Well-drafted contracts offer protection

Good employment contract can protect employer from certain costs upon termination
By Jeffrey Miller
|Canadian Employment Law Today

Background

Employment agreements are subject to the rules that apply to any other contract. If employers are careful in drafting such documents, they can save themselves a great deal of money and grief.

A fundamental principle of contract law is that if ‘A’ breaches his contract with ‘B’, ‘B’ is entitled to be put in the position she would have occupied had ‘A’ not broken the agreement. This is different from what the courts award for other wrongs, such as where someone sues for a personal injury. In such a case the person who causes the injury often has to compensate the damaged person for longer-term consequences arising from the injury — loss of earning potential, for example, or loss of enjoyment of life.

This issue’s case in point shows how a well-drafted contract can protect an employer from having to pay such greater, less certain damages. On the other hand, it also recalls that you should not allege dishonesty against an employee unless you have good evidence to back up the claim.

The case: Hamilton v. Open Window Bakery Ltd.

In hiring Jane Hamilton as its exclusive sales agent for Japan, Open Window Bakery wanted to make sure it could end the arrangement cleanly. Hamilton’s employment contract was for three years, but it said Open Window could terminate before that in several stipulated ways.

Open Window could fire Hamilton without notice if she acted in a manner “detrimental to [the employer’s] reputation and well being.” The contract also provided that, after 19 months, Open Window could dismiss Hamilton on three months’ notice without any particular cause.

About 16 months after Open Window hired Hamilton, it purported to fire her for cause. It alleged that, to get around Japanese tariffs, she failed to declare the sugar content in the bakery’s bagels. It also claimed she had given confidential information to a Japanese competitor.

When the 19-month mark passed, Open Window also relied on the clause allowing it to terminate on three months’ notice.

At trial Hamilton succeeded in showing that Open Window had dismissed her wrongfully. But the trial judge awarded her more in money damages than the equivalent of three months’ notice.

He gave Hamilton damages equivalent to the remuneration she would have received for working out her entire three-year contract. As well, he concluded that, because Open Window persistently said Hamilton was dishonest despite equivocal evidence of such conduct, she should receive some of her legal expenses on a higher scale, sometimes called “solicitor-client costs.”

The Ontario Court of Appeal found the trial judge was wrong in his assessment of damages. Unlike tort law (which compensates private wrongs such as personal injury because of someone’s negligence), contract law returned the injured party to where she would have been had the contract been performed. Therefore Open Window was obliged to pay no more than three months’ pay — the amount the contract stipulated as the notice period for firing without cause.

But the appeal court also ruled that because there was at least some “foundation” for the fraud allegations against Hamilton, she should not receive legal costs on a higher scale.

The Supreme Court of Canada has now agreed that Hamilton was entitled only to the lowest amount payable by Open Window under the termination clauses in the contract — three months’ remuneration in lieu of notice. But it has reinstated the trial judge’s award of solicitor-client costs.

Writing for the court, Justice Louise Arbour has ruled, “An unsuccessful attempt to prove fraud or dishonesty on a balance of probabilities does not lead inexorably to the conclusion that the unsuccessful party should be held liable for solicitor-and-client costs, since not all such attempts will be correctly considered to amount to ‘reprehensible, scandalous or outrageous conduct.’ However, allegations of fraud and dishonesty are serious and potentially very damaging to those accused of deception. When, as here, a party makes such allegations unsuccessfully at trial and with access to information sufficient to conclude that the other party was merely negligent and neither dishonest nor fraudulent... costs on a solicitor-and-client scale are appropriate.”

For more information see:

Hamilton v. Open Window Bakery Ltd.

, 2003 Carswell Ont5591, 2003 CarswellOnt 5592, 2004 SCC 9 (S.C.C.)

This in-depth look at damages and costs related to breach of employment contracts was provided by Jeffrey Miller, a Toronto writer, lawyer, and translator. His new crime novel, Murder at Osgoode Hall, will be available May 2004. For more information visit www.jeffreymiller.ca.

Lessons from the ‘hairy hand’ case for employers

The case law includes some highly diverting cases that show the distinction between awarding tort damages and damages for breach of contract. Perhaps the most notorious is Hawkins v. McGee, the so-called “hairy hand” case tried in New Hampshire in 1929 and featured in the novel and movie The Paper Chase.

However, the case demonstrates that because the defendant over-promised in the contract, the tort damages (for medical negligence) could have been lower than contract damages.

Young George Hawkins had burned his palm on an electric wire. Dr. Edward McGee promised to remove the scar tissue and, with skin grafts, give Hawkins a hand that was as good as new.

Hawkins and his father were skeptical, but McGee prevailed on them to give him the experience of trying the grafts.

McGee sutured Hawkins’ hand to his chest. The resulting loss of skin from George’s trunk pinched at him and made George walk bent over.

His hand ended up with a mass on it that looked like a hair transplant. This did not improve his social life.

When Hawkins sued, McGee argued he had never promised a 100 per cent cure; he only had given an opinion that such was possible. Therefore, Hawkins was entitled to a palm not very different from his scarred one.

But the jury found a binding contract for a “good as new” hand. And while an appeal court ruled that George was not entitled to extra damages for pain and suffering — they were part of the deal in any event: no pain, no gain — there was still a binding contract for a new palm. When McGee agreed to settle for $1,400, ironically his insurer refused to reimburse him because he was not insured for “special contracts.”

The lesson, as in the happier example for employers of Hamilton v. Open Window: Be careful what you promise.

For more information see:

Hawkins v. McGee, Supreme Court of New Hampshire, 1929 84 N.H. 114, 146 A. 641.

Tips for employers

•Don’t treat an employment contract as a mere formality. When drafting it, keep in mind what it will look like if it winds up before a judge — a neutral person who does not know the organization, its employees or the business.

•If contract terms are unusual or specific regarding a well-paid employee, and if the employee lacks business or legal experience, it is safer to advise the employee to obtain independent legal advice on the contract. Otherwise the employer might be accused of imposing unfair bargaining power.

•According to Justice Arbour in the Hamilton case, where a contract might be performed in several different ways, the general rule about damages for breach is that “it is not necessary that the non-breaching party [Hamilton] be restored to the position they would likely, as a matter of fact, have been in but for the repudiation [breach]. Rather, the non-breaching party is entitled to be restored to the position they would have been in had the contract been performed.”

•The courts frown on unproven allegations of criminal and quasi-criminal conduct. Don’t accuse an employee of such behaviour unless you can prove it.

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