Achieving finality in employment settlements: Court of Appeal weighs in

When an employer settles a wrongful dismissal claim it wants to ensure all possible claims from employment are resolved, and there are no other claims waiting in the weeds.

The Ontario Court of Appeal’s (the ONCA) recent decision in Preston v Cervus Equipment Corporation offers reassurance that well-drafted settlement documents can achieve this finality. In Preston, settlement documents were effective in resolving a wrongful dismissal action, and in barring a later claim for allegedly outstanding compensation.

The facts

After Mr. Preston’s employment was terminated by his employer, Cervus, he brought a wrongful dismissal action against the company. The parties settled the action. The terms of that settlement were set out in minutes of settlement and a release (the Settlement Documents). Mr. Preston received roughly $100,000 in exchange for dismissal of his action and execution of the release in favour of Cervus. Mr. Preston received independent legal advice in reaching this settlement.

However, after the settlement, Mr. Preston brought a new claim against Cervus for certain vested stock units, worth just over $75,000. The relevant stock plan provided that these vested stock units were to be automatically redeemed upon termination of employment. However, the vested stock units were never paid out by Cervus. This led to a dispute about whether the Settlement Documents barred Mr. Preston from bringing this second claim against Cervus.

The Settlement Documents contained both general and specific language outlining their scope: 

• The minutes of settlement generally indicated the parties’ intention to settle all matters and entitlements arising from employment or termination, under statute, contract or at common law, etc. 
• The release also discharged the employer from all actions, claims, etc., and specifically stated that Mr. Preston had no entitlement or claim against Cervus “in respect of, any bonus, share award, stock option, deferred share or similar incentive plan.”

Decision on summary judgment

On summary judgment, the motion judge found the Settlement Documents did not bar Mr. Preston’s claim for the vested stock units. The motion judge relied on the Supreme Court of Canada’s (the SCC) decision in Corner Brook (City) v Bailey, noting in particular the SCC has held that courts can be persuaded to interpret releases more narrowly than other types of contracts, based on their broad wording. The motion judge took guidance from this statement and ultimately found the release signed by Mr. Preston did not apply to his vested stock unit claim for three reasons:

1. Mr. Preston’s settled wrongful dismissal claim did not include a claim for stock units, only reasonable notice damages.
2. It made little economic sense for Mr. Preston to give up $75,000+ in vested stock units in settling his wrongful dismissal claim for $100,000. The net value of his settlement would be minimal.
3. The Settlement Documents had to be read in the context of the relevant stock plan, which provided for automatic redemption of vested units on an employee’s termination. The language in the Settlement Documents releasing claims to stock options and share awards must be read in a way that gave effect to the stock option plan. 

ONCA decision

Cervus successfully appealed the motion judge’s decision.

At the outset, the ONCA found that the motion judge correctly cited the applicable law for interpreting a release:

• The goal is to ascertain the objective, mutual intentions of the parties. 
• Interpretation of a release includes consideration of the surrounding facts, but those facts should not overwhelm the ordinary meaning of the words used in the release document.
• A broadly worded release may be interpreted narrowly to permit a future claim if that claim was not specifically anticipated by the wording of the release.

The ONCA held the motion judge made three errors in his analysis:

1. He allowed his interpretation of the facts of the case to overwhelm the wording of the Settlement Documents, effectively rewriting the contract between the parties.
2. His reliance on the proposition that broad releases may be narrowly construed was misplaced in this case, as this particular release contained specific language relating to stock units.
3. He evaluated the economic benefits of the settlement. It is not the place of a court to evaluate those benefits unless a party is under disability.

Ultimately, the ONCA determined that the wording of the Settlement Documents should have been given their ordinary meaning, which specifically included release of payments related to stock units.

Takeaways

Settlement documents should reference all potential outstanding claims to prevent a claimant from pursuing those demands in the future, even if they were not part of the original, settled action. In the employment context, this may include listing the different forms of incentive compensation received by the employee as part of the release agreement. If this is done properly and the settlement documents contain both general and specific release language, the ONCA’s decision in Preston shows that employers can have greater confidence that they have successfully settled all matters relating to the employment relationship.

Norton Rose Fulbright’s employment and labour group can assist in drafting release agreements in the employment context.