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The pitfalls of unwritten contracts – Part 3

magnifying_glass_over_contract1Getting your contracts in writing is half the battle. You must also ensure that your contract says what you want it to say, and says it clearly.

The main issue in the case below was the interpretation of an employment agreement (the “Agreement”), between Joshua Medad (“Medad”) and Hope House Charities (“Hope House”) (see Medad v Hope, 2016 ONSC 3323 (CanLII)).

Background

Hope House is a registered charity with a mission to provide a safe space for adolescents looking for support. It hired Medad as Director of Programming. Prior to joining Hope House, Medad had operated his own charitable organization to assist at–risk and homeless youth.

The relationship between the parties deteriorated, and Hope House terminated Medad, less than a year into his employment contract. At the time they signed the Agreement, and at the time Hope House terminated Medad, there was no agreement between Hope House and the Toronto District School Board (“TDSB”).

However, Paragraph 2 of the Agreement included the following termination provision:

2. … In the event that either party wish to terminate this agreement, either party must provide at least 1 year of notice to the other side, in order to provide continuity to the TDSB agreement for a full school year.

Medad claimed a year of notice pay, on the basis of Paragraph 2.

At the Small Claims Court

A Deputy Judge at the Small Claims Court concluded that Hope House did not have just cause to terminate Medad, and that, in accordance with the Agreement, Medad was entitled to one year’s notice pay.

The appeal

Hope House disagreed and appealed. At the Appeal, Hope House argued that the Deputy Judge:

  • Did not follow the strict principles of contract interpretation, by failing to give the termination provision its plain and ordinary grammatical meaning and by failing to interpret the provision in light of the entire Agreement and in light of its purposes and commercial context.
  • Failed to identify that the termination provision is a condition precedent, dependent on the TDSB. In other words, for the termination provision between Medad and Hope House to be effective, there had to be an agreement between Hope House and the TDSB. If there was no agreement between Hope House and the TDSB, the termination provision is unenforceable and Hope House did not have to give Medad a year’s notice.
  • Should have based Medad’s notice period on the common law principles of reasonable notice, since the termination provision in the Agreement was unenforceable. Hope House submitted that given Medad’s brief period of employment, his young age and his low level of remuneration, two weeks would be reasonable notice under common law.

Do you agree with Hope House’s position and its interpretation of Paragraph 2?

Well, the Appeal Court Judge disagreed with Hope House and said:

  • Contractual interpretation involves a practical, common sense approach.
  • What is important is to determine the intent of the parties given the ordinary and grammatical meaning of the words themselves and the contract as a whole.

Applying these principles to the interpretation of Paragraph 2, the Judge said:

  • It is reasonable to interpret Paragraph 2 to mean that Hope House should give Medad a year’s notice in the event it wishes to terminate him. This is commercially reasonable, in light of the Agreement as a whole and the surrounding circumstances:
    • Before Medad joined Hope House he had his own charitable organization and was giving it up to join Hope House. Therefore, it was reasonable that Medad required sufficient notice of termination to protect his interests.
    • The parties did not appear to have any intention to make the one year notice provision conditional on a TDSB agreement. For instance, they never discussed what would happen if there was no TDSB agreement.
  • Paragraph 2 does not create a condition precedent, whereby an agreement between Hope House and the TDSB was necessary before the termination provision could apply. Instead, under the plain wording of Paragraph 2, an agreement with the TDSB was at most a reason for the notice, but not a condition for the notice to apply.

Hope House lost its Appeal, and the employee won the right to a year’s notice pay.

Takeaways

In Part 1 of this series, we reminded you to put agreements in writing, but cautioned that this did not provide perfect inoculation against lawsuits—litigants often misunderstand the obvious; provisions may be open to multiple interpretations; and people sue even when they have no case.

In Part 2, an employee and her employer entered into an unwritten employment contract, and ended up in court with “very different views of their meetings, conversations, and the ultimate terms of the employment agreement.” This forced the court to piece together testimony and the facts at the time the contract was made, to determine the nature of contract. That process would likely have been less time-consuming, subjective and expensive, if the parties had a written contract.

Finally, in Part 3, above, we examine some of the principles of contract interpretation which courts use to interpret written contracts that are ambiguous; when parties have a different take on what the contract provision means; and when, as the Judge said in this case, the provision is “inelegant and awkward”.

You can read Part 1 of this series here and Part 2 here.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here
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