The Equities of Equities

Sometimes it simply does not matter what a contract says; the court will not give effect to it.

Recently, this blog, and others like it, have devoted a considerable amount of attention to the subject of what it takes to draft a legally enforceable termination of employment provision. However, an even more frustrating decision, Battiston v. Microsoft Canada Inc., 2020 ONSC 4286 (CanLII) demonstrates that, even if what one writes in its employment contract is, on its face, legally enforceable, that does not mean that Ontario’s courts will be prepared to give effect to it when the time comes.

This is one reason why I am losing my hair.

EDIT: The Court of Appeal for Ontario allowed the employer's appeal: Battiston v. Microsoft Canada Inc., 2021 ONCA 727 (CanLII).

Facts of the Case

The plaintiff employee, Battiston was employed by the defendant employer, Microsoft for almost 23 years until his termination, without cause, on August 10, 2018. In addition to his base salary, every year Battiston received benefits, including stock awards under Microsoft’s Rewards Policy. These bonus payments constituted about 30% of Battiston’s total compensation. The Policy provides that such rewards reflect an employee’s impact on team, business and customer results over the last year. Battiston was terminated shortly after Microsoft’s 2018 fiscal year, which ended June 30, 2018. He was advised that following his termination, Battiston was no longer entitled to the vesting of any granted but unvested stock awards. At the time of the termination of his employment, Battiston had 1,057 awarded but unvested shares.

The language from Microsoft’s Stock Award Agreements is included in the decision, but too long to repeat here.

Battiston testified that he did not read the length Stock Award Agreements nor did Microsoft draw his attention to the termination provisions. Battiston stated that he was under the impression that he would be eligible to cash out his granted but unvested stock awards in the event that he was terminated without cause.

Microsoft argued that Battiston was not entitled to damages for awarded but unvested stock awards because he had no entitlement to the vesting of such awards under the terms of the Stock Award Agreement given its termination provisions.

Decision of the Ontario Superior Court

The Honourable Mr. Justice M. D. Faieta of the Ontario Superior Court of Justice granted judgment to Mr Battison including damages for the granted stock awards that would have vested during the notice period had his employment not been terminated. Justice Faieta’s reasons for granting such judgment included the following:

[23] In O'Reilly v. IMAX Corporation, 2019 ONCA 991, at para. 32, Chief Justice Strathy stated:

1. A wrongfully dismissed employee is entitled to damages for the loss of wages, salary and other benefits, that would have been earned during the notice period.

2. This principle applies to bonuses, stock options, or incentives that are an integral part of the employee’s compensation, as well as pension benefits that would have accrued or been earned during the notice period.

3. In considering whether the loss of such benefits is recoverable, the court undertakes a two-step analysis.

4. The first step requires a determination of the employee’s common law right to damages for breach of contract, bearing in mind that the measure of damages is the amount to which the employee would have been entitled had the employer performed the contract.

5. The second step requires the court to determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee's common law rights, having regard to the presumption that the parties intended to apply the law, in the absence of clear language to the contrary.

…

[60] There is no dispute that the stock awards were an integral part of Battiston’s compensation package, and thus prima facie triggered a common law entitlement to damages in lieu of bonus.

[61] Microsoft submits that the termination provisions specifically removed Battiston’s common law entitlement as they provide

“… Awardee’s Continuous Status as a Participant will be considered terminated as of the date Awardee no longer is actively providing services to the Company or a Subsidiary (regardless of the reason for such termination and whether or not later to be found invalid or in breach of employment laws in the jurisdiction where Awardee is employed by the terms of Awardee’s employment agreement, if any), ...” [Emphasis added]

[62] Battiston submits that the cessation of “active employment” has been insufficient to oust an employee’s common law right to damages in other cases. [citations omitted.]

[63] Nevertheless, in this case, it is quite clear that the Stock Award Agreement provides that an employee’s right to vest Stock Awards terminates when that employee is no longer actively providing services to employer when he or she has been terminated for any reason even if such reason is unlawful. In my view, the circumstances of this case more closely resemble Kieran v. Ingram Micro Inc., 2004 CanLII 4852 (ON CA), which provided that the employee was not entitled to exercise stock options once he was “terminated for any reason …” Given the broad language of the termination provision, the presumption that termination must be according to law in order to end an employee’s right to vest stock options is rebutted.

