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Howard Levitt: Why Employers Almost Always Bear the Burden of Flawed Contracts

posted 2 years ago

Words are free, but how you use them can cost you.

Employers will almost always bear the costly burden of “flaws” in an employment contract, regardless of the intentions and even relative sophistication of the parties.

This was the outcome in the case of Steve Livshin, who successfully sued The Clinic Network Canada Inc. (TCN) on the basis that his termination provision violated the Employment Standards Act (the “ESA”). The wrinkle, in this case, is that the employment agreement was negotiated between parties — sophisticated business people — represented by counsel in both the share purchase transaction through which TCN acquired Livshin’s medical practice and the ensuing employment agreement Livshin signed.

Briefly, Livshin was an employee with a medical degree, and an abundance of experience in the health-care industry who had founded a  practice. His company was acquired by The Clinic Network Canada Inc. (TCN), a healthcare company owning and operating several pain and cannabis clinics across Canada.

As part of this acquisition, Livshin agreed to stay on as an employee of TCN on a fixed-term contract for three years. Unfortunately, the employment relationship was short-lived due to the economic impact of the COVID-19 pandemic. Livshin was terminated.

Just one month before Livshin’s case, an employer in another case had successfully argued that the imbalance of power that typically exists between employees and employers did not exist between sophisticated parties who had obtained legal advice. In that case, an otherwise unenforceable termination clause was deemed enforceable. This gave some solace to employers.

Likely inspired by this decision, TCN made the same argument. But, this time, the sophistication of the parties was found to have no bearing on the interpretation and enforceability of the termination provision.

Regardless of Livshin’s sophistication and the fact that he was represented by counsel in the share purchase, TCN could not, under any circumstances rely on an illegal termination provision.

This makes good legal sense because a week later, a similar case emphasized that a “termination clause cannot comply with the ESA for some employees but violate the ESA for others. It either violates the ESA or does not, and it (is) either enforceable or not.”

As highlighted in one of our firm’s successful arguments at the Supreme Court of Canada, employees often have less bargaining power and seldom are on equal footing with the employer when negotiating an employment agreement.

Therefore, we agree with this court’s ruling that “the goal that employers be encouraged to draft clauses that comply with the ESA trumps the suggestion that Livshin may have been better able than many or most employees to recognize the potential peril.”

Employers may well be frustrated by this decision. It might seem unfair to presume that a “flaw” in a termination clause undermines prudent, informed, negotiations between parties. However, the objective of the ESA is to protect the interests of employees, not to be balanced.

That is why, any attempt to contract out of or waive a provision of the ESA is illegal, even if both parties are sophisticated and freely agree to do so.

As we have previously emphasized, it is critical to have a well-drafted termination clause in an employment agreement as this could save employers significant costs and liability later. As the law evolves, employers must continue to be prudent and consult with legal counsel to ensure that the provisions comply with the ESA. After all, even fools are considered wise, if they use their words wisely. 

BY HOWARD LEVITT AND TARA SEOSANKAR

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Tara Seosankar is a partner at Levitt Sheikh.

THIS ARTICLE ORIGINALLY APPEARED HERE: https://financialpost.com/fp-work/howard-levitt-why-employers-almost-always-bear-the-burden-of-flawed-contracts

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