Contract that stipulated six-month severance package in event of takeover holds up in court
The recent decision of the Alberta Court of Queen’s Bench in Nystoruk v. Precision Diversified Services Ltd. highlights and clarifies a number of issues which regularly arise in employment law cases, especially as they relate to takeovers and the buying of one company by another.
While negotiating the terms of his employment, which required that he and his family relocate to Calgary, Donald Nystoruk became aware of rumours that Round-Up Well Services — the potential new employer — might be taken over by another company. He was concerned about his own job security if a sale went through. A verbal agreement was reached and he started working for Round-Up. Subsequently an employment agreement was drafted by the president of Round-Up which was executed by the parties. The pertinent terms of the agreement were as follows:
•This agreement is binding by both parties in the event of a “buyout” or “takeover” by any public or private entity.
•Minimum severance is six months of current salary.
•Benefits are provided for one year at no charge to the employee (to include Alberta health care and current medical and dental coverage).
•This agreement may only be modified at the request of Nystoruk and agreed to by the management of Round-Up or Plains Energy (Round-Up’s parent company.)
Three months after he started his employment, Precision Diversified Services Ltd. took control of Round-Up in a hostile takeover. Nystoruk wrote a letter in which he purported to exercise his rights under his agreement and requested the severance payout.
The successor employer responded, rejecting his request for severance pay, and confirmed that Nystoruk still had his current position, that his responsibilities had not changed since the acquisition and that it viewed the agreement to be unenforceable. It wrote that if Nystoruk chose not to continue to work that would amount to a resignation and he would not be entitled to any payment.
Nystoruk continued working for the successor employer. He took no further steps in confirming the enforceability of the employment agreement. He was not sure what to do, as he had a family to support and was concerned about job security.
Nearly three months’ later his employment was terminated and he was offered the equivalent of two-weeks’ salary. He did not accept the offer and was paid the minimum severance of one week. He sued for the damages stipulated in his agreement, or in the alternative for six-months’ salary in lieu of notice and loss of various employment benefits at common law. The employer took the following positions:
•The payment of six-months’ salary was a penalty clause and therefore was unenforceable and unconscionable.
•The agreement was void for uncertainty as it did not specify which of the companies must be the subject of a “buyout" or "takeover” and the meaning of the words “buyout” or “ takeover” were unclear.
•The agreement expired on the takeover. When his payout was rejected, Nystoruk ought to have left his job and sued. By remaining he acquiesced to the terms of the new employment relationship and thereby waived his right to enforce the agreement.
•The successor employer was entitled to credit for all sums Nystoruk earned in mitigation during the relevant six-month time period.
The court came to the following conclusions:
•The six-month salary payment was neither a penalty nor unconscionable in the circumstances. It was a genuine pre-estimate of damages. The court stated that payments which had been held to be unconscionable in other decisions were in the range of two-and-a-half years.
•While the paragraph dealing with the concepts of “buyout or takeover” may be ambiguous, such ambiguity should be resolved in accordance with the principle of contra proferentum (any ambiguity in a contract must be held against the drafter of the document) and accordingly the ambiguity had to be resolved in Nystoruk’s favour. The terms, if ambiguous, may be interpreted in accordance with their ordinary meaning and this established there had been a buyout or takeover. The court noted that prior to agreeing to accept employment, Nystoruk and Round-Up agreed to certain terms, one of which was the security of knowing that in the event of a takeover Nystoruk would receive compensation.
•When Nystoruk triggered his agreement by requesting payment and when the employer refused to honour its obligation, Nystoruk had the option of either treating the agreement as still being in force or terminating the agreement and suing. Nystoruk did not elect to treat the employment agreement as discharged and it is clear he did not communicate this in any way. He chose to treat the agreement as still in force. But he did not communicate this in any manner other than by silence. Does this silence constitute waiver of his continued right to enforce the contract? There was no evidence he intended to waive that right. He continued to work because he had a family to support. He was uncertain of what to do. The court found his conduct did not constitute a waiver of his right to enforce the employment agreement.
•On the question of mitigation, the court noted that:
a) Whether a contract is a fixed-term contract or a contract of indefinite duration, the principle of mitigation applies to a claim arising from any breach of that contract.
b) In cases where there is an agreed upon severance provision, the principle of mitigation also applies to that provision.
c) But there is an exception to that second rule in cases where the contract of employment can be interpreted as having exempted, either expressly or by implication, the employee from the duty to mitigate. This exception applies where the contract contains an express waiver of the duty to mitigate or an express obligation to continue to make payments under the employment contract or where the contractual provision provides the severance amount is payable immediately at, or very shortly after, the time of termination. In such cases the fact that payment is to be made prior to the time when either the employer or the employee could know whether mitigation could occur implicitly suggests a waiver of credit for mitigation.
The court concluded that Nystoruk was under no obligation to mitigate and was entitled to full payment under the employment agreement.
The decision is a reminder to employers who purchase a going concern that they are going to be responsible for the contractual entitlements of the employees who continue in their employ.
