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Force Majuere & Frustration of Contract In Commercial Leases

Force majeure is a French term – it means “major or superior force.”  It is an unforeseeable event that is outside of the control of the parties. It is a type of contractual provision that you will find across contracts, including in many commercial lease agreements. The clause is included to let a party off-the-hook when something extraordinary happens. Something that makes it impossible to do the thing they thought they could do when they entered into the contract. The common thread is that of the unexpected. Something beyond regular human foresight and skill.

When reviewing your commercial lease agreement, you must look at the Force Majeure (“FM”) clause in the context of COVID-19 as it relates to your [in]ability to continue operating your business.  Thousands of commercial tenants are now confronted by huge cash flows issues with revenue ground to a halt and ongoing liabilities (including lease payments) that they are unable to fund. As a result, one of the options for these tenants may be to invoke the FM clause in their commercial lease agreement. 

It important to review the specific language of the FM clause in your commercial lease agreement. Some FM clauses say that such a scenario only applies if “performance of obligations under the contract becomes impossible.”  That means it is not physically possible for the party to do the thing that was set out to do when the contract was entered.   The impact of COVID-19 on your specific business is a key consideration to determine whether it makes continued operation impossible (i.e., schools, restaurants, and other non-essential business that are subject to mandatory government closure) or more difficult to perform but still possible to operate. Can the tenant and its employees still gain access to their premises to retrieve files and/or laptops in the event access to the building is restricted?

You must consider what types of events will trigger a FM based on the wording of the lease. Some contracts may be silent on this.  Others will be specific – naming specific events that constitute FM (e.g. flood, strike, fire, or ‘Act of G-d,’ etc.).  The unifying thread of an ‘Act of G-d’ is an uncontrollable event that was not foreseen at the time the contract was entered into.  When the contract was negotiated may be critical. For instance, some contracts may expressly stipulate “pandemics” in FM clauses. Especially those that were negotiated around the time of the SARS virus. 

The determination as to whether COVID-19 is considered an FM event is based on how that term is defined in your contract. 

In many cases, parties to a contract could reasonably argue that they could not foresee the pandemic at this scale occurring at the time the contract was entered into.   On the other hand, just because it is more economically difficult for the party to perform the agreement, the simple fact that the event has caused a constraint on profitability, it may not be enough to trigger the FM clause.

If it is Physically Possible To Continue To Operate My Business But It Will Be Extremely Costly – What Are My Choices?

Do I have to pay my contractual obligations or just pay damages for breach of contract?  There is a well-recognized ability in the case law that it may be more economical for a party to an agreement to cease performing an agreement and breach the contract, rather than continue performing and lose money – this is often referred to as an ‘efficient breach.’   The counter-party in the breach of contract can be made whole, whereas the breaching party will minimize its losses by ending the contract at that time.

A key consideration is if a party breaches a contract with another party – that may impact the counter-parties ability to perform its other contractual relationships, which could lead to a cascade of breached contracts with third-parties.  Those other parties could potentially bring a claim against the initial breaching party based on tort law principles.  

Whatever industry you operate in, your company must consider how they will continue their business in the face of COVID-19.  Parties should take into account commercial leasing considerations and review their leases to determine what rights and obligations they have in light of COVID-19.

What Happens If You Do Not Have an FM Clause in Your Contract? Frustration of Contract

You may be able to rely on the doctrine of frustration of contract. Frustration is the occurrence of an unforeseen event that causes a radical change in performance of contract. This radical change makes performance under existing circumstances impossible, impractical or frustrates the original purpose of the agreement. The onus would be on the party alleging frustration of the contract to prove these elements.

According to the Supreme Court case Naylor Group Inc. v Ellis-Don Construction Ltd., the doctrine is applied where, “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’ The result of a successful frustration claim is that the contract is deemed frustrated and all obligations are extinguished as of the date of the supervening event.

If you have any questions with respect to your commercial lease and your rights and obligations in the face of COVID-19, it is important that you speak with qualified legal counsel to discuss the same. 

Temporary Lay-Offs due to COVID. Employer & Employee Rights and Obligations

Where an employer changes a fundamental term of employment, this may constitute constructive dismissal. It is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary. Since COVID-19 has resulted in significant business closures, many employees have been temporarily laid-off and are no longer being paid their salary.

Typically, where no agreement (employment contract) exists that expressly indicates that the employer was entitled to layoff the employee for any period of time, the employer cannot simply place an employee’s employment status on hold without pay and without substantial benefits and expect that this will not constitute constructive dismissal. If the demotion of an employee or a reduction in pay and responsibilities of an employee constitute constructive dismissal, then surely indefinite suspension with no guarantee of recall, no salary and virtually no benefits must also qualify for the same treatment at law.

