Week 6 - Expressed and Ancillary Contract terms

Judges interpreting expressed/ancillary terms

The main goal of contract interpretation is to figure out what the parties intended when they made the agreement.

• If theres a written employment contract, the judge begins by reading it carefully, giving a lot of weight to the expressed language both sides agreed to.

• If the language is clear and unambiguous then the court will enforce the contract as it was written. When a contract term is clear, a judge will not permit the employer or employee to present evidence that attempts to show they thought they were agreeing to something different than what the language says.

• The range of possible contract terms is limited only by statutory restrictions (Under the regulatory regime, ex: requirement to pay at least the minimum wage) and the imagination of the parties

Ambiguous

Unclear or having more than one possible meaning, can be interpreted in different ways.

Ambiguous contract terms

Further interpretation is needed when:

• The contract language is vague or unclear

• The written term sconflict with eachother

• The parties disagree about what certain terms mean. 

Parol evidence rule

A judge must decide what a contract means by looking at only the clear words of the contract

Contra proferentem doctrine (against the offeror)

The court will apply interpretation of ambiguous contract term that is most favourable to the party that did not write the contract

2 most litigated expressed contract terms

1. Restrictive covenant clauses

2. Termination of contract clauses

Restrictive covenant clauses

Impose limitations on the actions of former employees (limit what employees can do after leaving a job)

There are 3 main types:

1. Non-disclosure clause

2. Non-solicitation clause

3. Non-competition clause

Non-disclosure clause

“Upon termination of this contract, the employee shall not retain, remove from the employers property, or destroy any document or computer file containing confidential information, and shall not at any time disclose to any person any confidential information relating to the employer”

Non-solicitation clause

“The employee agrees not to solicit business by any means from any existing or former client of the employer for a period of one year after the termination of the contract” (prevents the employee from contacting or poaching former clients or colleagues)

Non-competition clause

“The employee agrees not to establish a competing business or otherwise engage in competition with the employer within a 20-km radius of the employers offices for a period of 3 years from the date of the termination of this contract”

• Courts view non-competition clauses as unenforceable unless they are very reasonable and narrowly tailored.

Controversy around restrictive covenant clauses

Covenant clauses, particularly non-competition clauses, are controversial. A legal tension is caused between freedom of contract and restraint of trade, which is summarized by the supreme court of canada.

Freedom of contract

In a free market, parties should generally be allowed to make whatever agreements they want, including agreeing to a non-competition clause.

• This supports business planning and protection of proprietary interests (confidential info, client relationships)

• Under common law

Public policy against restraint of trade

The law is cautious about restricting a persons right to earn a living.

• Non-competition clauses can limit competition and unfairly restrict workers, especially those in weaker bargaining positions. 

Competing interests in restrictive covenant clauses

Judges must balance competing interests when reviewing restrictive covenant clauses.

• Judges have a common law power to void contract terms that are contrary to public policy, including clauses that unreasonably restrict a persons right to work.

• Judges start with the presumption that restrictive covenant clauses are generally unenforceable due to the restraint of trade, and further reinforces the position in common law that employees are vulnerable and that there is an imbalance of power on the side of the employer

To balance competing interests between employee and employee, judges weigh:

• Employers interests

• Employees (and public) interests

Employers interests in restrictive covenant clauses

• Protecting trade secrets

• Client relationships

• Goodwill

• Business stability and planning

Employees (and public) interests in restrictive covenant clauses

• Right to earn a living and participate in the job market

• Avoiding unfair restrictions and power imbalance

Test of reasonableness in restrictive covenant clauses

Judges ask:

1. Is the clause clearly written and unambiguous? (scope is clear and understandable)

2. Is it reasonable in scope? (time, geography, activity): courts consider the type of work and what is reasonable to protect the employers business interests

3. Does it protect a legitimate business interest worthy of protections? (trade secrets, confidential business information, or key business connections and customer lists)

4. Is it reasonably necessary to protect the interests of the former employer? Are there no alternative measures that are less restrictive on the former employee that could protect the employers interests?

• If a clause fails any part of this test, it will likely be void for being against public policy

• Judges hate the non-competition clause, they often look for other non-restrictive clauses that could apply to the situation instead.

Restrictive covenant clauses and wrongful dismissal

A restrictive covenant clause will not be enforced in the event of a wrongful dismissal of an employee.

• When an employer engages in wrongful dismissal, the employer is saying they do not care about the contract (as they breached it). They cannot use the restrictive covenant clause, as the clauses is part of the contract that they breached, so you cant tell an employee to continue to follow it. 

• Employer does not need to give reason for termination, just have to give notice of termination to end the contract

Termination of contract clauses

In common law, if an employment contract doesnt say how it can be ended, courts imply a term that either a party must give “reasonable notice” before termination of the clause

Expressed termination clauses

If the contract includes a clear, legally valid clause stating the amount of notice, that will override the implied term (as long as it meets employment standards legislation, such as minimum notice under provincial or federal law).

