EMPLOYMENT CONTRACTS: RECENT DEVELOPMENTS

by Brian Grosman Q.C. and R. Mark Fletcher

*Versions of this paper were recently presented by Brian Grosman Q.C. at both the INSIGHT Employee Terminations Conference, held on April 9-10, 2003 in Toronto and at the INFONEX Employee Terminations Conference, held on June 4-5, 2003 in Toronto.

I INTRODUCTION

Canadian employers face a myriad of potential legal problems when terminating the employment of employees. Recent developments in the courts have compounded the complexity of these problems and blurred the distinction between a termination that will increase an employer's exposure to liability and one that will minimize its liability. The courts now closely scrutinize an employer's handling of the dismissal process. Where employers demonstrate bad faith or mishandle an employee termination, the courts will intervene to remedy the error by extending the employee's period of reasonable notice.¹

In addition to the liability risk that arises at the end of the employment relationship, employers must now institute proactive measures to protect critical assets from departing along with their former employees. In the new economy, an employer's intellectual property assets and confidential information require not only protection from competitors but also from employees who come into the possession of such information and knowledge. Employees have become very sophisticated and highly mobile in the last decade. To combat this trend, employers are increasingly relying on written employment agreements to provide themselves with both greater certainty and protection. The problem for many employers is that these written employment contracts often include restrictive covenants that go well beyond the ambit of legitimate economic interests and the courts have, at times, refused to enforce such contracts.

While a written employment contract is not a panacea solution to all the problems that an employer may face, a properly drafted and implemented employment agreement can be a strong ally in the deterrence of wrongful dismissal litigation or in the courtroom should a dispute with an employee escalate to litigation. However, in order to benefit from the advantages of a written employment contract, it is important not only to include necessary provisions but also to avoid common mistakes that may render the agreement unenforceable.

II TAKE APPROPRIATE STEPS TO ENSURE THAT THE EMPLOYMENT AGREEMENT IS ENFORCEABLE

2.1 Valid Consideration

Employers often have their new employees sign a written employment agreement after they have been hired, usually on the start date and while they are signing various other documents in relation to their new position. This is a common mistake and the folly in this approach cannot be over emphasized. Courts are typically very reluctant to enforce the provisions of a written employment contract signed by employees under these circumstances. The judiciary takes a very negative view of this practice, particularly where the employer attempts to have its new employee sign unfavourable terms relating to termination without receiving the benefit of any fresh consideration from the employer in exchange for having executed the unfavourable agreement.

The leading case of Francis v. Canadian Imperial Bank of Commerce (1992) 41 C.C.E.L. 37 (Ont. Ct. (Gen. Div.), vard. on other grounds (120 D.L.R. (4th) 393 (Ont. C.A.) illustrates this point. Mr. Francis was provided with an offer of employment by CIBC, which he accepted. Weeks after accepting the employment offer, on his first day of employment, CIBC required Mr. Francis to sign numerous forms and documents.

Included among these forms and documents was an "employment agreement" which contained a provision on termination. Several years later, CIBC terminated Mr. Francis' employment. Mr. Francis initiated a wrongful dismissal action. CIBC attempted to rely on the termination provision contained in the "employment agreement" and the Court held that the provision could not be enforced as Mr. Francis had signed the "employment agreement" after he had been hired and no additional consideration was provided in exchange for his execution of this agreement.

The lesson that employers should draw from this case is that all terms and conditions of the employment relationship should be communicated at the outset so that the offer of employment includes all contractual terms and conditions. In the alternative, where the employer requires that the employee sign an employment agreement following the acceptance of an offer or after the employment relationship has commenced, the employer should be sure to provide the employee with some additional or fresh consideration. The Court in Francis sends a clear message that new or additional consideration is required to vary the terms of an existing employment agreement. This may include a signing bonus, a promotion or some other benefit flowing from the employer to the employee.

However, consideration is not limited to financial benefits. It may also come in a different, albeit less attractive, form. If, for instance, the employer agrees to not do something that could be construed as disadvantageous to the employee, this is also regarded as valid consideration. In the Supreme Court of Canada case of Maguire v. Northland Drug Co. [1935] 3 D.L.R. 521 (S.C.C.) and more recently in two Ontario cases, Orlan Karigan & Associates Ltd. v. Hoffman (2001), 5 C.C.E.L. (3d) 311 (Ont. S.C.J.) and Techform Products Ltd. v. Wolda (2001), 206 D.L.R. (4th) 171, 56 O.R. (3d) 1 (C.A.) it has been recognized that forbearance by the employer, the promise to refrain from doing something, is a legitimate form of consideration. In these cases, the Courts found that an employer's promise to continue an employee's employment for a reasonable period following the employee's consent to new contractual terms constituted legal consideration.

