Breach of a non-competition covenant does not relieve employer of obligations under a settlement

September 22, 2015

In a recent case, an Ontario court considered whether an employer was entitled to avoid the terms of a settlement with a former employee based on the fact that the former employee took up employment with a competitor, allegedly in breach of the employee’s non-competition obligation to the employer.

Following the termination of his employment, Brian Wilson commenced a claim “for payments and benefits” against his former employers, Northwest Value Partners Inc. and Northwest International Healthcare Properties Real Estate Investment Trust (together, Northwest). Wilson was a senior executive of Northwest, until his employment was terminated in December 2013.

In January 2015, Wilson, Northwest, and their respective legal representatives, attended a court-directed mediation. During the mediation, Wilson and Northwest reached a settlement (the Settlement). After the mediation, Northwest discovered that Wilson had secured employment with one of its competitors. Northwest then informed Wilson’s lawyer that, due to Wilson’s post-employment “activities”, Northwest was no longer willing to accept the terms of the Settlement.

A flurry of legal action followed. Wilson brought a motion for summary judgment to enforce the Settlement. Northwest sought a declaration from the Court that the parties did not reach a definitive settlement agreement or, if they did, that the enforceability of the Settlement should be determined at trial. Northwest also brought an action against Wilson for breach of his non-competition agreement with Northwest.

Was there a binding settlement agreement between the parties?

In order to find that a settlement was reached at mediation, the Court would have to find that the parties (a) intended to create a legally binding agreement and (b) agreed on all terms.

Based on the circumstances under which the settlement was reached (i.e., during a court-directed mediation where both parties had legal representation), subsequent correspondence between the parties and their counsel and the production of a settlement agreement signed by both parties during the proceedings, the Court was satisfied that Wilson and Northwest intended to treat the matter as settled and create a legally binding agreement to settle.

The Court noted that, where a settlement is reached with the assistance of legal counsel, the circumstances in which a settlement will not be enforced by a court are very limited. For a court to find that a binding settlement agreement is not enforceable, there must be a “real risk of injustice”.

Should the Settlement be enforced?

Northwest took the position that the Settlement should not be enforced on the basis of (i) a material misrepresentation (in the form of an omission), (ii) a unilateral mistake of fact, and/or (iii) the prejudicial effect it would have on Northwest’s ability to pursue a claim against Wilson for breach of the non-competition obligations contained in his employment contract.

 i. Material Misrepresentation

Northwest argued that it would not have entered into the Settlement if it knew that Wilson was working for a competitor and that Wilson had a duty to report such activities to Northwest. However, Northwest did not provide any evidence to support its assertion that Wilson had a contractual obligation to disclose his post-employment activities to Northwest. Accordingly, Wilson’s breach of his post-employment obligations to Northwest was not material to his entitlement under the Settlement.

ii. Unilateral Mistake

Northwest also attempted to argue that the Settlement should not be enforced because it entered into the agreement with Wilson on the basis of a unilateral mistake, the mistake being Northwest’s belief that Wilson was not employed by a competitor. Unilateral mistake will only render a contract invalid if the mistake involves a material term of the contract, however. In this case, it was not a term of the Settlement that Wilson not be employed by a competitor. Thus, the fact that Northwest undertook settlement discussions on the mistaken belief that Wilson was not employed by a competitor did not render the Settlement unenforceable.

iii. Action Against Wilson

Northwest submitted that the language of the Settlement prevents it from pursuing its claim against Wilson for breach of his post-employment obligations and therefore it would be unfair to enforce it. The Court disagreed, finding that Northwest could still pursue a claim against Wilson for breach of his non-compete; the Settlement did not affect its ability to do so as it did not include a release by Northwest in favour of Wilson. Accordingly, there was no risk of injustice if the Settlement were to be enforced.

Our Views

This case is a reminder to employers and employees alike that assumptions made during the negotiation of a settlement are not legally binding; if you want to be able to rely on a term, you have to include it in the written contract. As an employee’s post-employment  activities may be relevant to a former employer for a number for reasons – such as to ensure compliance with post-employment restrictive covenants and monitor an employee’s mitigation efforts – it would be wise to make a habit of confirming during the severance negotiation process whether a former employee has sought and/or obtained a new job.

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