Implied Terms in a Dependent Contractor Relationship

Keenan v. Canac Kitchens Ltd., 2016 ONCA 79 (CanLII)

IMG_0468
Client focused and affordable

In a recent post, we looked at the question of whether a worker was an employee,  a contractor, or something in between, and why the answer to that question might be important.

Another recent Ontario Court of Appeal case, Keenan v. Canac Kitchens, has provided an opportunity for the court to comment further on the nature of the exclusivity factor required to establish an dependent contractor relationship.  In addition, the court in Keenan elaborated on how the length of notice for termination of a dependent contractor relationship should be determined.

In Keenan, a husband and wife (the “Keenans”) had been in the employ of Canac Kitchens since 1976 and 1983 respectively.  At the time of Mrs. Keenan’s employment by Canac in 1983, both of the Keenans worked as foremen for the company.  It was common ground that until October of 1987, the Keenans were employees of Canac and the company deducted and remitted Income Tax, EI and  CPP on behalf of all its employees, as required by law.

In 1987, Canac advised the Keenans that the working relationship between the company and the Keenans was to be changed.  The Keenans would no longer be employees of Canac, but would continue on as contractors.  As evidence of the change, the Keenans received Records of Employment  from Canac, and Canac no longer made statutory deductions or remittances on behalf of them.  The Keenans commenced making their own remittances to the CRA and were responsible to do so for their own employees.  Notwithstanding these changes, the Keenans continued to qualify for Canac employee discounts, wear Canac uniforms, and be provided with Canac business cards.  In addition, Canac gave Mr Keenan a special ring in 1996 in recognition of 20 years of service to the company.

Until 2007, the Keenans worked exclusively for Canac.  Thr0ughout 2006, however, business at Canac went into decline and in order to maintain their income, the Keenans commenced working part of their time at another company.  Canac was aware of this and the bulk of the Keenans’ revenue continued to be generated through Canac.

In 2009, Canac decided to shut down operations for business reasons.  It did not provide the Keenans any notice, pay in lieu of notice, or severance.  It did not provide the Keenans with any the minimum statutory notice prescribed by legislation.  Canac’s position was that the Keenans were independent contractors.

At trial, and on appeal, Canac argued that since the Keenans were not working exclusively for Canac at the time of the termination of their contracts, there was no element of exclusivity at that point and they were not, therefore, dependent contractors.  As independent contractors, Canac believed the Keenans were not entitled to notice or pay in  lieu of notice.  The trial judge rejected this argument on the basis the Keenans continued to be either exclusive, or “near exclusive” contractors to Canac up until the time of their dismissal.  While it might have been true technically, that the Keenans were contracting to two companies at the time of their termination from Canac,  there continued to be a substantial long-term economic dependency on Canac.

The court of appeal upheld the trial judges decision, adding that the question of exclusivity cannot be answered by looking what at might be happening at a given point in time, as Canac was attempting to do.  It was necessary to look at the entire term of the relationship.  In the last two years of their relationship to Canac, the Keenans did a modest amount of work for a competitor of Canac. Canac knew and chose to disregard this knowing the reason was the decline in Canac’s business.  When the appeal court looked at the whole term of the relationship between Canac and the Keenans, it concluded that the minor aberration 0f the last two years could not disturb the fact they were economically dependent on Canac throughout their relationship with the company, including the last two years.  This economic dependency, born of exclusivity, is the hallmark of the dependent contractor relationship.

Canac also appealed the trial court’s award of 26 months of notice for both Mr. and Mrs Keenan.  In its appeal, the company relied on an earlier Ontario Court of Appeal case that established a maximum notice period of 24 months, which could only be exceeded on a finding of exceptional circumstances.  There was no finding made by the trial judge in Keenan of the exceptional circumstances which would justify a notice award exceeding 24 months, though there was evidence that a 26 month notice period had been discussed.

Using the Bardal factors (the Bardal factors have been discussed in an earlier post), the Court of appeal chose to uphold the trial court’s award of 26 month’s notice for each of the Keenans.  In arriving at this decision, the Court of Appeal had regard to the length of service of the Keenans, their respective ages at the time of termination, the supervisory nature of their positions, the fact they were the public face of Canac for the best part of a generation, the degree of dependency they had on Canac and the difficult they would likely encounter in replacing their income with alternative employment.