An employer's promise not to terminate an employee for a reasonable period of time in exchange for the employee's agreement to new terms is one instance of forbearance. However, forbearance in relation to early termination is not the only instance where an employer's promise to refrain from doing something amounts to legal consideration. In Stott v. Merit Investment Corp. (1988) 11 C.C.E.L. 68 ², the Ontario Court of Appeal held that an employer's promise not to sue an employee who was indebted to the company for losses arising from his client's financial obligations constituted valuable consideration. The Court of Appeal determined that the employer believed, in good faith, that it had a legitimate cause of action against the employee for his client's financial debt and its promise not to sue the employee was made in exchange for the employee's agreement to new contractual terms.

Employers are cautioned to carefully determine which form of consideration best promotes their interests, as forbearance will probably not contribute to a positive working atmosphere from the employee's perspective. In any event, employers should ensure that the employee is provided with additional consideration prior to the unilateral imposition of new contractual terms or risk a court finding that the agreement is unenforceable. Some additional examples of consideration include providing the employee with a salary increase, a promotion, or a signing bonus. Provided that the fresh or new consideration is something of value to the employee, a court will determine that it is valid.

2.2 Employment Standards Act 2000 Compliance: A Pre-requisite To Enforcement

In addition to consideration, employers must ensure that the employment agreement complies with the Employment Standards Act 2000 (ESA)³ . To limit the extent of their financial liability at the end of the employment relationship, employers often insist on contractual terms that provide the employee with a substantially reduced notice period entitlement than is otherwise available to the employee at law. While such a desire may make good financial sense, employers should obtain the advice of an employment lawyer to ensure that their employment contract does not provide the employee with less entitlement than provided under the ESA.

The ESA sets out an employee's minimum entitlement. In accordance with section 5(1) of the ESA, employers and employees are prohibited from either waiving or contracting out of the ESA regime insofar as the employment contract would provide for less than the minimum standards provided under that statute. While employers and employees are free to agree to more generous terms than mandated under the ESA, contractual provisions that would provide an employee with less than the ESA are void. In Machtinger v. HOJ Industries Ltd. (1992), 91 D.L.R. (4th) 491 (S.C.C.), the Supreme Court of Canada determined that a termination provision in an employment contract was void where it failed to comply with the ESA.

More recently in Hutchinson v. Enreach Software Canada Inc. [2002] O.J. No. 4467, a U.S. employer operating in Ontario discovered that employers are not free to contract out of the ESA. In this case, the termination provision contained in the employer's offer letter stated:

You should be aware that your employment with the Company is for no specified period and constitutes at will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, theCompany is free to conclude its employment with you at any time, with or without cause, and with or without notice.

Mr. Justice Hoilett held that the termination provision was void and the employer could not rely on it as evidence supporting the parties' intention to agree to a short notice period. While the employee in this case had been employed for less than six (6) months, the Court determined that other factors in the case supported a reasonable notice period at common law of five (5) months. This adverse result may have been avoided had the employer included a termination provision that provided the employee with the minimum statutory entitlement available under the ESA.

Employers must ensure that the terms of the employment agreement provide for terms that are equal to or more generous than employee entitlements under the ESA. As the employer in Hutchinson learned, it makes better financial sense to agree to a notice period that is consistent with the ESA or greater rather than insisting on a lesser or non-existent notice period that will not withstand judicial scrutiny. Of course, the ESA sets the minimum only and in many cases that minimum will be insufficient notice and severance for a senior long term employee.

2.3 Eight Steps Employers Should Follow

Employers are well advised to take proactive measures to ensure that their written employment agreements will withstand any challenges to enforceability in the event of litigation. In this regard, my partner Norman Grosman proposes that employers take the following steps:

Employers who are careful to institute these measures will minimize the risk of having the termination provisions of their employment agreements declared unenforceable. Given the time, effort and costs associated with having an effective employment contract drafted, it is vital to ensure that, at the end of the day, it is binding on the parties.

III WRITTEN EMPLOYMENT CONTRACTS THE DUTY OF GOOD FAITH & THE WALLACE DECISION

3.1 Are Employment Contracts Subject To An Overriding Obligation Of Good Faith On The Part Of Employers?

Employment contracts are not typical commercial contracts. Over the years, the courts have recognized that the balance of power that exists between the parties in normal commercial dealings is absent in the context of an employment relationship.⁵ As a consequence, the law has evolved to provide employees with additional protections such as the obligation of good faith and fair dealing. This perceived power imbalance may be evaporating to some degree as executive employees become increasingly sophisticated and mobile in our knowledge based economy. Are employment contracts subject to an overriding duty of good faith on the employer's part? Has the decision in Wallace had an impact on employment contracts and, in particular, how have an employer's obligations been affected in the dismissal process?

3.2 The Obligation Of Good Faith In The Context Of Written Employment Contracts

A line of cases suggests that employers are under an obligation to exercise their contractual discretion fairly and in good faith.⁶

In the Greenberg decision, the appellant was a real estate salesperson who claimed an entitlement to commission for a listing that was sold following his termination by the employer real estate company. The written employment agreement stated, "in the event that a listing is sold after the sales agent's employment is terminated, any commission he or she receives will be at the sole discretion of the company, and the commission earned on the listing will be disbursed at the company's discretion". The employer decided not to pay the sales agent his commission.

