Stephenson v. Hilti (Canada) Ltd.

(1989) 63 D.L.R. (4th) 573

Nova Scotia Supreme Court - Trial Division

Halifax, Nova Scotia

Hallett J.

Employment -- Wrongful dismissal -- Release being set aside and unsophisticated 61-year-old plaintiff being awarded damages in lieu of 11 months' notice -- Release being unconscionable

This was an action for damages for wrongful dismissal. The plaintiff was 61 when dismissed. Fearing inability to meet his financial obligations, he signed a release and accepted three and a half months' wages plus certain improvements in his pension. The plaintiff was not sophisticated in business and had no legal advice.

HELD: The release was set aside and the action allowed. The plaintiff was entitled to damages in lieu of 11 months' notice. The release was unconscionable.

[Facts:   Stephenson was 61 years old, with 9 years’ service.  The employer decides he is not working out and decides to dismiss him.  They offer him a ‘severance package’ of about 4 months’ salary.  He accepted this, but then later sued for wrongful dismissal seeking a longer period of notice because the notice package he’d agreed to was too low, very unfair, and ‘uncounscionable’.  The employer argued that the employee should be held to the original agreement.]

The Plaintiff is the employee, the defendant is the employer.

HALLETT J.:--

...     There are two related issues in this case. The plaintiff [argues firstly that] the Court [should] to set aside the settlement as unconscionable. However, before that issue can be decided, it is necessary to determine what would have been reasonable notice of termination of employment in this case so that I will have some measurement against which I can determine if the settlement was unconscionable.

In an employment contract for an indefinite term, the law implies that if either party wishes to terminate the employment, the other must be given reasonable notice of the date of termination so that the employee can have a reasonable period of time to search for other employment and the employer a reasonable period to find someone to fill the position. In lieu of a reasonable notice, the employer shall pay the employee a salary for the equivalent period. In this case, the employer wishes to terminate a sixty-one year old man who had been with the company for nine years. This was not a dismissal for cause [and therefore the employee was entitled to reasonable notice].

There is no doubt that finding equivalent employment for a person of the plaintiff's age would be very difficult. As stated in numerous cases of wrongful dismissal, what is reasonable notice turns on the facts and circumstances of each case. In my opinion, considering the plaintiff's age in particular, reasonable notice would have been in the range of ten to twelve months. The plaintiff has been unable to find work and the defendant has decided to withdraw its assertion that he did not mitigate his damages.

That brings me to the question whether or not to set aside the settlement on the ground as alleged by the plaintiff that it is unconscionable. ...   The plaintiff was very bitter about having been terminated. He testified that he needed to have his pay continued because of his financial obligations and that is why he signed the release. I have concluded that in his distraught state of mind he genuinely thought he had the need for his pay but in reality he probably could have gotten by without it as he was entitled to Unemployment Insurance benefits of approximately $1,100.00 a month for one year and his wife was gainfully employed. They live in rented accommodations and his only liability was a bank loan of $15,000.00, part of which arose from his having guaranteed a loan for his son. The plaintiff could have sought legal advice but he did not. He signed the release at a time when he was being treated by Dr. Charles Anderson for depression and disorders related thereto. It is probable that this condition was brought on by his sudden termination.

The Courts must be very slow to set aside an agreement made between parties for valuable consideration. However, agreements that are unconscionable will be set aside. The law on the subject has been stated by Mr. Justice Jones of the Appeal Division of this Court in Stevens v. Stevens (1983), 57 N.S.R. (2d) 141 at p. 145 as being "well settled." Mr. Justice Jones then referred to the decision of Valta v. Valta and Johansson (1979), 8 R.F.L. (2d) 133 where Taggart, J.A., of the British Columbia Court of Appeal quoted from a decision in Morrison v. Coast Finance Ltd. as setting out the law on unconscionable transactions. In the latter decision, the Court stated:

               "... a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and reasonable:"

Mr. Justice Jones then quoted from Professor Crawford in a comment in (1966), 44 C.B.R. 142 where Professor Crawford stated at p. 143:

               "... the courts intervene to rescind the contract whenever it appears that one of the parties was incapable of adequately protecting his interests and the other has made some immoderate gain at his expense. If the bargain is fair the fact that the parties were not equally vigilant of their interest is immaterial. Likewise if one was not preyed upon by the other, an improvident or even grossly inadequate consideration is no ground upon which to set aside a contract freely entered into. It is the combination of inequality and improvidence which alone may invoke this jurisdiction."

