Repudiation as Opposed to Termination

There is a difference between repudiation and termination. Repudiation is an assertion that the employment “contract” has been violated by the conduct of the employer. An allegation of termination is that the conduct has brought about the end of the working relationship. There is no distinction where the relationship is a common law one.

If there is an existing written contract, which for example, sets out a defined severance obligation, the difference is meaningful. An assertion of repudiation, if successful, will release the employee from the terms of the contract and their claim will be based on common law.

An allegation of termination will allow the employee to claim that the agreement is just that, ended by the questioned conduct, in which case, the damages will follow the contracted term, one which has not been contested. ¹

Basics of Repudiation

It goes without saying that the issue of repudiation must be pleaded to allow for the submission to be made, and, further, that the onus rests upon the advocate of this submission. ² It is a significant defence as it allows the successful objector to avoid the consequences of the termination clause, or any other term of the contract. If so, the claim will be adjudicated by common law principles.

There will be two building blocks to the success of such an argument. The first is to prove that the conduct of the employer has ended the relationship and further that the innocent party has clearly and unequivocally communicated this position of repudiation, as opposed to just termination, to its counterpart. The law in Ontario notes that the conduct may have been such to reach termination grade, but not the higher level required for repudiation. The most recent case in B.C., decided in early 2024, after this most current Ontario review in 2023, a case which is not referenced in the B.C. decision, does not make this graded distinction.

Prudent judgment should be taken in electing to argue repudiation as its success will allow the claim to be assessed on common law ground. In certain situations, the contract remedy may provide better compensation. It will be possible to argue termination, but not repudiation, governed by the employee’s response at the time of the event. It is an election which is not reversible.

The wording of the objection made by the innocent party will be critical. Should for example, the employee be demoted, the response may be “I treat the agreement as terminated”, in which event, the damage claim will follow the contracted term. If the response is “I assert the contract is repudiated”, then the successful claim will be judged on common law principles and not the contract. This will be the election to be made by the innocent party.

B.C. Case Law

A recent decision in B.C. allowed the employee’s submission that the employment contract had been repudiated by the conduct of the employer. For this reason, the employment contract and its termination clause were determined to be unenforceable. The plaintiff’s claim was determined by common law. ³ The employment agreement called for a termination payment of four weeks’ compensation for each year of service. His years of service for this purpose were roughly eleven.

The decision recites that the parties had agreed to the relevant law on this subject, which was summarized as follows:

The parties agree on the applicable law. Repudiation is a breach of contract by one party giving rise to the right of the other party to terminate the contract and pursue the available remedies for the breach. A breach is a repudiation of the contract if it is a breach of a contractual condition or of some other sufficiently important term of the contract so that there is a substantial failure of performance (see Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10 at paras. 144-145).

The plaintiff’s employment was terminated on April 4, 2022. This was without cause. The termination letter requested certain conditions for the termination payment, one of which was the duty to report mitigation efforts monthly and the disclosure of the details of any job offers received. A second letter, sent on April 29, stated that the failure to provide such reports would result in the cessation of all payments. The agreement required severance based on salary and commissions. Only the salary sums were received and even these payments ended July 8. There was no explanation offered for paying only the salary components.

The defendant acknowledged that while the agreement did require mitigation, it did not mandate the reporting obligation.  The plaintiff found new employment the following February. The common law period was set at 18 months. An award of punitive damages of $25,000 also followed due to the failure of the employer to honour its clear contractual obligations.

The reasons did not offer a detailed review of the law on repudiation, put charitably.  On these facts, the court found that the employer had repudiated the contract and that the claim would be assessed by common law standards.

A prior B.C. decision from 1995 also allowed the defence of repudiation to avoid the contract. In this case, the employer was found to have asserted just cause when it knew that none existed. ⁴ This decision in Dixon was not referenced in Klyn. The defence of just cause in Dixon persisted until one month prior to trial. The employer testified at trial that it believed it has “business cause” to terminate but did not know whether it had legal cause. The court in Dixon found that the employer had committed the tort of deceit by advising the employee that it had cause when it knew it had none and also that it had defamed the plaintiff. For these reasons, repudiation was found. ⁵

Ontario

The case law in Ontario is not as straightforward, as was the reasoning in this 2024 B.C. decision.

The most recent review of such a case in the employment context is an Ontario Superior Court decision in 2023. ⁶

The facts leading to the claim are important. On January 22, the plaintiff requested a salary review and provided her reasons for this. She followed up on February 16. On February 18, she was advised that she had been removed from her position of COO and was suspended from work for two weeks with pay. Upon the expiry of this period, the employer advised that it would then decide to terminate or demote. The demotion would follow, only if she showed interest and the Board agreed.

The plaintiff was then terminated for cause. This defence was withdrawn roughly one year later. The was a defence also based on an employment termination clause which proposed to limit her entitlement to the ESA minimum. This sum of $2,283 was paid and in fact the employer mistakenly had paid a higher amount of $3,424. No claim of the differential was advanced.

Two arguments were advanced by the plaintiff. The first was that the contract lacked consideration. The second was that the employer had repudiated the agreement.

The trial judge found the agreement unenforceable due to lack of consideration.  The court also found that the plaintiff had been subjected to a toxic work environment, that there was an imminent demotion pending and the negative communications all led to the conclusion that her position had been constructively terminated. ⁷ The motion’s judge also found that the agreement had been repudiated by the conduct of the defendant, hence disallowing it the right to argue the termination clause as limiting the claim.

