Alleged breach of settlement agreement
It happens every now and then: the parties to a wrongful dismissal dispute agree to resolve their differences, typically with the employer agreeing to pay the employee a certain amount of compensation, and the employer subsequently learns that the employee is working for a competitor. Typically, they will react out of anger, immediately stopping all payments pursuant to the settlement. Can they do so?
According to a recent decision of the Superior Court of Justice of Ontario, the answer is no; the employer is not relieved of its obligations pursuant to the settlement agreement in such circumstances, though it may be able to commence its own action against the rogue employee.
In Wilson v. Northwest Value Partners Inc., Mr. Wilson sued his former employer after he was dismissed from his employment. The claim proceeded to mediation, and a settlement agreement was entered into. Not long thereafter, however, the company learned that Mr. Wilson had accepted employment with a direct competitor. Since Mr. Wilson had previously agreed to be bound by a non-competition covenant, the company took the position that it was no longer obligated to fulfill its obligations pursuant to the settlement in light of this breach of Mr. Wilson’s obligations. Mr. Wilson then brought a motion to enforce the settlement that had been reached. Concurrently, the company commenced its own civil claim against Mr. Wilson for breach of the non-competition covenant.
The motion proceeded before Mr. Justice Faieta, who addressed the arguments raised by the company that the settlement should not be enforced on one or more of the following bases:
- a material misrepresentation in the form of Mr. Wilson’s omission of the fact that he had accepted employment with a competitor;
- unilateral mistake of fact; and
- the prejudicial effect that it would have on Northwest’s ability to pursue its own claim against Mr. Wilson.
It is not uncommon to observe or be involved in a situation like this, where one party to a settlement agreement takes the position that they would not have entered into the agreement if the other side had been forthright with respect to certain facts. Unfortunately, in many cases, including this one, there is no obligation on the other party to share that information, and the party now seeking to avoid the implications of the agreement did not include any conditions in that agreement that would allow it to do so. Furthermore, the court noted that any alleged breach of Mr. Wilson’s duties was not relevant to his entitlement to the payments that were agreed upon (bonuses, etc.). As a result, that argument was rejected.
With respect to the argument of unilateral mistake, the court rejected this by stating that “a unilateral mistake will only affect the validity of an agreement if it involves a material term of the contract”. Since the court had already found that Mr. Wilson’s compliance or noncompliance with the non-competition covenant was irrelevant to his entitlement to the payments that had been agreed upon, the argument of unilateral mistake failed as well.
With respect to the third argument raised by the company, the court noted that the agreement did not include a release in favour of Mr. Wilson, and that there was nothing in the settlement documentation or otherwise that would preclude the company from proceeding with a claim against him. As a result, this argument failed as well.
The court confirmed that when one party brings a motion to enforce a settlement, a court is to embark upon a two-step analysis. The first step is to determine whether the parties agreed to settle the action. As the court confirmed, this analysis is to be undertaken in accordance with rule 20 of the Rules of Civil Procedure, which is used on motions for summary judgment. The court should refuse to grant judgment based upon the settlement if there are material issues of fact or genuine issues of credibility regarding:
- whether the parties intended to create a legally binding relation; or
- whether there was agreement on all essential terms.
If a settlement is found to exist based upon the tests above, then the court is to determine whether there are other relevant factors, disclosed by the evidence, which would lead to the conclusion that the settlement should not be enforced. Given the analysis of the arguments put forward by the employer, as described above, the court concluded that there was a binding agreement entered into by the parties that should not be disturbed.
The bottom line is that parties negotiating an agreement should raise all issues of concern to them prior to entering into a binding agreement, and ensure that appropriate representations and conditions are included in the documentation. Otherwise, a party in the position that Northwest Value Partners Inc. found itself in will not be able to avoid its obligations pursuant to the settlement agreement, though it may still be able to pursue its own action against the other party to the deal