Court File and Parties
COURT FILE NO.: CV-19-618448 MOTION HEARD: 20210624 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Michael James Welling, Plaintiff AND: Doug & Partners Inc., Defendant
BEFORE: Master Jolley
COUNSEL: Daniel Rosenbluth, Counsel for the Moving Party Defendant Michael Church and Erin Carr, Counsel for the Responding Party Plaintiff
HEARD: 24 June 2021
Reasons for Decision
The defendant brings this motion to strike paragraphs 20-32, a portion of paragraph 48 and paragraph 64 from the plaintiff’s statement of claim.
The plaintiff has sued his former employer for damages for breach of contract and wrongful dismissal and for damages for intentional infliction of emotional distress and reprisal and for aggravated, punitive and exemplary damages arising from the termination of his employment.
The plaintiff’s written employment agreement entitled him to six months’ notice of termination or payment of six months’ base salary and benefits in lieu of notice. In addition, he was entitled to certain vesting rights related to his stock options. The plaintiff’s employment was terminated without cause on 15 February 2018. He was provided with two separate letters. The termination letter advised that the plaintiff would simply be paid his entitlements under the Employment Standards Act, 2000. The defendant did not offer any payment pursuant to the employment contract in this letter. Instead, the termination letter made reference to a separate letter with an offer to resolve all matters between the parties (the “offer letter”), which was delivered contemporaneously.
The defendant argues that the plaintiff refers to and discloses the contents of that privileged settlement offer and the subsequent conversations about it in paragraphs 20-32, 64 and the reference to “the circumstances thereafter” in paragraph 48 of the claim.
The plaintiff denies that he referenced any offers to settle in the statement of claim. In the alternative, he denies that any references in the impugned paragraphs are privileged. If they are found to be privileged, he argues that he is permitted to plead the details in support of his claim for bad faith.
As a general rule, a party may not plead without prejudice discussions including offers or communications which take place for the purpose of trying to avoid litigation (Clayton v. SPS Commerce Canada Ltd. 2018 ONSC 5017). The parties agree that the limited exception to this rule is set out in the decision of Master Sugunasiri, as she then was, in Irwin v. Canadian Professional Sales Association 2019 ONSC 7332 at paragraphs 14-16). Where a party moves to strike references to settlement offers from a pleading, the court should consider: (a) whether the impugned paragraphs contain a reasonable claim to settlement privilege; (b) whether the settlement offer is relevant to the issues at trial other than to prove the weakness of the other party’s case; and (c) if the offer is pleaded in support of allegations of bad faith, mental distress or punitive damages, whether those claims have an air of reality.
The onus is on the party seeking to strike the pleading to establish a reasonable claim to settlement privilege but it is a low threshold. If the threshold is met, the onus shifts to the responding party to establish the purpose of the pleading and to demonstrate that its bad faith claim has an air of reality to it.
A. Does the claim refer to settlement offers?
- I do not agree with the plaintiff’s submission that he has not pleaded any settlement offers for two reasons. First, the impugned paragraphs specifically outline the defendant’s offer – for instance, paragraph 20 speaks about the payout offered and the terms on which it could be accepted; paragraph 21 references specific clauses in the offer. Second, even if the offers were not directly pleaded, the privilege is not so narrowly constrained. It covers offers and all communications made concerning the settlement proposal (see Clayton, supra at paragraphs 7, 8).
B. Is there a reasonable claim to settlement privilege over matters pleaded in the impugned paragraphs?
- In order to meet this low threshold, the defendant must demonstrate that litigation is either in existence or contemplated, that the communication was made with the intention that it would not be disclosed if negotiations failed and that the purpose was to attempt to reach a settlement.
(i) Was litigation contemplated and was the communication made with the intention that it would not be disclosed?
I find that litigation was contemplated at the time of the offer letter and that the intention of the defendant was that the offer letter would not be disclosed if the parties did not reach a settlement. The offer letter is marked “without prejudice” and opens stating that “doug&partners is prepared to offer to resolve all matters between you and doug&partners on the following basis”. It attaches a proposed release and indemnity, the purpose of which was to release any of the plaintiff’s legal claims arising from the termination of his employment.
In response to the offer letter, the plaintiff references his lawyer’s availability to review it and prefaces his comments by stating “before we get engaged in any expensive and contentious lawyer to lawyer dialogues”. In that context the parties continued to discuss the valuation of the plaintiff’s options, which the defendant had valued at zero. The plaintiff took the position that he had signed the employment agreement under duress and should be paid out that contract amount immediately without prejudice to his further claims. The defendant retained counsel shortly thereafter and all communication from it to the plaintiff is marked without prejudice. Absent a settlement, it is evident that litigation is contemplated.
(ii) Was the offer letter an attempt to reach a settlement?
The plaintiff argues that the offer letter could not be privileged as it did not represent any compromise. It merely provided the plaintiff with the six months of salary continuation that he was already owed under his agreement and valued his options at $0. This was not a negotiation but simply the defendant’s assertion as to what the employment contract called for.
The defendant reasons that its offer was a compromise in the face of the plaintiff’s position that he was not bound by the written employment agreement. The defendant was prepared to settle on the basis of that agreement but was not prepared to pay those sums if the plaintiff believed the parties were not bound by the contract. It noted that the plaintiff was also arguing that his options were to be valued under an oral agreement reached with a former principal of the defendant and not as set out in the employment agreement. In exchange for payment, the defendant wished an assurance that the plaintiff would not challenge his employment agreement and sue for more.