• A termination clause is automatically void if, on its face (by its wording), it:

• Violates employment standards legislation (minimum notice)

• Provides less notice than the minimum required by law.

Even if the employer:

• Later gives more notice than the contract says, or

• Follows the law correctly at the time of termination,

The clause is still invalid and will be void. The validity of a termination clause depends on its wording, not on the employer’s later actions.

Fixed-term of fixed-task contracts

A contract that is not open-ended but is written to:

• End on a specific date (fixed term)

• End when a specific task or project is complete (fixed task)

  Contract ends when the term or task is done

• Contract is breached if either part terminates before the agreed-upon end date

Legal issues relating to contract termination in fixed term/task contracts

Courts may demand very clear evidence that both parties intended the result, if any uncertainty exists about the intention of both parties, judges will revert to implied “reasonable notice”.

• If either party terminates a fixed-term contract before the agreed-upon end date, that party will be in breach of the contract unless the contract expressly permits an early termination

Indefinite term contracts

In indefinite-term employment contracts, employers and employees often include a termination clause that sets out how much notice (or pay in lieu) is required to end the contract.

• This clause is meant to replace the common law requirement of “reasonable notice”

• However, for it to be legally valid, it must meet strict conditions

Legal issues relating to contract termination in indefinite term contracts

If an employee remains employed beyond the end of a fixed task/term, the contract becomes one of indefinite term, and is subject to the implied obligation to provide reasonable notice of termination.

The rebuttable presumption of reasonable notice

In common law, courts presume an employee is entitled to reasonable notice, but this presumption can be rebutted (overridden) if:

1. The contract contains and clear and unambiguous notice clause

2. The clause complies with employment standards legislation

Pitfalls that could make a termination clause invalid

1. Violation of statutory minimums

2. Unconscionability

3. Changed substratum doctrine

Violation of statutory minimums in termination clauses

If the termination clause provides less notice or severance than required by employment standards legislation, it is void

Ex: a clause saying “employment can be terminated without notice”, because everyone is entitled to minimum notice under law

Statutory minimum notice of termination provisions in NL

Under the regulatory standards (non-unionized)

• Less than 1 year: 1 week (after 3 months)

• 2-3 years: 2 weeks

• 3-5 years: 2 weeks

• 5-9 years: 3 weeks

• 10-15 years: 4 weeks

• 15+ years: 6 weeks

  Judge may find this unfair and rule this out depending on age, position, and conditions of the market in that job

Unconscionability in termination clauses

If the clause is extremely unfair, especially where there is a power imbalance and the employee didnt understand or agree freely, a court may strike it down as unconscionable.

• Courts are very reluctant to use this, its rare in employment cases

Changed substratum doctrine in termination clauses

If the employees role significantly changes over time, and the contract wasnt updated, the court may say the original contract no longer reflects the reality of the job, therefore, the old termination clause would no longer apply

Ex: Jane was hired as a junior analyst with a contract that allowed for 2 weeks’ notice. Over 5 years, she becomes a senior executive with new duties and authority.If her employer fires her and relies on the original contract’s 2-week notice clause, a court may apply the changed substratum doctrine and say this contract no longer reflects Jane’s current role, so she is entitled to reasonable notice instead (under regulatory standards)

Mandatory retirement clause

A provision in an employment contract that says the employee must retire and the contract will end when they reach a certain age

• In most cases this is now unlawful in canada

• Human rights legislation amended to make forced retirement clauses unlawful age discrimination

• Some narrow exceptions: When retirement at a specific age is a requirement of a “bona fide” pension plan scheme

Ancillary documents

Documents that describe rules that apply to the employment relationship

Ex: Employee handbooks, human resource policy manuals, retirement plans, benefits handbooks, etc

Legally enforceable ancillary contract terms

Whether or not ancillary contract terms are legally enforceable depends on if:

• Documents constitute a separate legal contract or are part of the existing employment contract (unenforceable if neither)

• An enforceable contract consists of a mutually agreed upon promise. At minimum, both parties need to know about the ancillary document, and there should be clear evidence that both parties agreed to its terms. It should be understood that the document would be legally enforceable

Incorporating ancillary documents

Can be done:

• When parties are entering into an employment contract (such as stating the handbook attached forms part of the contract)

• During the employment relationship (conditions must be met)

Conditions to meet to introduce ancillary documents after employment

1. It must have been made clear to the employee that the new document was intended to be legally enforceable, and the court must be satisfied that the employee understood and agreed to that condition. The employees agreement will not be assumed just from the fact that the employee continues to work after the document was given to them.

2. Even if the employee agreed to the new terms in the ancillary document, such as signing the document, the terms will still not be enforceable unless both the employer and employee received “fresh consideration” when the ancillary document was introduced.