[64] I find that the Stock Award Agreement unambiguously excludes Battiston’s right to vest his stock awards after he has been terminated without cause.

[65] There is no dispute that the termination provisions found in the Stock Award Agreements were not drawn to Battiston’s attention by Microsoft.

[66] Battiston relies on Tilden Rent-A-Car Co. v. Clendenning (1976), 1978 CanLII 1446 (ON CA), for the submission that the termination provisions of the Stock Award Agreements should not be enforced as they were not specifically brought to his attention. Tilden was recently considered in MacQuarie Equipment Finance Ltd. v. 2326695 Ontario Ltd. (Durham Drug Store), 2020 ONCA 139, where the Ontario Court of Appeal stated:

[32] … As noted by Professor John D. McCamus in The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012), at p. 193: “If an agreement is entered into on the basis of a document proffered by one party and signed by the other, it is clearly established that the agreement between the parties contains the terms expressed in the document, whether or not the signing party has read the documents.”

[33] However, Professor McCamus adds that sometimes, even with a signed agreement, inadequate notice of a particularly unfair term may render that term unenforceable, at p. 194:

In many contractual settings, it will not be expected that a signing party will take time to read the agreement. Even if the document is read, it may well be, especially in the context of consumer transactions, the purport of particular provisions of the agreement will not be understood by the signing party. Under traditional doctrine, then, although the fact of the signature appears to dispense with the notice issue, the opportunities for imposing harsh and oppressive terms on an unsuspecting party are, as a practical matter, as present in the context of signed documents as they are in the context of unsigned documents. Accordingly, it is perhaps not surprising that the recent jurisprudence indicates that notice requirements are migrating into the context of signed agreements.

[34] The leading Ontario case on this point remains this court’s decision in Clendenning. There, Dubin J.A. (as he then was) for the majority refused to enforce a limitation of liability provision in a car rental agreement that purported to exclude the rental company’s liability for a collision where the customer had driven the car after consuming alcohol. Before renting the car, the customer had chosen to pay an additional premium for “collision damage waiver”, which he had been led to understand provided comprehensive insurance for vehicle damage. He signed the rental agreement without reading it.

[35] In finding the exclusion clause unenforceable, Dubin J.A. highlighted that such a rental transaction was typically concluded in a “hurried, informal manner”, and that the liability exclusion provision was “[o]n the back of the contract in particularly small type and so faint in the customer’s copy as to be hardly legible”: at pp. 602, 606. The exclusion clause was also “inconsistent with the over-all purpose for which the transaction is entered into by the hirer”: at p. 606.

[36] In these circumstances, Dubin J.A. concluded that “something more should be done by the party submitting the contract for signature than merely handing it over to be signed” (at p. 606) — namely, reasonable measures must be taken to draw harsh and oppressive terms to the attention of the other party, at p. 609:

In modern commercial practice, many standard form printed documents are signed without being read or understood. In many cases the parties seeking to rely on the terms of the contract know or ought to know that the signature of a party to the contract does not represent the true intention of the signer, and that the party signing is unaware of the stringent and onerous provisions which the standard form contains. Under such circumstances, I am of the opinion that the party seeking to rely on such terms should not be able to do so in the absence of first having taken reasonable measures to draw such terms to the attention of the other party, and, in the absence of such reasonable measures, it is not necessary for the party denying knowledge of such terms to prove either fraud, misrepresentation or non est factum. [Emphasis added]

[67] Tilden also applies to the enforcement of termination clauses found in bonus plans. In Paquette v. TeraGo Networks Inc, 2016 ONCA 618, at para. 18, the Ontario Court of Appeal stated:

Where a bonus plan exists, its terms will often be important in determining the bonus component of a wrongful dismissal damages award. The plan may contain eligibility criteria and establish a formula for the calculation of the bonus. And, as here, the plan may contain limitations on or conditions for the payment of the bonus. To the extent that there are limitations, the question may arise as to whether they were brought to the attention of the affected employees, and formed part of their contract of employment. The latter issue does not arise here, however, as the appellant did not dispute that he was aware of the plan’s terms.

