Employment contracts: say what you mean, Canadian HR Reporter (December 3, 2012)

Employment contracts: say what you mean, Canadian HR Reporter (December 3, 2012)

By Nikolay Y. Chsherbinin

Many experienced employment lawyers and HR professionals recognize the importance of written employment contracts. Their purpose is to clearly define the terms and conditions that represent the actual intentions of the contracting parties at the time of its execution.

However, written words, taken in isolation, have an inherent ambiguity that often finds its way into a courtroom, requiring a judge to determine the meaning of the written contract. A good example is the recent decision in Freudenberg Household Products Inc. v. DiGiammarino, where judge Geoffrey Morawetz of the Ontario Superior Court was asked to interpret the meaning of the severance provision in an employment contract.

In November 2010, Franca DiGiammarino entered into a written employment contract with Freudenberg Household Products, which contained the following words: “In the case that the company would decide to terminate the contract with the employee in the first four years after the signature, the company will pay to the employee an indemnity compensation of two years’ salary including the bonuses. After these four years, this indemnity compensation will be no more applicable.”

In the summer of 2011, Freudenberg decided to terminate DiGiammarino’s employment. However, it chose not to inform the employee of its decision until the four-year contractual term had run its course. By delaying the communication of its decision to the employee, the employer sought to avoid paying her the lump-sum severance equal to two years’ compensation. But when DiGiammarino found out the company was planning to terminate her and the severance was not forthcoming, she took issue with the employer’s interpretation of the contract.

Relying on the words “would decide to,” DiGiammarino argued the company’s obligation to pay severance was triggered on the date it made the decision to terminate the contract, not on the date of actual termination. Justice Morawetz agreed that DiGiammarino’s interpretation of the written words was consistent with a plain reading of the contract.

To hold otherwise would require a reading out of the words “would decide to” from the impugned paragraph and endorse a situation where the employer, having made the decision to terminate, could unilaterally delay the communication of such a decision so as to avoid its contractual obligations, he said.

Morawetz’s interpretation folds perfectly into a 2009 Ontario Superior Court interpretation of the contractual provision in Tavares v. Cargill Ltd., where, as in DiGiammarino, the issue was the interpretation of the severance provision of the employment contract.

In Tavares, the employee argued that, on the clear wording of the employment contract, the common law severance compensation negotiated was to be “in addition to” the statutory severance described in the contract.

In response, the employer argued that on a plain reading that takes the “factual matrix” into account, a plain construction of the employment contract leads to the conclusion the benefits and salary negotiated were to include those described in the earlier paragraph.

The court preferred the employee’s interpretation, explaining that while the employer’s interpretation of the contract would have made sense, it “was not what the words actually said.”

Relying on the Ontario Court of Appeal decision in Plan Group v. Bell Canada, the court observed contracts are to be interpreted by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” they have intended what they have said.

The cardinal presumption also played a significant role in DiGiammarino, where Morawetz concluded: “If the (employer) intended for the indemnity provision to apply based on the date of termination as opposed to the date of the decision to terminate, then (it) should have said so in the employment contract. It did not. Rather, the provision clearly states that it is engaged when the company decided to terminate the contract.”

As a consequence, DiGiammarino was awarded two years’ severance that was not subject to mitigation. Describing the Ontario Court of Appeal decision in Bowes v. Goss Powers Products Ltd. as the “controlling authority” on the issue of mitigation, Morawetz explained that where the employment contract contains a stipulated entitlement on termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.

No sidestepping written contract

DiGiammarino, Tavares, The Plan Group and other cases of a similar nature serve as useful reminders to employers that courts are not simply going to permit them to use any, however ingenious, argument to sidestep a written contract of employment.

These decisions underscore the importance of clear and precise language in an employment contract. No doubt, the dictionary and grammatical meaning of the words, which sometimes are called the “plain meaning,” used by contracting parties will be important and often decisive in determining the meaning of an employment contract.

Properly drafted employment contracts, particularly severance clauses, may substantially eliminate misunderstandings and reduce employers’ liability for damages.

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