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Terminating Senior Executive Employees

As we have discussed in various posts, a termination from employment in Ontario can occur in one of two ways; (i) a termination without cause; and (ii) a termination for just cause. As we have noted here, the threshold to establish a termination for cause is very high and the test for establishing just cause was discussed as length by the Supreme Court of Canada in McKinley v. BC Tel 2001 SCC. As noted in McKinley, a contextual interpretation to the employees alleged misconduct is considered in determining whether the employer had just cause for termination, rather that considering the sole instance of alleged misconduct in a vacuum. At paragraph 33:

The courts do not consider an act of misconduct, in and of itself, to be grounds for dismissal without notice, unless it is so grievous that it gives rise to the inference that the employee intends no longer to be bound by the contract of service. There is no definition which sets out, precisely, what conduct, or  misconduct, justifies dismissal without notice, and rightly so.  Each case must be determined on its own facts. . . .

Thus, according to this reasoning, an employee’s misconduct does not inherently justify dismissal without notice unless it is “so grievous” that it intimates the employee’s abandonment of the intention to remain part of the employment relationship. In drawing this conclusion, the Nova Scotia Court of Appeal relied on the following passage in The Law of Dismissal in Canada (2nd ed. 1992), at p. 124:

What constitutes just cause in a specific situation is particularly difficult to enumerate because it depends not only on the category and possible consequences of the misconduct, but also on both the nature of the employment and the status of the employee . . . .

The existence of misconduct sufficient to justify cause cannot be looked at in isolation. Whether misconduct constitutes just cause has to be analyzed in the circumstances of each case.  Misconduct must be more serious in order to justify the termination of a more senior, longer‑service employee who has made contributions to the company.

The last point is the most relevant for the purposes of this discussion. Longer service more senior employees who have a demonstrable history of strong performance and dedication with a company will have more latitude when it comes to alleged misconduct. In other words, it is harder to establish just cause for terminating the employment of a senior executive that a short-term entry-level employee.

Where a senior executive is terminated from their employment without cause, the typical factors as enunciated originally in Bardal v. Globe & Mail Ltd., 1960 CanLII 294 (ON SC) continue to apply; including (i) the age of terminated employee, with employees of more advanced age typically entitled to more severance pay given the challenges for older workers to obtain new jobs; (ii) the years of service with the company, with longer service employees being entitled to more severance on average; (iii) the specialization of the job and the corresponding time it is anticipated for the employee to obtain a new job, with more specialized employees likely to have more difficulty obtain comparable employment, thereby entitling them to enhanced notice periods; among other factors.

For senior executives with long lengths of service, they can typically be entitled to severance pay at the high-end of the range awarded by Courts in Ontario. Other considerations including the payment of variable incentive pay, commissions accrued but unpaid to the termination date, continuation of RRSP or pension plan contribution matching, employee benefits coverage continuation, contributions to legal fees, provisions of letters of reference, and outplacement counselling to assist employees with obtaining a new job. These are all requests made in the ordinary course while negotiating severance packages for terminated employees.

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. 

Breach of Real Estate Deal By Sellers

We represent defaulting and non-defaulting sellers and buyers in breach of contract claims relating to real estate agreements of purchase and sale.  We have found that a number of sellers will sign an Agreement of Purchase and Sale, and later decide to change their mind and not sell.  If the prospective purchaser does not agree to sign a Mutual Release, which releases all parties from future claims and actions against one another, the seller could be exposed to a claim for breach of contract.

Sellers may wish to terminate an Agreement of Purchase and Sale if they have entered into the agreement prior to a general price increase in the market.  In such a scenario, the sale price of the property may be below the current market value of the home.  As such, the seller will not wish to sell their property at a price lower than the market. Accordingly, the seller will attempt to default on their agreement, hoping that the buyer does not seek recourse. Buyers of these properties, intending to close the transaction and experience an immediate capital appreciation, will pursue sellers for all losses that are a reasonable and natural consequence flowing from the breach of contract.