In its clear and plain wording, the Employment Standards Act (ESA) allows for temporary layoffs and an employee is not terminated (for the purpose of the statute) until and unless his or her temporary layoff exceeds the time frames allowed by s. 56(2), prior to which time he or she is not entitled to termination or severance pay pursuant to O.Reg 288/01. If the layoff does exceed the timelines, then the employee has been terminated.

That said, the temporary layoff provisions of the ESA operate separately from an employees common law rights. The ESA provisions are intended to provide protection to employees in situations where layoffs are otherwise permitted as an express term of the employment contract by limiting temporary layoffs to the maximum time periods stated in the ESA.

“Temporary layoff” is a defined term[8] in the ESA, as follows:

A layoff of more than 13 weeks in any period of 20 consecutive weeks, if the layoff is less than 35 weeks in any period of 52 consecutive weeks and,

                                       i.              the employee continues to receive substantial payments from the employer;

                                    ii.              the employer continues to make payments for the benefit of the employee under a legitimate retirement or pension plan or a legitimate group or employee insurance plan;

                                   iii.              the employee receives supplementary unemployment benefits; and

                                   iv.              the employee is employed elsewhere during the layoff and would be entitled to receive supplementary unemployment benefits if that were not so,

Section 56(4) allows an employer to layoff an employee without specifying a recall date without being considered to have terminated the employment unless the period of layoff exceeds that of a temporary layoff.

Section 56(1)(c) provides that an employer terminates the employment if it lays the employee off for a period longer than the period of a temporary layoff.

Section 54 provides that no employer shall terminate the employment of an employee who has been continuously employed for three months or more absent written notice of termination under the act or having made appropriate payment in lieu of such notice.Section 56(1) provides that an employer terminates the employment of an employee for purposes of s.54 if:

a)         the employer dismisses the employee or otherwise refuses or is unable to continue employing him or her;

b)        the employer constructively dismisses the employee and the employee resigns from his or her employment in response to that within a reasonable period; or

c)         the employer lays the employee off for a period longer than the period of a temporary layoff.

 s. 56(1) of the ESA operates to terminate an employee’s employment in law, so that the employee may claim for common law wrongful dismissal damages. The evident purpose of s. 54 is to prevent employers from avoiding the liabilities that flow from terminating the employment of employees under the guise of placing them on indefinite layoff. The legislature has provided that when a layoff reaches 35 weeks in 52, the employee is terminated.

At common law, an employer has no right to layoff an employee. Absent an agreement to the contrary, a unilateral layoff by an employer is a substantial change in the employer’s employment, and would be a constructive dismissal.

More specifically, a proper reading of the ESA layoff provisions requires the conclusions that:

a.         it is not a termination of employment to temporarily lay off an employee so long as that temporary layoff does not exceed the definition of “temporary” – s.56(4);

b.         an employer may not contract below the Act and therefore may not contract for provisions that allow that temporary layoffs exceed the timeframe set out in s.56 of the Act;

c.         once a layoff exceeds the definition of temporary it is a termination of the employee’s employment pursuant to the Act and pursuant to the common-law, as the Act no longer protects the employer by displacing the common-law jurisprudence and the Act itself also deems a termination; and

d.        the common-law doctrine of constructive dismissal is suspended until such time as the layoff exceeds the definition of  “temporary” in the Act.

TAKEAWAYS

  • Always seek legal advice before deciding to temporarily layoff an employee.
  • Review any relevant contracts or documents pertaining to the employee you are considering laying off before doing so.
  • If there is no contractual right to temporarily layoff the employee, consider speaking with the employee beforehand and document in writing any agreements made.
  • If you are considering being temporarily laid off, or have been laid off by your employer, be aware of the maximum time period a lay off can last under the Employment Standards Act, and what obligations the employer has to you during the layoff itself.

If I Am Subject to Temporary Lay-Off Due To Coronavirus, Am I Entitled to Severance Pay?

