Employment Contracts

Settlement Agreement

The question will arise as to whether a settlement agreement may be set aside as unconscionable, as reviewed above.

The Supreme Court of Newfoundland and Labrador in Howell v Reitmans noted that the Supreme Court of Canada in Wallace spoke to the importance of the employer acting fairly at the time of termination and the impact of the termination itself upon the employee, an observation which could go to the validity of the release and settlement agreement. Chief Justice Green stated:

    It is not surprising that a power imbalance in the employer-employee relationship should require an employer to act fairly when making decisions that affect such a significant part of an individual’s life and from which most individuals derive a fundamental sense of self-worth. Other areas of employment law take a similar approach. For example, inequality of bargaining position between employer and employee is given as one of the rationales for the more restrictive approach adopted by the courts with respect to the enforcement of covenants restraining an employee from competing against a former employer following termination, as opposed to covenants in restraint of trade imposed as part of a bargain involving the sale of a business.

[27]                       While there are statements in some of the cases (e.g. Bartlett at para. 34, and Stephenson at para. 9) that the mere fact of some inequality of bargaining positions between a large commercial concern and an employee is not enough in itself to raise a presumption of unconscionability with respect to any transaction entered into between them, the fact that an agreement is reached in the context of an unequal employer-employee relationship may be a factor to be considered, in conjunction with all the other factors, in determining whether, on the evidence as a whole, unconscionability is disclosed.

[28]                       In this case, as in all cases of termination, it is incumbent upon an employer to recognize that an act of dismissal, especially when it comes without much or any warning, can have a devastating effect on an employee. It might adversely affect her ability to protect her own interests.

The Court did find that there was an inequality of bargaining power in this instance, but not as a presumptive conclusion. Many factors led to this decision, including her modest grade 10 education, her need for an income, the impact of the termination and also the statement made by the employer that she needed to sign the release to qualify for EI benefits.

The decision, as noted above of Adamson v Watts & Henderson, involved a settlement agreement which was successfully set aside as unconscionable. The inequality test was seen to be satisfied by his financial distress and naivety in matters of business.

The issue of unconscionability was reviewed by Hoy, J. in Bjelakovic v Accenture Global, a 2008 decision of the Ontario Superior Court. The issue in question concerned the release which the plaintiff had signed following her dismissal.

An offer had been made at termination of 2 months, countered by the plaintiff’s request for 6 months and resolved at 3 months for which the release was signed.

Almost 6 years later, this action was commenced and was met by a motion for summary judgment to dismiss. The plaintiff argued duress, unconscionability and a lack of mental capacity. The court defined the test for unconscionability as follows:

A party relying on the doctrine of unconscionability to set aside a contract faces a high hurdle. The following four elements are necessary to set aside a release on the basis that it is unconscionable: (1) a grossly unfair and improvident transaction; (2) the victim's lack of independent, or other suitable, advice; (3) an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and (4) the other party's knowingly taking advantage of this vulnerability: Titus v. William F. Cooke Enterprises Inc., [2007] O.J. No. 3148, paras. 36 and 38 (Ont. C.A.).

This fourfold test has been oft repeated as the conjunctive requirements to pass the test.

The fact that the plaintiff had also signed an employment contract which was exceeded by her accepted offer did not help her cause. The claim was dismissed.

The Alberta Court of Appeal in Cain v. Clarica Life Insurance Co, a case in which the plaintiff successfully set aside a settlement agreement at trial, yet reversed on appeal, repeated and applied this test for unconscionability.

It referred to Morrison v Coast Finance as the leading case on the subject. Morrison involved an elderly widow who had mortgaged her house to provide funds to a lodger and his companion for no consideration, all such facts being in possession of the lender, a case a touch different from the typical employment circumstance in which this plea is raised.

In Augustine v Nadrofsky, 1 a decision of the Ontario Divisional Court, affirmed the trial decision which had set aside the release.

The plaintiff had been employed three years and two months. The employer had insisted that the plaintiff sign a release prior to the payment to him of two weeks’ severance pay and income which he had earned and was owing to him.

The Divisional Court agreed that the release was not enforceable due to the inequality of bargaining power:

The employer here had absolutely no right to insist that the plaintiff employee sign the agreement or go without the pay he had earned and for which he had a real need. In our view, this unreasonable demand of the employer, having regard to the age, and education of the plaintiff and the imbalance of bargaining power between the parties, constituted sufficient coercion to vitiate the legal effect of the document signed.

It is not clear from the decision as to whether the ratio was duress, given the reference to coercion or unconscionability, noting the “imbalance of bargaining power”. The Divisional Court did reduce the common law award made by the trial judge from four to two months.

The reality is that a release should not be requested by the employer for sums which are clearly due and owing such as salary to the date of termination, vacation pay and although not referenced in this instance, statutory severance and termination, where the termination is admittedly without cause. These sums are due by law and should be conditioned by the request for a release, even if the overall sum offered encompasses these components.