With a recent downturn in the Toronto residential housing market, buyers are now walking away from their deposits after they have entered into Agreements of Purchase and Sale, and they may be unable to recoup the same unless through a Mutual Release, Court Order, or the closing of the home.  When you are embroiled in a real estate dispute, it is advisable to call a lawyer that understands the standard form documentation that governs real estate transactions in Ontario, and how to protect your rights.

Breach of Real Estate Agreement by Buyer

Breach of Contract by Buyers

Oftentimes, unwitting buyers and sellers enter into Agreements of Purchase and Sale in an unprepared manner; with one side to the transaction unable to close for any number of reasons. Buyers typically do not include conditional financing arrangements in their offers, for fear that they will not be successful in attaining an accepted offer and binding agreement with the seller as the GTA real estate market has been fierce over the past few years; however, this often comes back to haunt them.

Buyers entering into binding agreements with a seller, who are unable to subsequently obtain financing, and thereby default on the agreement, will subject themselves to potentially significant damages for breach of contract. The non-defaulting seller will be entitled to retain the deposit or more of the total purchase price of the property), and any other costs that are a natural consequence of the breach (i.e., if they are able to re-sell the home at a lower price), the defaulting buyer will be on the hook for the shortfall.

We have negotiated with numerous buyers and sellers for extensions to Agreements of Purchase and Sale. Buyers are most typically requiring extensions to purchase agreements due to their inability to obtain financing to close transactions.  With the recent softening of the GTA housing market, many purchase agreements that were entered into several months back are at purchase prices above the market price of the property at closing. Accordingly, tier one banks are appraising the value of the home at a price lower than the purchase price, and accordingly, are not willing to provide mortgage loans sufficient to cover the balance of the purchase (above the equity down payment).

In the circumstances, buyers are seeking out alternate financing from secondary lenders, which can often come at prohibitive interest rates, to finance the difference between the value as appraised by the banks at closing and the purchase price of the property according to the Agreement of Purchase and Sale.

Rather than take on high-interest financing, many buyers opt to forego the deal altogether, thereby forfeiting their initial deposit and subject themselves to future claims from non-defaulting sellers for damages. If you are involved in a real estate dispute, whether as a buyer or seller, it is advisable to consult with an experienced lawyer in Toronto prior to signing any further documents.  Goldstein Law is available for a free consultation today.

Breach of Real Estate Agreement of Purchase and Sale

Goldstein Law has experience working with residential and commercial purchasers, vendors, landlords, tenants, real estate agents, and insurers with respect to a wide variety of real estate issues. Our real estate dispute lawyers employ a business-minded approach to obtain efficient and cost-effective results for clients in connection with their real estate issue.  We have specific expertise in handling aborted or defaulted transactions.

Breaches of Contract by Purchasers 

When a buyer and seller enter into an Agreement of Purchase and Sale (OREA Standard Form 100) both parties are bound by the terms and conditions set out in the contract and any Schedule “A” thereto. In a hot real estate market such as Toronto, where properties are sold in bidding wars, buyers often avoid including conditions in their offers to purchase. A condition permits a buyer to abort the transaction without penalty if it cannot be satisfied. If the agreement does not contain a condition, the buyer is bound by its terms and must perform the contract.

Making Your Agreement Conditional on Financing

One of the most common reasons that buyers are unable to close on transactions is an inability to secure financing. Without an agreement conditional on financing (see information and examples of financing conditions here), the buyer cannot abort the contract due to the failure to obtain mortgage financing. As such, they will be bound by the terms of the agreement, and if the contract is breached, will be liable for any damages resulting therefrom.  A financing condition will permit the purchaser to cancel the transaction if they cannot obtain financing satisfactory to the buyer at their sole and absolute discretion. As such, if you cannot obtain the amount of financing at the interest rate, term, or amortization period that you require, you will have the right to terminate the contract without penalty, but only if the agreement is conditional on financing.