The coronavirus (COVID-19) has resulted in business closures and downsizing, in some cases temporary and others on a permanent basis. The Employment Standards Act in Ontario expressly enumerates in s.56(2) the requirements for a temporary lay-off to occur. Specifically, the criteria include the following:

A temporary layoff is,

(a) a lay-off of not more than 13 weeks in any period of 20 consecutive weeks;

(b) a lay-off of more than 13 weeks in any period of 20 consecutive weeks, if the lay-off is less than 35 weeks in any period of 52 consecutive weeks and,

(i) the employee continues to receive substantial payments from the employer,

(ii) the employer continues to make payments for the benefit of the employee under a legitimate retirement or pension plan or a legitimate group or employee insurance plan,

(iii) the employee receives supplementary unemployment benefits,

(iv) the employee is employed elsewhere during the lay-off and would be entitled to receive supplementary unemployment benefits if that were not so,

(v) the employer recalls the employee within the time approved by the Director, or

(vi) in the case of an employee who is not represented by a trade union, the employer recalls the employee within the time set out in an agreement between the employer and the employee; or

(c) in the case of an employee represented by a trade union, a lay-off longer than a lay-off described in clause (b) where the employer recalls the employee within the time set out in an agreement between the employer and the trade union.  2000, c. 41, s. 56 (2); 2001, c. 9, Sched. I, s. 1 (12).

Generally, the common law in Ontario has held that a temporary lay-off is not permitted in Ontario unless it is expressly authorized in a employee’s employment contract and the employer follows the specific requirements outlined above. At this time, the Courts have not rendered a decision on whether a temporary lay-off constitutes a constructive dismissal (i.e., termination of employment) absent an express term of an employment contract permitting such a lay-off, which has been the law to-date.

Rather, it is probable that a Court may find that an economically required lay-off is not deemed to be a termination of employment because of the unique financial circumstances and constraints that have been posed by the virus. Nevertheless, each case is fact-dependent, and it is best to consult with an employment lawyer to discuss the potential outcomes should you pursue a claim for constructive dismissal.

Can an Employer Terminate My Employment Due to a Business Down-Turn Resulting from the Coronavirus (COVID-19)?

In Ontario, it is a well-established principle of employment law, that an employer can terminate an employee at any time without cause for any reason, so long as the reason is not discriminatory or a breach of a human right. Typically, where an employee is terminated without cause, they are not provided with any advanced notice of dismissal. With ongoing concerns associated with the COVID-19 pandemic, large contracts and business relationships have been terminated that will inevitable result in a paring down of the workforce without advanced notice.

At law, there is no difference between the right of an employer to provide working notice (i.e., advanced notice of termination) or payment in lieu of notice of termination (i.e., a lump sum severance payout). Accordingly, in many cases businesses will prefer to immediately terminate an employee without cause while providing pay in lieu of notice to avoid the potential morale drain, transfer of confidential information, solicitation of clients or colleagues, or other potential implications of providing working notice to a disgruntled employee.

If you have recently been terminated from your employment in Ontario, it is likely that you have received a termination letter from your employee which outlines the specific severance package. The employer does not need to provide any specific reason for the dismissal, though more recently many employers are terminated employees due to the business realities caused by the global COVID-19 pandemic.

An employer who terminates an employee without cause is required to make the employee whole during the period of reasonable notice. In other words, at common law, the employee is entitled to continue to receive all the compensation (including commissions, bonuses and stock options) and benefits that he or she would have enjoyed if still actively employed with the employer throughout the notice period.

If you have been terminated from your employment, contrary to what most employment lawyers will tell you, it is generally a very straightforward and simple process to negotiate an enhanced severance package, and where litigation is required – the substance is simple (i.e., it does not require a law degree, let alone a high school diploma to determine how much severance you may be entitled to) – it is merely the unfortunate procedure that lawyers have developed in order to protect their profession and demand unjust and punitive hourly rates that make the process challenging.

If you are contemplating hiring a lawyer, be very careful in understanding the retainer agreement. Under no circumstances, unless for senior executives with potentially 100’s of thousands of dollars of severance pay outstanding, you should not pay more than $2,000.00 as an up-front retainer to a lawyer. Again, these matters are very simple and straightforward. The work is typically done by template and the system is often designed to enrich the lawyer to your benefit. At Goldstein Law, we believe that we put the client first by acting transparently and only taking on cases where there is a real economic benefit to be realized by all parties involved. Thanks for reading.

Section 22 Notice of Injurious Affection Under the Expropriations Act

Section 22 of the Expropriations Act imposes a critical limitation period – Claimants who have suffered losses as a result of a partial taking of their property or whom have suffered injurious affection to their property or business where no land has been taken, must provide the statutory authority with written notice of injurious affection (“IA”) within one year after the damage was sustained or after it became known. If not, compensation claims for injurious affection are “forever barred.”

