Understanding repudiation and just cause

Exclusive to Canadian HR Reporter from Rudner Law.

Imagine that you find out that an employee has engaged in serious misconduct. You investigate and dismiss them for cause, and they decide to sue for wrongful dismissal.

If the court finds that you did not have just cause to dismiss, can you still rely on the termination clause in the contract which limits their severance entitlement?

Some court decisions have suggested that you may not be able to, but in Singh v Clark Builders, the Alberta Court of King’s Bench addressed the issue and clarified that if the employer has a reasonable basis to assert cause, they are not precluded from relying on a termination clause if that is unsuccessful.

Termination agreement

The worker began his employment on Oct. 15, 2013, in the role of VP corporate operations, pursuant to a written employment agreement. The agreement provided that in the event of a termination without cause, he would receive 90 days of notice or pay in lieu; he negotiated this provision himself.

The agreement further provided that the employer could terminate his employment immediately for just cause.

In addition to the agreement, the employee and employer agreed that he would replace the current COO upon his retirement, with both parties exchanging correspondence affirming this mutual intent. In November 2015, the employee was promoted to COO, which was his role upon his dismissal in September 2019.

Since the parties’ contemplated this new role, and the agreement provided that it would continue to apply after changes in duties, the court confirmed that the agreement remained valid.

Just cause – with severance

In early 2019, the employer became aware of, and investigated, suspected financial wrongdoing and other misconduct involving breaches of policies, as well as concerns regarding poor performance. After the investigation, the employer decided to proceed with termination.

In good faith, it made a severance offer, noting although it had serious concerns about his conduct, it wanted to avoid a dismissal for cause. The parties agreed that his last day would be in September but continued to negotiate a severance package; consequently, no compensation was yet paid.

In December 2019, the employee sued for wrongful dismissal. The employer’s Statement of Defence alleged cause, but was later amended to remove those allegations.

Repudiation of agreement?

The employee argued that he was entitled to reasonable notice at common law because the employer repudiated the agreement by a) alleging just cause in bad faith, and b) failing to provide him with 90 days of pay in lieu. The court rejected his arguments.

Regarding the argument that the employer alleged cause in bad faith, the court found that the employer had reasonable grounds to allege cause and raised them in good faith. The employer investigated the employee’s suspected misconduct and uncovered many troubling issues that cost it millions in losses, so it had a reasonable basis to allege cause.

Regarding the employer’s alleged failure to pay, the court distinguished this case from cases where not paying contractually agreed upon payments were instances of repudiation because in this case, the parties were still negotiating a severance package just before the employee sued. Once the case was live, the contractual payment was not made because there was a dispute as to what was contractually required to be paid given the allegations of cause.

Consequently, the employer did not repudiate the agreement, as it believed in good faith that it had cause and it was reasonable to wait for the court to make a determination prior to providing any payments.

Since there was no repudiation, the agreement applied and its termination provisions governed. As such, in the absence of cause, the employee was owed 90 days of pay in lieu of notice rather than reasonable notice at common law, which would have entitled him to greater compensation.

Key takeaways from Singh case

Singh teaches some important lessons. For employers, it demonstrates the value of strong employment contracts, and of properly investigating misconduct. The employer in this case was able to show that it had grounds to allege cause, even though it ultimately did not argue it. This allowed it to prove that it was acting in good faith and not repudiating the agreement.

Likewise, the agreement addressed changes in duties, which, if unaddressed, can make a contract invalid should an employee’s role change substantially.

For employees, this decision underlines the importance of legal counsel when negotiating contracts. The court found that the plaintiff, a C-Suite employee, had equal bargaining power with the employer, and did not let him off the hook when he did not want to stick by the termination provision he bargained for. Even if you think you’re getting what you want, it is always advisable to get counsel to review employment agreements and assist in negotiations.

David Gelles is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].