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When worlds collide – The evolution of employment law principles in the termination of independent contractor relationships

employment law principles

It is remarkable how much the law can change in as little as 14 years. In 2005, Justice Kathryn N. Feldman authored reasons for decision on behalf of the Court of Appeal for Ontario in the case of 1193430 Ontario Inc. v. Boa-Franc Inc., 2005 CanLII 39862 (ON CA). The essential holding of that case is that, “Employment law concepts such as just cause should not be imported into commercial law context to govern distributorship agreements.”

14 years later, in the case of Barresi v. Jones Lang Lasalle Real Estate Services Inc., 2019 ONCA 884 (CanLII), the two worlds could not be more intertwined.

Facts

Barresi concerned the case of an independent contractor who alleged that his services contract was anticipatorily repudiated by the company to whom he was providing services. Following a five-day trial, the Honourable Justice Catherine D. Aitken of the Ontario Superior Court of Justice found that the defendant, Jones Lang Salle Real Estate Services Inc. (“JLL”) had fundamentally altered the terms of the agreement between the parties, thereby denying Barresi substantially the whole of the agreement for which he had bargained. For a summary of that decision see my post Claiming Constructive Dismissal as an Independent Contractor.

JLL appealed Justice Aitken’s decision to the Court of Appeal for Ontario alleging, among other things, that the trial judge failed “to identify and properly apply the legal test for anticipatory repudiation”, that is, repudiation as to the future performance of the contract. It also argued that there could be no repudiation here because section “S” of the Agreement expressly permitted it to revoke Barresi’s status as the “Ottawa Practice Lead”.

Decision of the Court of Appeal in Barresi

In rejecting JLL’s appeal, the Court of Appeal for Ontario (Feldman, Fairburn and Jamal JJ.A.) wrote, in material part, the following:

[5] The trial judge correctly noted that contractual repudiation occurs “by words or conduct evincing an intention not to be bound by the contract”: Guarantee Co. of North America v. Gordon Capital, [1999] 3 S.C.R. 423, at para. 40. A contractual breach “is a repudiation of the contract if it is a breach of a contractual condition or of some other sufficiently important term of the contract so that there is a substantial failure of performance”: Potter v. New Brunswick Legal Aid Services Commission, [2015] 1 S.C.R. 500, at para. 145.

Commentary

The reason why I reference the Boa-Franc decision is because Potter, a 2015 decision of the Supreme Court of Canada, was an employment law case, in which the principles of anticipatory repudiation were confirmed.

In Potter, Justice Cromwell wrote the following in his concurring reasons for decision:

[143] The whole of the law of wrongful dismissal is grounded in the broader contract law principles relating to repudiation and anticipatory breach: see, e.g., G. England, Individual Employment Law (2nd ed. 2008), at pp. 346-47.

[144] The term repudiation refers to the situation in which a breach of contract by one party gives rise to the right of the other party to terminate the contract and pursue the available remedies for the breach: J. D. McCamus, The Law of Contracts (2nd ed. 2012), at pp. 676-78. This occurs when one party actually breaches the contract in some very important respect and is said to thereby repudiate the contract. If the other party “accepts” the repudiation, the contract is over. If the other party does not accept the repudiation, the contract continues (subject to various other doctrines). In either case, the non-breaching party can pursue the available remedies which may vary depending on whether that party has accepted the repudiation or affirmed the contract.

[145] There is a wealth of learning about the types of breach that constitute repudiation. Without getting into the details, we may say in brief that a breach is a repudiation of the contract if it is a breach of a contractual condition or of some other sufficiently important term of the contract so that there is a substantial failure of performance: S. M. Waddams, The Law of Contracts (6th ed. 2010), at ¶590; McCamus, at pp. 676-77.

[146] I pause here to deal with three problems of terminology that can cause confusion.

[147] The first relates to the word “repudiation”; it is used in at least two different senses. Sometimes it refers to the conduct of the breaching party in committing a breach that is sufficiently serious to give the non-breaching party the right to treat the contract as over. At other times the term is used to refer to the choice of the non-breaching party, faced with this sort of serious breach, to treat the contract as over. I will use the word “repudiation” to refer to the acts of the party alleged to be in breach. I will refer to the choice of the non-breaching party to treat the contract as over as “acceptance” of the repudiation.

[148] The second terminological clarification deals with the term “fundamental breach”. The types of breach that are sufficiently serious to constitute repudiation are often referred to as “fundamental” breaches. However, use of the term “fundamental breach” can cause confusion because it is also used in the distinct context of deciding whether a contractual provision excluding or limiting liability is effective in the face of a radical departure from the contractual obligations: see, e.g., Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII) at paras. 104-23. To avoid that confusion, I prefer to refer to breaches of this nature as breaches of “sufficiently important terms” or “repudiatory” breaches: see, e.g., McCamus, at p. 651.