A plain reading of s. 22 outlines three key points: (1) notice must be given in writing; (2) notice must be given one year after the damage was sustained; and (3) if notice was not given within one year after the damage was sustained, notice may also be provided after damages became “known” to the person.

On what date does a Claimant know, or ought to have known, they have a claim for IA? The case law has been generous to Claimants who have
valid and unvexatious compensation claims for IA, and this is appropriate. In Willies Car & Van Wash Ltd. v. Simcoe (County) 2015, L.C.R. 39, OMB (upheld on appeal), the OMB noted that it is not reasonable to delay giving notice until after the full amount of the loss is calculated. Instead,
the Board found that s. 22 notice was due one year after the Claimant knew that a road closure was the alleged cause of its income losses – the Board held that notice was due, at the latest, 12 months after a road closure was
finalized and losses began to mount. The Board also noted that “the Claimant is also required to act diligently to inform itself of any loss giving rise to a claim.”

Where construction works are ongoing (i.e., with the Eglinton Crosstown) or other large scale infrastructure projects, injurious affection can theoretically be happening on a daily basis to the business or property; accordingly, a rolling limitation period applies, whereby damages can be claimed for one-year prior to the date the notice was issued. Where the injurious affection ceases, the section 22 notice has to be issued no more than one-year following that date.

If your property has been expropriated in Ontario or you have suffered an unreasonable interference from government construction works, it is important to protect all of your interest (i.e., the market value of the property expropriated, any damages for injurious affection, personal and business losses, and disturbance damages). These categories of damages are expressly stipulated in the Expropriations Act and have specific interpretations that have been applied by the Courts in Ontario. A qualified expropriation lawyer will assist the claimant in understanding the totality of their claims for damages under the Act.

Fixed Term Contracts – Termination Clauses

Employers may wish to enter into fixed-term employment contracts for various reasons, most commonly where the employee is hired to complete a specific project or task for the employer with a defined deadline or where the employee has been hired during another employees leave of absence (i.e., maternity leave, sick leave, disability-related absence, etc.). When the full-time employee returns from leave, the services of employee that is working on a fixed-term contract will no longer be required.

Substantial litigation in Ontario has surrounded the early termination of fixed-term employment contracts. In other words, how much is the fixed-term employee owed if the employer opts to terminate their employment prior to the end of the expiry of the fixed term? In some cases, a clear and unambiguous termination clause will obligate the employer to only pay the amounts indicated in the clause (i.e., typically, 2 weeks of advanced notice of early termination or payment in lieu thereof); however, where these restrictive early termination clauses are ambiguous, they will be interpreted and construed in favour of the employee, in accordance with the principle of contract law referred to as contra preferentem.

As noted in Howard v. Benson 2015 ONSC 2638, in the absence of an enforceable (i.e., unambiguous) contractual provision, a fixed term employment contract obligates an employer to pay an employee to the end of the term and the obligation will not be subject to mitigation.  Where the language of a termination clause is unclear or can be interpreted in more than one way, the court should adopt the interpretation most favourable to the employee (Wood v. Fred Deeley Imports Ltd. 2017 ONCA 158).

Ambiguity can relate to any number of factors. In one case, our clients fixed term employment contract stipulated a minimum notice requirement but not a maximum. In other words, there was no language that clearly indicated that the 2 weeks notice represented all obligations of the employer to the employee on termination.In addition, it is a complete contradiction in terms to suggest that a contract is for one-year and then say it may be for just two weeks, at the whim of the employer. 

It is arguable that all fixed term contracts that purport to allow early termination for unspecified reasons ought, in principle, to be considered ambiguous, and interpreted contra proferentem.   However, there does not yet appear to be any jurisprudence which goes quite so far.  The point wasn’t raised in Benson, which looked instead for technical ambiguities in the wording of the termination clause itself.  It seems to me to be a contradiction in terms to state that you have a contract for a year, and then say that it might be a contract for just two weeks, at the whim of the employer.  

In any event, if you are an employee that has been terminated prior to the end of a fixed term contract, it is in your interest to have the severance package reviewed by an employment lawyer to determine whether the employer has provided you with your full entitlements based on the wording of your employment contract.

Updating and Amending Employment Contracts

After you have worked for a company for a period of time, your employer may request to update or amend your employment contract for any number of reasons. These reasons typically include an update to reflect a promotion or change in job position, a demotion, a restructuring of the organization, change in the amount of compensation earned (i.e., from salary to commission or vice versa), a change in the location of where job duties are to be carried out (i.e., at home or remote, or a new company office) and any other changes.