Peter Israel is head of Goodman and Carr LLP’s Human Resource Management Group. He can be reached at (416) 595-2323 or [email protected].
While negotiating the terms of his employment, which required that he and his family relocate to Calgary, Donald Nystoruk became aware of rumours that Round-Up Well Services — the potential new employer — might be taken over by another company. He was concerned about his own job security if a sale went through. A verbal agreement was reached and he started working for Round-Up. Subsequently an employment agreement was drafted by the president of Round-Up which was executed by the parties. The pertinent terms of the agreement were as follows:
•This agreement is binding by both parties in the event of a “buyout” or “takeover” by any public or private entity.
•Minimum severance is six months of current salary.
•Benefits are provided for one year at no charge to the employee (to include Alberta health care and current medical and dental coverage).
•This agreement may only be modified at the request of Nystoruk and agreed to by the management of Round-Up or Plains Energy (Round-Up’s parent company.)
Three months after he started his employment, Precision Diversified Services Ltd. took control of Round-Up in a hostile takeover. Nystoruk wrote a letter in which he purported to exercise his rights under his agreement and requested the severance payout.
The successor employer responded, rejecting his request for severance pay, and confirmed that Nystoruk still had his current position, that his responsibilities had not changed since the acquisition and that it viewed the agreement to be unenforceable. It wrote that if Nystoruk chose not to continue to work that would amount to a resignation and he would not be entitled to any payment.
Nystoruk continued working for the successor employer. He took no further steps in confirming the enforceability of the employment agreement. He was not sure what to do, as he had a family to support and was concerned about job security.
Nearly three months’ later his employment was terminated and he was offered the equivalent of two-weeks’ salary. He did not accept the offer and was paid the minimum severance of one week. He sued for the damages stipulated in his agreement, or in the alternative for six-months’ salary in lieu of notice and loss of various employment benefits at common law. The employer took the following positions:
•The payment of six-months’ salary was a penalty clause and therefore was unenforceable and unconscionable.
•The agreement was void for uncertainty as it did not specify which of the companies must be the subject of a “buyout" or "takeover” and the meaning of the words “buyout” or “ takeover” were unclear.
•The agreement expired on the takeover. When his payout was rejected, Nystoruk ought to have left his job and sued. By remaining he acquiesced to the terms of the new employment relationship and thereby waived his right to enforce the agreement.
•The successor employer was entitled to credit for all sums Nystoruk earned in mitigation during the relevant six-month time period.
The court came to the following conclusions:
•The six-month salary payment was neither a penalty nor unconscionable in the circumstances. It was a genuine pre-estimate of damages. The court stated that payments which had been held to be unconscionable in other decisions were in the range of two-and-a-half years.
•While the paragraph dealing with the concepts of “buyout or takeover” may be ambiguous, such ambiguity should be resolved in accordance with the principle of contra proferentum (any ambiguity in a contract must be held against the drafter of the document) and accordingly the ambiguity had to be resolved in Nystoruk’s favour. The terms, if ambiguous, may be interpreted in accordance with their ordinary meaning and this established there had been a buyout or takeover. The court noted that prior to agreeing to accept employment, Nystoruk and Round-Up agreed to certain terms, one of which was the security of knowing that in the event of a takeover Nystoruk would receive compensation.
•When Nystoruk triggered his agreement by requesting payment and when the employer refused to honour its obligation, Nystoruk had the option of either treating the agreement as still being in force or terminating the agreement and suing. Nystoruk did not elect to treat the employment agreement as discharged and it is clear he did not communicate this in any way. He chose to treat the agreement as still in force. But he did not communicate this in any manner other than by silence. Does this silence constitute waiver of his continued right to enforce the contract? There was no evidence he intended to waive that right. He continued to work because he had a family to support. He was uncertain of what to do. The court found his conduct did not constitute a waiver of his right to enforce the employment agreement.
•On the question of mitigation, the court noted that:
a) Whether a contract is a fixed-term contract or a contract of indefinite duration, the principle of mitigation applies to a claim arising from any breach of that contract.
b) In cases where there is an agreed upon severance provision, the principle of mitigation also applies to that provision.
c) But there is an exception to that second rule in cases where the contract of employment can be interpreted as having exempted, either expressly or by implication, the employee from the duty to mitigate. This exception applies where the contract contains an express waiver of the duty to mitigate or an express obligation to continue to make payments under the employment contract or where the contractual provision provides the severance amount is payable immediately at, or very shortly after, the time of termination. In such cases the fact that payment is to be made prior to the time when either the employer or the employee could know whether mitigation could occur implicitly suggests a waiver of credit for mitigation.
The court concluded that Nystoruk was under no obligation to mitigate and was entitled to full payment under the employment agreement.
The decision is a reminder to employers who purchase a going concern that they are going to be responsible for the contractual entitlements of the employees who continue in their employ.
Peter Israel is head of Goodman and Carr LLP’s Human Resource Management Group. He can be reached at (416) 595-2323 or [email protected].