The important takeaways from the Keenan case include the court’s emphasis on having to look at the entirety of the relationship in assessing whether there is the kind of exclusivity and economic dependence required to establish a relationship of dependent contractor.  Exclusivity does not have to be absolute where economic dependency clearly continues to exist.  The second takeaway is that the determination of reasonable notice for terminating a dependent contractor relationship is the same as that for an employee.  Most importantly, there is no hard and fast limit in determining the maximum length of notice that may be awarded.  The court will continue to have regard to the facts and circumstances of each individual case and making this determination.

 

 

Can an oral agreement be enforced?

Jeffrie v. Hendriksen, 2015 NSCA 49

The parties  in this case (“Jeffrie” and “Hendriksen”) were equal shareholders in a fishandrew-montgomery-lg buying company called Three Ports Fisheries Limited (“Three Ports”). Three Ports was in the business of purchasing fish from harvesters and selling that same fish.

As can sometimes happen in small business, the relationship between Jeffrie and Hendriksen began to deteriorate after Jeffrie fell ill and was absent from the business for an extended period of time.  The parties commenced negotiating terms of the sale of Jeffrie’s shares to Hendriksen and this resulted in an oral agreement between the parties conveying full interest in Three Ports to Hendriksen.  Hendriksen subsequently refused to honour the agreement.  Jeffrie sued Hendriksen for breach of the agreement of purchase and sale.to processors.

At trial the court found that the parties had, indeed, reached an oral agreement for the sale of Jeffrie’s shares in Three Ports to Hendriksen.  The trial judge, however, dismissed Jeffrie’s law suit because the oral agreement made was not put in writing.  The court held that putting the agreement in writing was a prerequisite to it becoming legally binding and enforceable.  Jeffrie appealed the trial judge’s decision.

When disputes arise between parties to an oral agreement, a trial judge is heavily dependent on his or her assessment of the credibility and reliability of the oral testimony of the parties to the alleged agreement.  The court of appeal found that the trial judge strongly preferred the evidence of Jeffrie and rejected the evidence of Hendriksen in concluding that the parties had reached an oral agreement on the sale of Jeffrie’s shares to Hendriksen.

Specifically, the trial judge rejected Hendriksen’s evidence that:

  1. Hendriksen  had to confirm financing and get his wife’s approval of the purchase before the agreement could be made legally binding;
  2. He allegedly called Jeffrie’s accountant and advised the accountant he was not able to honour the agreement, and
  3. Hendriksen had prepared an altogether new counter proposal which he attempted to introduce through his lawyer.

The court of appeal found that the trial record fully supported the credibility findings made by the trial judge.

Although the judge at trial found there to be more than sufficient evidence of an oral agreement having been reached between the parties, he went on to conclude that the agreement was not  legally enforceable and, consequently, not binding.  It was the determination of the trial court that the oral agreement reached by the parties would only be legally binding once it was set down in a written document and signed.

The appeal court disagreed. In reviewing the law the appeal court stated, “It is well settled that an agreement need not be in writing to be enforceable”The appeal court also referred to one of its earlier decisions in which it stated, “Parties may agree that they will execute a future, more formal document.  If they have agreed on all of the essential terms and it is their intention that their agreement be binding, there is an enforceable contract;  it is not unenforceable simply because it calls for the execution of a further formal document.”  Setting apart specific examples such as  contracts of purchase and sale of real property or, contracts that carry on beyond one year,  contract law recognizes that agreements that are legally binding and enforceable do not always have to be put in writing.

The most important question that must be answered is whether reducing an oral agreement to writing is a condition that must be fulfilled before the agreement becomes legally binding or is the written form merely a descriptive document about how an agreement, already in place, is to be carried out.  In order to answer this question, the court uses a test based on the reasonableness of the parties expectations (the “Test”).  The application of the Test requires the court to look at the entirety of the agreement in the context of how it came about and what its ultimate purpose is. The court must determine whether the parties committed themselves to a firm agreement or, did one or the other retain the discretion to back out of the agreement if certain conditions were not met?  This determination is made by considering what a hypothetical, reasonable person, under the same conditions and circumstances would believe the expectations of the parties were.