With respect to employment contracts, Professor Fridman in his text entitled The Law of Contract, Second Edition, 1986, at p. 306 stated that the mere fact that the parties were employer and employee and thus an obvious inequality of situations did not of itself raise any presumption of unconscionability. Professor Fridman stated:

               "There had to be something which indicated that unfair advantage was being taken of the employee's situation, in particular, his need to be employed, and his inability to bargain with respect to the transaction ..."

...   In Harry v. Kreutziger (1979), 95 D.L.R. (3d) 231 the British Columbia Court of Appeal reviewed the authorities on unconscionable transactions. Mr. Justice Lambert proposed a fairly simple test for determining whether a transaction was unconscionable where he stated at p. 241 that the single question is whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded.

To summarize the principles set out in the foregoing cases, it seems to me that a transaction may be set aside as being unconscionable if the evidence shows the following:

(1) That there is an inequality of bargaining position arising out of ignorance, need or distress of the weaker party;

(2) The stronger party has unconscientiously used a position of power to achieve an advantage; and

(3) The agreement reached is substantially unfair to the weaker party or, as expressed in the Harry v. Kreutziger case, it is sufficiently divergent from community standards of commercial morality that it should be set aside.

To put it even more succinctly, is the transaction so unconscionable that it requires the intervention of the Court considering all the circumstances surrounding the making of the agreement.

Based on the decided cases and considering the facts of this case, I have concluded that a reasonable notice would have been in the range of ten to twelve months. Was the settlement made between the plaintiff and the defendant unconscionable? I am satisfied on the evidence that there was an inequality of bargaining position between the plaintiff and the defendant because of the plaintiff's distress, lack of sophistication in business matters and genuinely felt need of the plaintiff to have his pay continued that put him in a position that he was not thinking as clearly as he should have been at the time when he was discussing his termination with the defendant.

This leads to the second question, whether the defendant, through an unconscientious use of power, achieved a settlement that was substantially unfair to the plaintiff. I find the defendant did not act maliciously but I do not feel the defendant gave very much thought to the issue of what would be reasonable notice to the plaintiff. In that sense, the defendant's decision to terminate the plaintiff's employment but pay him to March 31, 1988, with some improvement in his pension plan was an unconscientious use of its more powerful bargaining position. The defendant was not thinking about the plaintiff's well-being to the extent it should have considering the fact the plaintiff was in his sixties and had been a loyal and dedicated employee for nine years, albeit with some deficiency as a sales person. The termination package (the settlement) was "substantially unfair" when measured against what I would consider to have been a reasonable notice of termination on the facts of this case. This case is what I would refer to as a close call but, in my view, the settlement is sufficiently divergent from community standards of commercial morality that it should be categorized as unconscionable and therefore the release should be set aside. ...

Having decided that the transaction was unconscionable and should be set aside, I will now move to the assessment of damages. The general principles for the assessment of damages for breach of contract should apply; that is, the plaintiff should be put in the same position as he would have been had his employment contract been performed. The purpose of contracts is to allow and protect reliance; that is, the reliance placed by the parties on the performance by the other side. In this case, the law implies a term that the defendant would not terminate the contract without giving the plaintiff reasonable notice or in lieu thereof pay for an equivalent period, the overall consideration being that the plaintiff should be put in the same position as he would have been had this term been honoured by the defendant (The Law of Contract by Waddams, Second Edition, c. 21 - Damages).

Had the plaintiff been given reasonable notice of termination, his employment would have continued from December 4, 1987, for another ten or twelve months. For the purpose of calculating damages, I will use eleven months. He would, of course, have had to pay income tax on his earnings and have had deductions for Unemployment Insurance premiums, etc., just as was done for the period to March 31, 1988. However, the law in Canada is that the dismissed employee who is found to be entitled to an award for wrongful dismissal is entitled to have that award calculated on the basis of his gross salary and benefits (Innis Christie's Employment Law in Canada, 1980, p. 404 re entitlement to award based on "before tax" income; p. 395, awards should include benefits)....

For the purpose of assessing damages, I have rounded this total annual benefit at $3,000.00 and his salary at $37,000.00, for a total of $40,000.00 annually for salary and benefits.   The plaintiff's monthly remuneration based on projected salary and benefits for the year 1988 would have been $3,333.00. As best I can calculate from the evidence, he received the equivalent of approximately five months salary and benefits plus vacation pay at 8% of gross earnings for the period July 1, 1987, to March 31, 1988. The plaintiff is entitled to a damage award of a further six months gross salary and benefits which I have rounded to $20,000.00. In addition, he is entitled to vacation pay as provided for in the Labour Standards Code, S.N.S. 1972, c. 10, less vacation pay he has already been paid., he would have been entitled on termination to the vacation pay earned from January 29, 1988, to November 10, 1988, a period of nine and one-third months.