I am satisfied that the offer meets the low bar which the defendant must clear to establish privilege for the purposes of this motion. In the face of the plaintiff’s position that his agreement was signed under duress and that he was entitled to more than was set out in it, the defendant offered to pay the full amount owing, pursuant to its interpretation, to buy peace from a claim that challenged the written agreement. The plaintiff did not accept that offer and, in this action, he alleges that he was forced to sign the agreement under duress and that he is entitled, not to the six months’ under the agreement, but to 20-22 months of pay in lieu of reasonable notice.
Having found that the paragraphs establish a reasonable claim to settlement privilege, the onus then shifts to the plaintiff to demonstrate that the settlement discussions and offer are relevant to the issues at trial other than to prove the weakness of the defendant’s case. He must also demonstrate that his pleading of bad faith, mental distress or punitive damages has an air of reality.
C. Are the settlement discussions relevant to an issue at trial other than to prove the weakness of the defendant’s position?
- It is conceded that the plaintiff has pleaded the settlement offers, not to demonstrate the weakness of the defendant’s case, but to support a claim for punitive damages and for bad faith and mental distress.
D. Does the plaintiff’s bad faith claim have an air of reality?
Given the importance of privilege to the legal system, permitting a party to plead otherwise privileged communication requires more than just a plea of bad faith. While the plaintiff argues I am not to determine the legitimacy of the plaintiff’s bad faith claim on this pleadings motion, I am required to assess whether there is an air of reality to it.
In their settlement exchange, it is evident that the parties disagreed about the value of the options and also, fundamentally about whether the employment contract was binding. I cannot say which interpretation will prevail at trial but I do not see, on the evidence to date, an air of reality to the bad faith claim. The plaintiff had an agreement that provided how options were to be valued – the difference between the strike price and the fair market value of the shares calculated on the basis of EBITDA at the time of exercise. Based on its calculation, the defendant stated that the fair market value was $0.00. The plaintiff disagreed and argued that the valuation was to be based on the results of the previous fiscal year. He found the defendant’s calculation suspect as he knew the company was historically profitable. In response to the plaintiff’s concerns, the defendant advised that, per the agreement, the calculation was made at the time of exercise and not at the end of the previous fiscal year and provided the numbers and a chart in support of its calculation. The plaintiff complained that he could not assess the defendant’s position unless it disclosed the calculation’s supporting numbers. He argues that the defendant’s failure to provide the financial information he needed to assess its stock option offer constituted bad faith. The defendant contends that this issue only came into play when the plaintiff argued for a calculation other than that provided for in the agreement.
The plaintiff argues that the defendant’s insistence on receipt of a release as a condition of paying him what he was already contractually entitled to constitutes bad faith. The defendant argues that the release was necessary in light of the plaintiff’s position that the agreement was the product of duress and that he was entitled to greater notice than was set out there. If it was paying out under the agreement that was being challenged, it wanted to ensure it had a settlement.
Whether the plaintiff succeeds on these arguments will be for the trial judge, but I find they do not rise to the level of bad faith needed to strip a party of its otherwise protected privileged communications. The plaintiff pleads in paragraphs 30 and 32 of his claim that the defendant would not accept the plaintiff’s position on how the share value should be calculated. Similarly the plaintiff would not accept the defendant’s zero valuation. There was evident disagreement on the interpretation or calculation of a contractual benefit and whether a written contract had been amended by an oral agreement. However, the conduct alleged is unlike the bad faith allegations in Doyle v Zochem 2017 ONCA 130 where the plaintiff was terminated for complaining of sexual harassment in the workplace or Prior v Sunnybrook and Women’s College Health Sciences Centre 2006 CanLII 17329 where the defendant threatened to continue a professional discipline complaint against the plaintiff absent a release or Irwin, supra, where the employer threatened to allege cause if its offer was not accepted.
Similarly, paragraph 29 alleges that the defendant caused the plaintiff personal, emotional and financial stress when it directed him to deal with the defendant’s lawyer and not the defendant directly. I do not find this claim in support of bad faith has an air of reality to it as the defendant was not required to forego its right to have its lawyers carry the discussions with the plaintiff.
This is not to say that the plaintiff may not pursue his bad faith claim. He remains free to argue that he was entitled to six months’ notice of termination or pay in lieu, if he is relying on the written agreement or that he was otherwise entitled to common law notice, and that the defendant’s failure to pay a clear contractual obligation constituted bad faith and amounted to intentional infliction of emotional distress. What is not appropriate is to rely on the privileged offer letter and subsequent exchanges in support of that bad faith claim. The settlement allegations are not needed to support the plaintiff’s bad faith claim.
Conclusion
Paragraphs 20-22, 25-32 and 64 are hereby struck. Paragraph 48 may remain as “the circumstances thereafter” will now reference the defendant’s failure to pay the plaintiff either under his contract or at common law.
Paragraphs 23 and 24 may remain. They are statements of fact and, while part of the overall settlement package, could not be realistically construed as a compromise on that valuation issue.
I encourage the parties to attempt to resolve the issue of costs. If they are unable to do so by 20 August 2021, they may each file cost submissions no more than three pages in length and a costs outline with my assistant trial coordinator Ms. Meditskos at Christine.Meditskos@ontario.ca.
Master Jolley