[68] In Poole v Whirlpool Corp., 2011 ONCA 808, an employee was never given or shown a copy of the bonus plan, was never asked to agree to its terms, nor was he aware that it required him to be actively employed in order to be eligible to receive a bonus. The Court stated, at paras. 4-6:

[4] The appellants contend that to be eligible for a bonus under the applicable Bonus Plan, the respondent was required to be actively employed on December 31st of the year for which the bonus was claimed. As the respondent was fired in March 2010, he did not qualify for a bonus in 2010 or 2011.

[5] The motion judge was correct to reject this contention. The bonus eligibility precondition relied on by the appellants was not incorporated in the respondent’s 2007 letter of employment; nor was there any evidence that the precondition was otherwise drawn to the respondent’s attention at any time, whether orally, in writing, or by means of the appellants’ internal intranet communications system, or that he ever agreed to it. The appellants elected not to cross-examine the respondent on his affidavit materials, in which he swore that he never agreed to the precondition and was unaware of any reference to it on the appellants’ intranet system.

[6] The appellants’ failure to lead evidence or otherwise establish through cross-examination of the respondent that they had communicated the bonus eligibility precondition to the respondent or obtained his assent or agreement to it precludes any reliance by the appellants on the precondition to defeat the respondent’s bonus claim. [Emphasis added]

[69] In Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512, the employer took the position that the employee was not entitled to bonus payments over the notice period because his bonus entitlement was limited by a termination provision contained in the bonus plan. The Court of Appeal found that the termination provision was unenforceable as it had been unilaterally imposed and not brought to the employee’s attention at any time before his termination. At para.74 the Court of Appeal stated:

Notably absent from the record was any direct evidence that the terms in question were brought to Mr. Dawe’s attention. As counsel for Mr. Dawe argued on appeal, had Mr. Beettam’s memo of March 29, 2006 contained one further sentence that referred to the termination provisions, it is quite possible that this litigation would never have been commenced. Alternatively, Mr. Dawe may have objected to the inclusions of these limitations, leading to scenarios (2) or (3), discussed in Wronko (at para. 67, above). Given how the transition of the bonus plans was implemented by Equitable Life, we will never know how things would have played out had Mr. Dawe been informed that he would be forfeiting large sums of money even if his employment were to be terminated without cause.

[70] I find that the termination provisions found in the Stock Award Agreements were harsh and oppressive as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause. I also accept Battiston’s evidence that he was unaware of these termination provisions and that these provisions were not brought to his attention by Microsoft. Microsoft’s email communication that accompanied the notice of the stock award each year does not amount to reasonable measures to draw the termination provisions to Battiston’s attention. Accordingly, the termination provisions in the Stock Award Agreements cannot be enforced against Battiston. Battiston is entitled to damages in lieu of the 1,057 shares awarded that remain unvested.

…

[72] Given that I have concluded that the termination provisions of the Stock Award Agreements are unenforceable, it is unnecessary to address Battiston’s argument that the termination provisions are void under the ESA.

Commentary

Refusal to give effect to “harsh and oppressive” contractual terms residing in employment contracts is a bit of a theme of the 2020 employment law season. I apologize to those who may have thought my introductory comment to this post as being an introduction to the Supreme Court of Canada’s decision in Uber Technologies Inc. v. Heller, 2020 SCC 16.

Practically speaking, I have fewer concerns about the Clendenning analysis than I do about Justice Faieta’s conclusion, at paragraph 70 of his reasons for decision, that the termination provisions found in the Stock Award Agreements were “harsh and oppressive” as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause. Further commentary and analysis, perhaps taking into account what the majority of the SCC said in Uber about unconscionability would have been helpful. What Justice Faieta’s comment signal is that it is irrelevant what Microsoft told Mr. Battiston about the termination provision, His Honour was never going to be prepared to give effect to such term because it was “harsh and oppressive.” Whether such finding would rise to the level necessary for “unconscionability” is an issue on which one is left to speculate.

Assuming that Microsoft appeals this decision, one question for the ONCA has to be whether Justice Faieta’s conclusion, at paragraph 70, was correct. If the ONCA should find that Justice Justice Faieta was correct, then it would benefit us all to know why such an approach, by employers granting contingent equity, is indefensible.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

The foregoing opinions reflect those of the author alone and are unlikely to be shared by all clients to whom he provides professional legal services.