Verbal promises can’t overwrite ‘entire agreement’ clause

Executive claimed company broke promises made during takeover negotiations

Verbal statements made to an executive can’t overrule a written employment contract that states it is the entire employment agreement, the Ontario Superior Court of Justice has ruled.

Thomas McNeely joined Herbal Magic, a weight loss management company based in Toronto, as a senior executive in January 2004. Two years later, Herbal Magic was acquired by Torquest Partners Fund and a new company, Herbal Magic Inc., was created. McNeely was actively involved in the negotiations for the acquisition.

During the negotiations, Brent Belzberg, the head of Torquest, told McNeely it wanted to keep him with the new company and would not turn around and get rid of him a few months later. Torquest also said it would not buy Herbal Magic without McNeely as part of the package and Belzberg wanted McNeely to be the president and CEO after the acquisition.

These statements persuaded McNeely to invest $2.5 million in stock of the new company as he believed Torquest intended for him to be a senior executive for a long time to come.

After the acquisition was complete, McNeely was named president and CEO of Herbal Magic. However, seven months later, his employment was terminated and he was removed from Herbal Magic’s board of directors. Herbal Magic paid him his severance entitlement as outlined in his employment agreement, but McNeely claimed the termination harmed him because he was unable to sell his shares and his interest in the company was diluted. He also claimed Belzberg’s statements before the acquisition constituted a collateral agreement and turned out to be a negligent misrepresentation and a violation of his “faith and strength” in Torquest.

Torquest didn’t deny the things McNeely was told before the acquisition, but argued they weren’t valid because McNeely’s employment agreement stipulated that it was “the entire agreement” and superseded all other oral or written agreements. McNeely was aware of the terms when he signed the agreement and only negotiated the severance arrangements for termination without cause rather than whether he had a fixed term of employment. This showed he contemplated the possibility that his employment could be terminated without cause, said Torquest.

The court noted the entire agreement clause in McNeely’s employment agreement specifically referred to “all prior agreements, understandings, representations or warranties, negotiations and discussions, whether oral or written” between McNeely and Herbal Magic. It found this meant both parties intended for this agreement to cover the entire employment relationship.

“A commercially reasonable interpretation of the entire agreement clauses precludes a negligent misrepresentation claim based upon any pre-contractual discussions, including Mr. Belzberg’s statements to Mr. McNeely,” said the court.

See McNeely v. Herbal Magic Inc., 2011 CarswellOnt 6247 (Ont. S.C.J.).

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