Factual Basis of Repudiation

The court concluded that the evidence before it met the test of repudiation:

I am satisfied that in the circumstances of this case outlined above, Ms. Humphrey has established on a balance of probabilities that Menē’s conduct, objectively viewed, demonstrates an intention to no longer be bound by the December 2018 Employment Agreement, thus repudiating it. The conduct which I have found includes setting her up to fail, subjecting her to a toxic workplace, embarrassing and humiliating her before co-workers and clients after her suspension, significantly exaggerating performance issues and the evidence it had in support of these at the time of termination, and alleging cause when it knew or should have known it did not have it. These are not mere technical breaches made in good faith. Menē’s conduct in this case goes to the heart of the employment relationship.

The motion’s judge also reviewed the requirement of the innocent party to communicate their assertion of repudiation.

Communicate the Repudiation

To advance the argument of repudiation, it is incumbent upon the innocent party to state such a position in a clear and unequivocal manner. This must be completed within a reasonable time. This communication may, however, be effected orally or in writing, or “may be inferred from the conduct of the innocent party in the particular circumstances” of this case. ⁸ This passage was cited in this instance and the words on the subject of inference by the conduct of the party were emphasized.

The court then looked to the conduct of the plaintiff to determine whether this aspect of the test had been met. The facts which led the trial judge to conclude that the plaintiff had shown her position of treating the employer’s conduct as repudiation were as follows:

1. A letter sent from her legal counsel to the company dated February 21 disputed the accuracy of the allegations in the suspension letter. The judge also noted that the letter contained without prejudice remarks which had been redacted.
2. The plff advised the employer, through counsel, that she was not willing to consider any other position within the defendant’s organization;
3. The employer responded to this position by stating that it had considered offering the plaintiff an alternate position but the “legal letter makes it clear that this path is no longer viable”. The same letter stated “ It seemed Jacquelyn preferred to seek legal advice and strategize a profitable exit from the company rather than address any of the issues raised in the letter.”

The conduct of the company was also seen to have supported this conclusion. The employer further testified that “as a result of the receipt of [the February 21, 2019] letter, the board realized that there was no other option for Ms. Humphrey and proceeded to terminate with cause.” The court concluded:

 Based upon all of the above facts, I infer that the letter of February 21, 2019 from Ms. Humphrey’s counsel contained some communication about terms for Ms. Humphrey’s departure from Mene. In my view, taking into account the particular circumstances of this case, which includes a vulnerable employee in what appears to me to have been a “no win” situation, Ms. Humphrey’s counsel’s letter of February 21, 2019 constitutes sufficiently clear and unequivocal acceptance of the repudiation.

On February 26, the employer terminated for cause.

Law on Repudiation of the Employment Agreement

The decision considered the law on this subject. Repudiation may be found based on the employer’s conduct. Constructive dismissal is one example of such conduct which may be asserted to be repudiation. This, the court noted, was the trial judge’s finding in Matthews, namely, that the employer’s conduct was intended to push Matthews out of operations, as would have been seen as a reasonable person, showing its intent to be no longer bound by the contract. ⁹

That being said, a finding of a termination, direct or constructive, does not necessarily lead to repudiation which denies the employer the right to assert the termination clause or other term in the contract. The employer’s conduct must be assessed to determine if it meets the higher level test to reach the standard of repudiation grade.

An earlier Divisional Court case in 2014 spoke to the same need to show a higher level breach to allow for the repudiation defence. ¹⁰ The case involved a claim of constructive dismissal based on a lay-off. The company had paid the ESA sum based on the employment contract entitlement on termination. The plaintiff sued and was met with a defence of just cause. The Court allowed for the proposition that the breach must reach a higher “order of magnitude” to succeed in the repudiation submission, one which was not met in this instance. The failed allegation of just cause did not suffice.

The same argument had been advanced in a 2015 Ontario decision. The plaintiff submitted that the conduct of the defence was “mean-spirited” enough to be a rejection of the employment contract. The word “repudiation” was not used in the reasons to describe the argument, but this was the substantive plea. The same argument requested the court to examine the context of the contract in this light, one which limited the termination payment and set a 24 month non-compete. The argument was not successful. It did not address the argument that a “mean-spirited” finding may have led to a different consequence. ¹¹

In the Gordon case, the trial judge used two cases to support his decision to dismiss this submission. The first was not a repudiation case, ¹² nor was the second. ¹³ The reasons were not comprehensive.

The decision in Humphrey is a watershed moment on this issue. The motion judge reviewed the common law principles and concluded:

1. An allegation of just cause which fails, or is withdrawn, or where the employer has constructively dismissed an employee, is not precluded from relying upon a without cause termination provision.
2. Certain types of violations may be so significant that they may lead to the without cause termination clause unenforceable.
3. Employment agreements are negotiated and made based on certain minimum expectations as to how the employer will conduct itself. Good faith is one example. An agreement which has a significant impact on a person’s common law rights must be based on the expectation that the employer will comply with these implied minimum standards.
4. Should the employer depart from these standards, the employee should not be held to the “extremely disadvantageous” terms.
5. Minor or technical mistakes made in good faith should be excepted from the above.

Apart from assessing the quality of the breach to determine if it is of repudiation grade, the Court also injected into the analysis the good faith conduct obligation, one typically held to apply at the time of termination. Also the judge allowed for a review of the terms of the contract to examine whether the terms were “extremely disadvantageous”. This is a remarkable increment to the law, that is, to look to the impact of an otherwise enforceable clause, as a matter of fairness.

On that subject, the Court also considered the issue of the inherent inequality of bargaining power and the principle that in interpreting employment contracts, the interpretation which favours the employee should be succeed, where the meaning may be subject to multiple interpretations. ¹⁴

These principles of employment law interpretation had not been previously used in a repudiation analysis.

As noted, the decision was appealed but not on this subject.