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The increasing internationalization of employment has resulted in greater complexity for employers

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The increasing internationalization of employment has resulted in greater complexity for employers in determining which country’s laws will apply to the employment relationships they enter. While the general presumption is that the law of the province, territory or state in which the employee works will apply, the appropriate locale is not always easy to determine. The employee may work in a number of jurisdictions, or be hired in one jurisdiction and placed to work in another. In order to avoid the potential pitfalls in such relationships, employers have attempted to implement employment contracts that specify whose law will apply to the employment relationship in question. However, when that relationship ends, one or both parties may look at ways to avoid that jurisdictional stipulation where doing so would be of advantage.

In a decision released by the Ontario Court of Appeal on July 6, 2012, the Court sought to clarify when it will or won’t enforce such form selection clauses to the detriment of the employee. The Court of Appeal considered the interpretation of a clause found within a written confidentiality agreement between the parties:

Employee hereby consents to the exclusive jurisdiction in the courts of the Commonwealth of Pennsylvania and of the United States situate in the Commonwealth of Pennsylvania, in connection with any action or suit to enforce this Agreement, that relates to this Agreement, that arises out of or in any way relates to the company’s business relations with the employee.

The employer in question was a Pennsylvania-based company and sought to enforce similar agreements with all of its employees in its various worldwide locations.

The company manufactured and recycled rubber. The employee was a professional engineer who lived in Toronto and provided services for the company in Ontario. During the course of his employment, the employee invented a new type of flooring system. By an agreement dated October 10, 2001, the employee signed all of his rights in this flooring invention to the employer. Some years later, the employer requested that the employee sign a revised confidentiality agreement, but he refused. Despite the refusal, his employment continued for a further three years, at which time he launched an action against the employer for amounts that he alleged were owing pursuant to an oral promise by the employer to “reasonably compensate him” for the assignment of his rights to the flooring he’d invented.

Not surprisingly, the employer responded by terminating the employee for cause. The employer then brought a motion to dismiss the claim on the basis of the forum selection clause in the confidentiality agreement. It was the employer’s position that this clause prevented the Ontario court from adjudicating the dispute. The employee took the position that, if the Court of Appeal agreed with the employer that the Ontario Court was not the appropriate jurisdiction pursuant to that confidentiality agreement, the confidentiality agreement itself was unenforceable as the individual was never actually an employee of the company.

One of the confounding facts of the case was the decision by the employee to interpose a management company between himself and the employer. The employee had indicated to the employer that he required such a management company for “Canadian tax law.” It was the employee’s lawyer who drafted the consulting agreement, which also provided for the execution of the standard confidentiality agreement.

In concluding that the motion judge had erred in holding that the confidentiality agreement was unenforceable, the Court of Appeal sought to interpret the provisions with respect to jurisdiction in the confidentiality agreement. The Court held that it was accepted law that, when interpreting a contract, the courts must look at the context in which the contract was signed in order to determine the intentions of the parties.

The Appeal Court looked at the circumstances surrounding the execution of the agreement, in particular, the evidence of discussions and exchange of correspondence as to the expectations of the employee’s role. The Court found that the expectations of the employee with respect to the confidentiality requirements did not change when he insisted on the interposition of a management company. Therefore, the fact that the contract was with this management company rather than him personally, did not alter his obligations. The interposition of the management company was “simply a tax device that in the motion judge’s words, was implemented at the employee’s request and for his advantage.” The Court found that this business reality was a critical fact in interpreting the consulting and confidentiality agreements.

While it was true that the management company never executed the confidentiality agreement, nor was it named as a party, the Court found that the two agreements together were essential in understanding the intended relationship between the parties. In particular, the Court pointed out that the two agreements would make no sense if the individual employee was not bound to those confidentiality obligations. As the Court found, it was clear that the parties understood and intended that the agreements be considered as one package.

It is sometimes said that being a motions court judge is a thankless task, as your decisions are viewed very publicly by your peers. In this case, the Court of Appeal was less than charitable with respect to the judge’s findings on the relationship between the two agreements. As the Court of Appeal pointed out, the judge’s interpretation of the obligations under the consulting and confidentiality agreements would result in the company “being deprived of the very protection of its intellectual property for which it bargained.” The Court concluded that it was clearly the intent of the parties that the employee be bound personally by the provisions of these agreements. Therefore, the motions judge erred in refusing to enforce the agreement, and found that the promises made by the employee both personally and through his management company, were the very promises that allowed him to realize the benefits of the agreement. The Court found that had the employee not executed these agreements, the company would not have agreed to retain him.

I have repeatedly advised both employees and employers, when considering litigating the provisions of employment contracts, that the courts will impose reasonable resolutions in light of commercial reality. Generally, courts will not impose an outcome that seems unfair. Parties should therefore consider their disputes against the background of commercial reasonableness and avoid taking positions in court which contradict such principles.

Earl Altman
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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