[149] The final point of terminology is concerned with “anticipatory” breach. An anticipatory breach “occurs when one party manifests, through words or conduct, an intention not to perform or not to be bound by provisions of the agreement that require performance in the future”: McCamus, at p. 689; see also A. Swan, with the assistance of J. Adamski, Canadian Contract Law (2nd ed. 2009), at §7.89. When the anticipated future non-observance relates to important terms of the contract or shows an intention not to be bound in the future, the anticipatory breach gives rise to anticipatory repudiation. The focus in such cases is on what the party’s words and/or conduct say about future performance of the contract. For example, there will be an anticipatory repudiation if the words and conduct evince an intention to breach a term of the contract which, if actually breached, would constitute repudiation of the contract.

[150] How do these general contract principles play out in wrongful dismissal cases?

[151] The most straightforward case is one in which the employer expressly dismisses the employee in breach of the contract of employment. This is an express, anticipatory repudiation: the employer states expressly that he or she will not observe the terms of the employment contract in the future. As McCardie J. put it in Rubel Bronze, “in the ordinary case of wrongful dismissal a master purports completely to terminate the contract. He refuses to accept further service. He wholly declines to pay further remuneration. The repudiation, as a rule, is undoubted, decisive, and complete”: p. 321. The employer’s express and complete repudiation of the contract in the future gives rise to the employee’s right to treat the contract as over at that point and to sue for damages for its breach.

[152] More complicated are cases of so-called “constructive” dismissal in which there is no express repudiation by the employer. As my colleague points out, the employer’s acts are treated as a dismissal because of the way they are characterized by the law.

[153] Constructive dismissals may be the result of repudiatory breach — that is, an actual breach of a condition or other sufficiently significant term of the employee’s contract. As McCardie J. put it in Rubel Bronze, “If the conduct of the employer amounts to a basic refusal to continue the servant on the agreed terms of the employment, then there is at once a wrongful dismissal and a repudiation of the contract”: p. 323. These sorts of breaches relate to unilateral and important changes to the employee’s terms of employment; the question of how significant the change must be is one of degree: England, at pp. 348-56; Rubel Bronze, at p. 323.

[154] Constructive dismissal may also occur even if the employee cannot point to an actual, specific, important change in compensation, work assignments, etc., that on its own constitutes a repudiatory breach. This occurs, for example, where the employer, through a course of conduct, “evince[s] an intention no longer to be bound by the contract”: Rubel Bronze, at p. 322, citing General Billposting Co. v. Atkinson, [1909] A.C. 118 (H.L.), at p. 122, per Lord Collins, quoting Freeth v. Burr (1874), L.R. 9 C.P. 208, at p. 213. The focus in these sorts of anticipatory repudiation cases is not simply on the seriousness of any actual breach, but on what the employer’s intent is with respect to future adherence to the contract of employment.

[155] Thus, an employee is constructively dismissed in two situations: where the employer’s conduct is “a significant breach going to the root of the contract of employment” and where the employer’s conduct otherwise “shows that the employer no longer intends to be bound by one or more of the essential terms of the contract”: Western Excavating (ECC) Ltd. v. Sharp, [1978] 1 All E.R. 713 (C.A.), at p. 717.

[156] At least two factors have contributed to some lack of clarity in the law. There has been a blurring of the distinction between the two categories of repudiation which constitute “constructive” dismissal flowing from a lack of precision in describing the actual or future breach underlying them. For example, it is often said that a breach will be sufficiently significant to constitute repudiation if it is of such a nature as to show the intent of the breaching party not to be bound by the contract in the future. But this way of describing the breach risks confusing repudiation inferred from the importance of an actual breach of contract with anticipatory repudiation inferred from conduct which may or may not be a breach, but that nonetheless evinces the intention not to be bound by the contract, or at least by some of its important terms, in the future.

[157] Both of these problems are apparent in plausible readings of the discussion of the common law of unjust dismissal in Farber, a civil law case. In my view, we should take this opportunity to clarify these points. As I see it, these are the points that led in this case to the errors both at trial and in the Court of Appeal.

[158] The issue in Farber was whether unilateral changes made by the employer to the employment contract amounted to a constructive dismissal of the employee: para. 1. The employer eliminated the employee’s position, but offered him a different position. Farber was therefore, in common law terms, a case about alleged repudiation by significant breach; the question was whether the employer’s alleged breach of contract — that is, the elimination of his position coupled with the offer of a new one — was sufficiently important to constitute a repudiation of the contract by the employer. The Court referred to such a breach as a “fundamental breach” to signify “fundamental changes” to the contract in the sense that they were “substantial” changes to “essential” terms: see, e.g., para. 35. For the reasons that I have just discussed, I suggest that it would be more helpful in future to avoid the term “fundamental breach” in this context.