The appeal court found that the trial judge failed to properly apply the Test in coming to his decision.  He mistakenly split the Test into two separate steps and then made contradictory findings at each step. At the first step, the trial judge found there was clearly an oral agreement that the parties, including Hendriksen, had committed themselves to.  At the second step, however, the trial judge contradicted his finding at that first step by concluding there could not be a binding enforceable contract because the agreement was never put into writing. On review, the appeal court held that inconsistent findings on the essential question before the court constitutes an error of law.  If there was an oral agreement on the essential terms of a contract between the parties, that should have been the end of the analysis.  An oral agreement on all of the essential terms of an agreement can be legally binding and, therefore, enforceable without having to be put in writing.

To illustrate the principle more clearly, the appeal court quoted from a decision of the Ontario Court of Appeal: “When [the parties] agree on all of the essential provisions to be incorporated into a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.” In the case of the Ontario Court of Appeal, there was no requirement that lawyers prepare a written form of the agreement before it came binding.  The Nova Scotia Court of Appeal held similarly in Jeffrie v. Hendriksen.  Hendriksen was determined to have breached the terms of a binding oral agreement to purchase Jeffrie’s shares.  Jeffrie was entitled either to specific performance (a legal remedy obliging Hendriksen to follow through on and conclude the oral agreement) or to an award of damages equal to the value of purchase price of his shares.

While the oral agreement in Jeffrie v. Hendricksen was upheld by the court of appeal as legally binding and enforceable, this result should not be taken as recommending or favouring the use of oral contracts.  In thes writer’s opinion, it is always prudent and wise to put the terms and provisions of an oral agreement into writing so that it can be made clear to all, what the intentions of the contracting parties are. The written terms should be as precise and clear as possible.  A commercial lawyer is skilled in preparing written contractual agreements.

 

 

Hole v. Hole, 2016, ABCA 34

andrew-montgomery-lg

Hole  v. Hole is a recent decision from the Alberta Court of Appeal.  The case highlights a number of the key principles of contract interpretation and showcases what can go wrong when contractual documents are not worded clearly and precisely.

All parties in Hole were family members.  The individual appellant was the father of two of the individual respondents, uncle to a third and brother to the fourth individual respondent. All parties were equal shareholders in a company registered as Lockerbie and Hole Western Ltd.  As such, the appellants held a 20% interest in the company and the Respondents together, held the remaining 80%.

By agreement, the shareholders and directors of Lockerbie and Hole Western Limited had a mandatory retirement clause.  Any individual shareholder, within one year of attaining 60 years of age, was required to sell their shares to the remaining shareholders, and cease acting as a director of the company.

In 1991 the appellant J.F. Hole (“JF”) was instrumental in bringing a major piece of business to Lockerbie.  JF was a shareholder of Westcan Malting Ltd., the malting plant Lockerbie was constructing, and he was chairman of Westcan’s board.  In addition, however, JF was beyond the mandatory retirement age of 60 and all indications were he intended to remain active in Lockerbie as a shareholder and director.  With the express intention of addressing the retirement issue, the individual respondents drafted a specific retirement agreement (the “Retirement Agreement”) designed to encourage and facilitate JF’s retirement. The evidence indicated this Retirement Agreement went through 20 drafts before it was considered to be in final form and ready for execution.  The Retirement Agreement contemplated the redistribution of JF’s interest in Lockerbie upon his retirement. The Agreement further recognized JF’s share in the Westcan malt plant project at $1.6 million. Upon execution of the Retirement Agreement, JF was to receive a partial payment of $600,000 toward his $1.6 million share of the Westcan profits.

Integral to securing J.F. Hole’s signature on the Retirement Agreement, was a Letter of Understanding and Obligation for Payment of One Million Dollars (the balance required to satisfy JF’s full share of the Westcan profits) that the individual respondents also entered into along with the Retirement Agreement .  The $1 million balance was secured by a “non-callable promissory note” that was the subject of the Letter of Understanding (the “LOU”).

