'Claiming just cause had a reasonable basis to it and it wasn't done for some improper purpose'
“When an employer makes a just-cause defense allegation, as long as it’s made with good faith and not for some improper purpose, it isn't going to preclude the employer from relying on a without-cause termination provision in the employment contract.”
So say Stephen Torscher, a labour and employment lawyer at Carbert Waite in Calgary, after an Alberta court upheld a without-cause termination provision after the employer unsuccessfully alleged that it had just cause.
The worker was a veteran of the construction industry who met the president and CEO of Clark Builders – an Edmonton-based construction company serving clients in Western and Northern Canada – in late 2012. They discussed the possibility of the worker joining Clark, and the worker expressed interest in becoming the chief operating officer (COO).
After several months of negotiations, the worker accepted an employment offer for the position of Vice-President Corporate Operations, reporting to the existing COO. His employment contract, along with several letters, specified that he would transition to the COO role upon the retirement of the current one.
The offer was signed on Sept. 6, 2013, and Clark provided the worker with a formal employment contract on Oct. 15 that included a provision stipulating “90 days’ notice to terminate to be provided by the employee and a 90 days’ notice period for the employer.” The worker had requested this wording, a change from the original wording that referred to the provisions of the applicable provincial employment standards code. The worker began working for Clark on Oct. 15.
The existing COO retired two weeks later, on Nov. 1, and the worker became COO of Clark.
Termination offer
In 2019, concerns arose about discrepancies in the worker’s financial reporting, prompting a company-wide review. Clark attributed a significant profit write-down to overestimations of anticipated profits across multiple projects and, in June 2019, the worker was informed of the issue. On August 26, Clark presented the worker with a termination offer and release stating that the company was restructuring and “there is no position for you.” They agreed that the worker’s last day of employment would be Sept. 30.
The company didn’t mention any cause, but the worker was given an envelope with a letter stating that Clark believed it had just cause due to the profit write-down, but it wanted to find an agreement to avoid for-cause termination. Clark offered the worker 90 days’ salary and bonus as per the without-cause termination provision, with additional offers of a settlement if the worker signed a release.
They weren’t able to reach a settlement and the worker filed a wrongful dismissal claim, arguing that the termination provision in his contract wasn’t enforceable due to ambiguous language that could be interpreted as either a minimum of “90 days or more” or only referring to notice, not his entitlement. He also argued that his promotions and added responsibilities changed his position enough that the substratum of his original employment contract changed, making it unenforceable.
The worker also claimed that Clark had repudiated the contract by alleging just cause in bad faith and failing to pay him the notice entitlement outlined in his contract.
Clark maintained that it had just cause, alleging gross negligence in financial reporting and inappropriate use of company resources related to the worker building a house using Clark resources, which was a breach of the company’s code of ethics. The company later dropped its just cause argument.
Worker chose termination provision
The court ruled that the termination provision was enforceable. The provision, which the worker had personally revised during negotiations – and he was a “knowledgeable and sophisticated executive” with experience in negotiating employment terms - entitled Clark to terminate his employment either immediately for just cause or by providing 90 days’ notice or pay in lieu of notice if without cause. The worker chose to replace the reference to statutory entitlements with the 90 days’ notice or pay in lieu of notice and he didn’t add any language contemplating that 90 days was only a minimum entitlement, the court said.
What distinguishes this case is the worker’s level of sophistication and how involved he was in negotiating the terms of the contract, according to Torscher.
“It's not the case that this was an unsophisticated employee who was given an employment contract that was the only option,” he says. “He went back-and-forth and negotiated the terms of the employment contract, he was an experienced negotiator and, at the end of the day, the termination clause in the contract was essentially the one that he preferred and the one that he wanted.”
The worker’s sophistication and involvement in negotiating made the situation different than the typical inequality of bargaining power in the employment relationship, adds Torscher.
“Courts are very aware of the potential abuse that could flow from [the inequality of bargaining power], so they step in to protect the employee where there's ambiguity in a contract,” he says. “Ambiguity is usually resolved against the party that drafted the provision, and it's almost always the employer that drafted the contract – but this employee didn't need the same kind of protection because there was a more level playing field.”
Promotion didn’t affect contract
The court rejected the worker’s argument that the change substratum doctrine applied, which could have nullified the termination clause due to significant changes in his job responsibilities over time, because the worker’s promotion to COO was anticipated from the outset and explicitly outlined in his contract.
The court also found that Clark didn’t repudiate the contract by alleging just cause. The company had a reasonable basis for its allegations, given the worker’s senior role and responsibilities in overseeing financial reporting and the profit discrepancies that led to the write-down. In addition, the consequences of the inaccuracies were substantial and “went to the heart of the responsibilities born by the entire C suite, including [the worker],” the court said, adding that the failure to pay the 90 days’ pay also wasn’t a repudiation, as the parties were attempting to negotiate a settlement.
The company withdrew the just-cause claim during litigation, but the court found that wasn’t bad faith, pointing to previous decisions establishing that an employer’s failure to prove just cause, where there is a reasonable and good-faith basis for such an allegation, “will not disentitle the employer from enforcing an otherwise valid without cause termination provision.”
“The court found that claiming just cause had a reasonable basis to it and it wasn't done for some improper purpose that could potentially be a breach of the duty of good faith that's inherent in an all employment contracts,” says Torscher. “And so because there was a reasonable basis and the parties were continuing to negotiate a resolution, the court allowed [Clark] to rely on the without-cause termination provision.”
It’s likely that the court would find the same if the employer didn’t drop its just-cause argument and still lost, according to Torscher.
“If the employer has a good-faith basis for making a just-cause argument and maintains that all the way through trial, even if they were unsuccessful, I don't think that the court would say it repudiated the employment contract,” he says. “Where an employer would get in trouble is if it became clear that there was no good-faith basis for just cause and the employer nonetheless insisted on going down that path all the way to trial - the longer that you maintain an unreasonable position, the more that the court is going to have concerns with the employer's conduct.”
Working notice or pay in lieu
On the issue of damages, the court found that the worker was entitled to receive 90 days’ notice or pay in lieu, as specified in his contract. Although the worker received 35 days’ notice of termination, Clark couldn’t count it since the termination provision didn’t specify that it could provide a combination of working notice or pay in lieu – it had to be 90 days of one or the other, the court said.
As a result, the company was ordered to pay the worker 90 days’ salary, benefits, and allowances, calculated at $86,699.
“This is a is a pretty good win for employers, because it shows that if you're dealing with an employee who's sophisticated and there are negotiations to reach the terms of the employment contract, the court may uphold the language that's ultimately settled on,” says Torscher. “Certain language might not be upheld in normal circumstances where you're dealing with an employee who doesn't have the same level of bargaining power or sophistication and is unable to negotiate terms of the employment contract.”
“[The decision] prevents employers from having to make a choice - do we go down the path of defending on the basis of just cause, or do we go with a without-cause termination?”