Agreements Without Conditions 

If you enter an Agreement without any conditions, financing or otherwise, and you are unable to carry out the transaction, you may be liable for damages.  When a property is canceled with no justifiable reason,  the non-defaulting party (i.e., the seller in this case) will be entitled to retain the deposit (i.e., the buyer forfeits the deposit) and additional damages that naturally arise out of the breach of contract. However, in certain cases (as discussed Redstone Enterprises Ltd. v. Simple Technology Inc.), a Court may order relief from forfeiture if the amount of deposit is disproportionately high as compared to the purchase price of the property; and it would be unconscionable for the deposit to be forfeited to the seller.  This only happens in extreme scenarios.  Typically, the deposit is to be forfeited by the defaulting buyer to the non-defaulting seller, even if the seller does not demonstrate that any damages have been suffered). 

Calculating Damages

Typical damages include extra expenses that incurred, that would have been avoided had the property been sold at the closing date (i.e., additional mortgage interest payments, utility bills, property tax, and insurance premiums). In addition, if the non-defaulting party re-lists the property and is unable to obtain the equivalent purchase price (i.e., suffers a loss in purchase price), the defaulting party may be liable for such shortfall.

Forfeiting Deposits

It is important to note that when a deposit is provided by a purchaser to a vendor in connection with a real estate transaction, that deposit is held in the listing real estate brokerages trust account. The deposit cannot be released in the event of a breach of contract without the consent of the vendor and purchaser as diarized on a Mutual Release Form. Though the Mutual Release form contains signature lines for the real estate brokerage, the signatures of the brokerages are not actually required to release the funds.  If the buyer and seller cannot agree to a distribution of the deposit, litigation may commence and the real estate brokerage will be required to retain the deposit funds in trust until a Court Order is issued. For more information on handling deposits, refer to the Real Estate Council of Ontario bulletin here. 

If you have been involved in an aborted real estate transaction in Ontario, it is best to obtain the insights of an experienced real estate dispute lawyer to advise you of your rights. Contact Goldstein Law Firm for a free consultation around your breach of contract.

Termination for Cause – Recent Example

As we have discussed previously in this blog, terminating an employee for just cause has been considered the ‘capital punishment’ of employment law. As such, the employee ought to have displayed misconduct so egregious to justify such a termination. The onus of proving just cause is on the employer.¹

Absenteeism and lateness, ² fraud, theft, dishonesty, or a series of improper behaviors can justify a termination for cause. The Court will apply a contextual analysis; considering the surrounding circumstances, such as the duration of the employment, the number of previous incidents of misconduct, the age and specialization of the employee, among other things.³

If an employer does not have cause for termination, then the employer is required to pay reasonable notice of termination or payment in lieu thereof. The factors considered by the Court in determining the length of reasonable notice include age, length of employment, seniority, specialization, and any other extenuating factors, as initially enumerated by the Court and as commonly referred to as the Bardal factors. In terms of an employees entitlements to termination pay in the event of a just cause termination, an employee is entitled to the minimum statutory notice as outlined in the Employment Standards Act (“ESA”), and, absent an enforceable termination provision limiting the employees’ entitlements upon termination to ESA minimums, reasonable notice of termination or payment in lieu thereof at common.

With respect to just cause terminations, the Court has held that the standard of conduct required to negate an employees entitlement to reasonable notice of termination at common law is lower than the high threshold of misconduct required to nullify an employees entitlement to ESA entitlements. In other words, employees that display gross misconduct may still qualify for minimum ESA entitlements, which can be rather substantial if a long duration of employment has accumulated, but at the expense of his or her common law entitlement.

If you have been terminated from your employment for cause, it is imperative that you consult with an employment lawyer about your rights and obligations.

 

 

¹Dowling v. Ontario (WSIB) 2004 CanLII 43692
² S. v. H. & D.P.M. Inc.,1999 CanLII 14865 (ON SC
³
McKinley v. BC Tel, 2001 SC 38