Not long after the execution of the new Retirement Agreement the relationship amongst the individual respondents began to unravel and collateral trouble began for JF.  The result of the trouble amongst the individual respondents is that Lockerbie and Hole Western Ltd. became defunct and two new companies were set up by three of the four individual respondents.  By 2000, JF had received no payment on the promissory note.

Notwithstanding repeated inquiries and demands, JF was not paid anything, nor was he permitted access by the respondents to the financial records of the two new companies through which the individual respondents were operating.  A court action was commenced by appellants in 2001, suing on the non-callable promissory note.  The respondents took the position the LOU was not intended to be a binding enforceable agreement and that they owed nothing to the appellants.

At trial, the court found for the respondents and ruled against the appellants.  The basis for the ruling in favour of the respondents was, firstly, that the evidence of the parties was in such conflict as to the intent of the LOU, that it was generally void for uncertainty.  The court found there was no objective way to evaluate and weigh the strongly competing interpretations and understandings of the LOU held by the respective parties.

Secondly, the trial judge found that certain specific phrases in the LOU lacked the requisite certainty to establish a legally binding relationship.  For example, the phrase “non-callable promissory note” was not defined. There was no agreement amongst the parties as to what it was intended to mean, and there was no independent or acknowledged business meaning to the phrase.  Other phrases of the LOU were similarly found by the trial judge to be incapable of certainty as to meaning.

Finally, the trial judge found the action to be statute barred as it was determined to have been filed outside the six year limitation period under the Alberta Limitation of Actions Act.

The end result was that the LOU was determined by the trial judge to be unenforceable on the basis it did not create and was not intended to create a legally binding agreement.

On appeal to the Alberta Court of Appeal, the court relied on a number of principles of contractual interpretation stated and confirmed by the Supreme Court of Canada in Sattva, Capital Corp. v Creston Moly Corp 2014 SCC 53 (CanLII) in overturning the trial judge’s decision.

The appeal court found that the trial judge applied incorrect principles of contract interpretation by taking into consideration the subjective intentions of the parties as stated after the LOU was signed.  Such intentions, under Sattva, are considered irrelevant to the interpretation of the LOU.  A decision at trial based on irrelevant considerations was considered an error of law on the part of the trial judge and thus subject to being overturned by the appeal court.

The court of appeal further re-stated the well established principle that the courts should generally choose an interpretation of a contractual agreement which promotes a sensible commercial result and ignore an interpretation which essentially renders the agreement void of clear intents and objectives.  The trial judge’s decision was found by the appeal court to have accomplished the latter and subject, therefore, to review and to being overturned.

As to the trial judge’s finding that the time limit within which the appellants were required by statute to commence their lawsuit had expired, the court of appeal also determined the trial judge to be in error.  The law is well established that the running of the limitation period for breach of contract commences at the time the breach occurs.  Put another way, the limitation period is said to begin running when the party claiming breach knew or ought to have known about the breach.  In Hole, even if the respondents were considered to have repudiated the contract with the appellants as early as 1994, the law expressly holds that the appellants were not obliged to accept the repudiation.  The appellants had the option of refusing the repudiation and treating the contract as continuing in full force.  The court of appeal further found that the appellants had clearly demonstrated, as late as 2000, that they considered the contract to be continuing in full force and effect when they demanded again that the respondents fulfill their obligations under the contract.

In overturning the trial judge’s decision in favour of the appellants, the court of appeal highlighted several key principles of contractual interpretation:

  1. Oral evidence of the parties to a written contract, that is diametrically opposed and which contradicts the express terms of a written contract, is not admissible and will not be considered by a court in interpreting a written contract;
  2. Uncertainty of terms in a written contract can be fatal to its enforceability but the court will generally look to an interpretation that makes commercial sense and reject an interpretation that does not;
  3. If there is ambiguity in a written contract, such ambiguity will be construed against the party that drafted the contract; and,
  4. A party  not in breach of a contract always has the choice of considering the contract at an end and suing for damages or, treating the contract as continuing in full force and effect and requiring the party in breach to fulfill all of its obligations under the contract.