[159] Farber’s discussion of the common law is capable of being read as saying that there are not two categories of repudiation constituting constructive dismissal, but only one. Constructive dismissal only occurs when the employer commits what the Court referred to as a fundamental breach, or to use the language that I prefer, where the employer has committed a sufficiently significant breach: para. 33. On this reading of the decision the employer’s conduct that is not a breach or is not a sufficiently significant breach cannot constitute constructive dismissal. However, I do not think that this is the correct interpretation of the common law discussion in Farber. It is well established in the common law that an employer may constructively dismiss an employee even though the employer’s conduct which evinces an intention not to be bound by the contract in the future does not constitute a present breach of contract or, if there is a present breach, is not sufficiently important to constitute repudiation on its own.

As demonstrated above, Justice Cromwell freely navigates back and forth between employment law principles and the contract law principles in which they are grounded. Such familiarly between such two worlds stands in sharp contrast to what Justice Feldman wrote in 2015:

[46] In employment law, an employer may terminate the employment of an employee without notice, where the employer has just cause for the dismissal of the employee. However, the circumstances where an employee can be terminated for cause are limited. The meaning of just cause in that context can be seen in the cases involving dishonesty. Not every act of dishonesty amounts to just cause for dismissal; the degree and type of dishonesty will determine whether what the employee did was serious enough to amount to just cause for dismissal. The test is whether the dishonesty causes a breakdown in the employment relationship: see McKinley v. BC Tel, 2001 SCC 38 (CanLII), at para. 48. If the dishonesty does not cause such a breakdown, the employer may of course still terminate the employee, but only on reasonable notice.

[47] The issue that arises from this background is, to what extent is it appropriate or necessary to apply employment law concepts to a commercial distributorship agreement. I share the concern of McEachern C.J.B.C. in Marbry that even if it may in some ways resemble an employment relationship, a distributorship agreement is a commercial contract negotiated by business entities, each with its own interests to protect. Because it is a business relationship governed by contract, there is no reason why the ordinary rules of contract, including the rules for implying a term and for determining the consequences of a breach of contract ought not to apply. The incorporation of the concepts of termination on reasonable notice or for cause appear to have arisen in one line of cases from an analogy to employment law. However, in the other line, adopted in the Hillis Oil case, the concept of termination on notice comes from the interpretation of the contract itself and not from an analytical comparison of the particular contractual relationship with that of employee or independent contractor. I conclude that at this stage in the development and application of the law, there is no need, nor is it appropriate in a commercial law context, to import employment law concepts to govern distributorship agreements.

[48] Outside employment law, the concept of “just cause” is not used as a basis for terminating contracts. In fact, a breach of contract by one party does not relieve the innocent party of its duty to perform the contract unless the breach is fundamental or goes to the root of the contract: see generally Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426 at 499. Applying ordinary contract principles to the right to terminate a distribution agreement for breach, the innocent party can only terminate and be relieved of any further obligation if the breach of contract meets the test for fundamental breach. Therefore, if one wished to maintain the use of the nomenclature of termination for cause, the cause must amount to a fundamental breach of the contract before the innocent party can terminate and be relieved of its obligation to continue to perform.

[49] I note that this approach is consistent with the courts’ definition of just cause for termination in the employment context. Only the most serious breakdown in the employment relationship will amount to just cause for dismissal. Most breaches by employees, including egregious ones, still leave the employer unable to terminate the employment except on reasonable notice.

[50] The test for determining whether a breach amounts to a fundamental breach that deprives the innocent party of “substantially the whole benefit of the contract” was recently restated by this court in Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.). In that case, the court adopted the application of five factors extrapolated by Professor Waddams from the case law, to analyze whether there has been a substantial failure of performance amounting to fundamental breach…

Things have now come full circle. Whereas in Boa-Franc Justice Feldman was reticent to import employment law principles in commercial contracts, in Barresi it is an employment law case, Potter, which provided the court’s direction on how to define anticipatory repudiation and “fundamental breach” in the commercial law context. Perhaps even more confusing is that, while Potter was undeniably an employment law case, its fundamental principles were grounded in commercial law.

To my mind, what Barresi demonstrates is that the line between employment law principles and “independent contractor” commercial law principles continues to blur. As the nature of what it means to be “employed” continues to evolve, so too must the law. The question that remains to be answered, however, is whether the law will continue to import some of the seminal holds of employment law, e.g. the oft-repeated statement in Wallace v. United Grain Growers Ltd., [1997] 3 SCR 701 that, “for most people, work is one of the defining features of their lives”, or whether the line will blur the other way, relying more heavily on contract law principles. The decision of the Supreme Court of Canada in Heller v. Uber Technologies Inc. may yet provide some insight.

Sean Bawden

LL.B., Director,Legal (Employment and Litigation) at Labour Pain
Sean Bawden, is now a director of legal for a private company and blogging about work by an in-house lawyer which he calls “Labour Pain.”To read more click here.

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