the funds to do so. The judge held that there was a run-of-the-mill breach of the settlement agreement resulting in damages.

Upshot

The judge awarded the employee the grand sum of $12,500 USD. As an aside, not only was the employer not represented by counsel, the employer did not even appear on the motion. The employee, who was represented by counsel, still lost. Worse yet, given the poor financial health of the employer, the employee might not even be able to collect the judgment amount.

Image courtesy of faustlawmarketing.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.