In order for an updated or amended employment contract to be considered enforceable by the Courts in Ontario, it must be accompanied by fresh consideration. In other words, and as noted in the BC Court in the case of Krieser v. Active Chemicals Ltd, 2005 BCSC 1370, an updated employment contract will only be enforced if there is a further benefit to both parties.

One of the common and relevant terms that employers attempt to include in updated employment contracts are restrictive termination clauses. We have written about the impact that a restrictive termination clause can have on your severance entitlements in the event of a without cause termination from employment here. A restrictive termination clause, if properly drafted, and compliant with the Employment Standards Act (“ESA”) in Ontario, will limit a terminated employees severance entitlements to the minimum amounts prescribed by the employment standards legislation in the province.

The minimum termination entitlements of an employee terminated without cause in Ontario is equivalent to one-week of termination pay per year worked up to a maximum of 8 weeks pay; and one-week of severance pay per year worked up to a maximum of 26 weeks, in the event a certain eligibility test for severance is satisfied, as further described here. These represent an employees minimum entitlements, which are applicable in the event a restrictive termination clause is included in an employment contract.

Absent such a termination clause, terminated employees are entitled to “reasonable notice” of termination, further described here. Severance packages calculated on the basis of reasonable notice are substantially higher than those that are merely based on the ESA minimums. These packages can amount to awards of 1 month of more per year of service, rather than the one week per year enumerated in the ESA. Accordingly, it can amount to a huge financial gain for the employee to receive reasonable notice on termination rather than the statutory minimum. Accordingly, an updated employment contract with the inclusion of a restrictive termination clause can be of immense benefit to the employer and detrimental to the employee. As such, Courts will not enforce such updates absent fresh consideration (or benefit) flowing between both parties.

Reasonable notice is calculated based on a host of factors recognized by Ontario Courts over the years, including but not limited to the following:

-Age of the employee (more advanced age employees are entitled to larger severance packages, all else equal);
-Years of service (the longer duration of employment will justify a larger severance award);
-Specialization and availability of comparable employment (as severance packages are designed to bridge the gap during a period of unemployment, employees with highly specialized jobs may find it more challenging to find comparable employment after a termination);
-Income level;
-Other unique circumstances.

Clearly there is a large benefit to receiving reasonable notice on termination. As such, if an employer attempts to update your employment contract, it is best to contact a qualified employment lawyer for a review.

Valuations in Expropriation

What is Expropriation?

Expropriation occurs when an authorized public authority takes private property without consent of the owner. In Canada, public authorities have the right to take private property, as long as the appropriate government body approves the acquisition.

Given the imbalance of power between the landowner and the government, numerous safeguards are in place to protect the property owner in the expropriation process. One of these safeguards ensures the property owner is entitled to “be made whole” for any property taken. This may include:

  • The fair market value of the expropriated property at the date of expropriation;
  • Losses attributable to the adjoining land;
  • Compensation for reasonable legal or accounting fees associated with the expropriation;
  • Relocation costs for a business, or if a business cannot be relocated, the value of the goodwill of the business;
  • Reasonable business losses attributable to downtime; and/or
  • Interest for unpaid parts of the claim at a prescribed rate

As a practical matter, Chartered Business Valuators (“CBV”) and other professionals are usually retained to assess the quantum of damages suffered by the expropriated business owner.

Why do I need a Valuation?

Generally, a CBV becomes involved in expropriation matters when the taking of real property adversely affects a business. Examples include:

  • Business Closure: When a business’s property is taken and the business is unable to relocate and must close;
  • Business Relocation: When a business’s property is taken and the business is forced to relocate;
  • Business Disruption: When part of the business’s property is taken and the reduced utility of the remaining property results in extra costs for the business; or
  • Construction Loss: in an injurious affection scenario, where no property is taken, but a business is impacted by construction-related activities that occur in close proximity to its property.

In general, these losses exist in one of two categories: past losses and future losses.

Past losses occur between the date of the expropriation and the date of the valuation. Past losses are calculated by assuming that, had the expropriation not occurred, the business would have continued as normal. The CBV will use the historical profitability of the business as the basis of the quantification, adjusted for any industry trends, market trends, and other factors deemed appropriate.

Future losses occur after the date of the valuation. Unlike past losses, future losses are, by their very nature, speculative and involve many assumptions. If the business is unable to continue operating, the CBV may quantify the businesses goodwill [hyperlink to goodwill blog] as the future loss. If the business is able to relocate and continue operations, the CBV may need to estimate how profitable the business will be at the new location, and estimate how far in the future the losses attributable to the expropriation will continue.