The Court found that the employer had a duty to act reasonably in exercising its discretion, and this required that the employer act honestly and in good faith. In other words, the real estate company was not entitled to act arbitrarily but had to have a good reason for exercising its discretion to not pay the commission. Since the employer failed to meet these standards, the employee was entitled to his commission on the listing. It should be noted that in this case the employer's decision not to pay the commission to the employee permitted its principals to pocket the commission from the sale. The Court would not allow the employer to be unjustly enriched on the basis of its exercise of contractual discretion.

The employer's duty of good faith was also examined in a more recent case Partec Lavalin Inc. v. Meyer⁷[2001]A.J. No. 764, leave to appeal to the Supreme Court of Canada was not granted [dismissed] [2001] S.C.C.A. No. 453. In this case, the Alberta Court of Appeal reviewed an employer's exercise of contractual discretion to terminate an employee. The employer relied on the termination provisions contained in its written employment contract to defend against the wrongful dismissal action.

The contract stated, "if in the Project Manager's opinion the conduct or quality of the Employee's work proves to be unsatisfactory, or if the Client requires that the Employee be replaced on the project for any reason whatsoever, the Employer may terminate the agreement at any time, one month after receipt by the Employee of a written notice of termination".

According to the Court, where the employment contract provides discretion to terminate an employee without cause, it must first determine whether such discretion should be assessed on an objective or subjective standard. The Court reasoned that the words used in the agreement "in the project Manager's opinion" required a subjective standard to be applied to assess the exercise of the employer's discretion. The Alberta Court determined that there was no evidence of improper motive or capricious behaviour and nothing to establish that the employer had exercised its discretion in bad faith. It should be noted that the Court elected to refrain from substituting its own judgment for the employer's because the agreement specifically reserved the employer's right to dismiss the employee in its discretion.

Employment contracts are generally subject to an overriding duty of good faith. However, employers may be able to limit the extent of judicial scrutiny into their conduct where they construct employment agreements that promote the subjective approach to their review of an employee's conduct. While the exercise of contractual discretion against the employee's interests in a blatantly unfair or unreasonable manner will lead a court to find that the employer has breached its duty of fairness and good faith, a well drafted agreement may serve to minimize that risk, provided that the employer's exercise of discretion is not carried out to serve improper motives or with bad faith intentions.

3.3 The Impact Of The Wallace Decision On Written Employment Contracts

It has been nearly six years since the Supreme Court of Canada delivered the Wallace decision. Employers and their legal counsel remain confounded by its widespread implications. Employment lawyers attempt to avoid the significant uncertainty that surrounds an employer's obligations of good faith and fairness owed to employees at the time of dismissal by inserting specific contractual provisions in order to address the expanding nature of these issues. In the wake of Wallace, employers are justifiably concerned with the threat of increased liability that may result from a mishandled dismissal process. Human Resource managers and employment lawyers alike find it difficult to properly advise their principals and clients on the reasonable notice entitlement of dismissed employees where there are signs that the manner of termination involved "bad faith". As a consequence, it is natural for employers to seek greater certainty and protection from a carefully drafted employment contract.

Can a written employment contract be structured to shelter an employer from Wallace liability? To put the question another way, can employers contract out of their Wallace obligations? There is currently little judicial guidance on this point. However, as post Wallace employment agreements are reviewed by the courts it is almost certain that this issue will receive close attention.

A recent decision from the Prince Edward Island Court of Appeal suggests that where a written contract of employment provides an express provision regarding notice or payment in lieu thereof in the case of termination, a court is not at liberty to extend the period of reasonable notice for bad faith in the manner of dismissal. In Barnard v. Testori Americas Corp. [2001] P.E.I.J. No. 28⁸ , Mitchell C.J.P.E.I. stated "the law does not imply a term providing for reasonable notice in cases where the employment contract already contains an express term regarding notice or payment in lieu thereof in case of termination, accordingly, in this case there is no implied reasonable notice period to be extended for bad faith considerations"⁹. The Court in Barnard distinguished the Wallace decision on the basis that it did not deal with a written termination provision.

Regrettably, this decision failed to properly apply the principles laid down by the Supreme Court of Canada in Wallace. According to the rationale put forward by the Court in Barnard, employers could easily avoid their duty of good faith and fair dealing simply by insisting on having a written employment contract that contained a termination provision that specified the employee's entitlement to notice or payment in lieu thereof upon termination. The presence of bad faith circumstances such as unfounded allegations of cause, enticement from secure employment on the basis of misrepresentation or harsh or vindictive treatment by the employer should constitute forms of conduct that would result in damages. Otherwise, factors that would increase the period of reasonable notice in the case of an unwritten contract of employment would no longer present a problem for employers who had entered into a written contract of employment with their employees.

A close review of the Wallace decision does not support the double standard approach advocated in Barnard. Indeed, Mr. Justice Iacobucci states "by no means do I condone the behaviour of employers who subject their employees to callous and insensitive treatment in their dismissal, showing no regard for their welfare. Rather, I believe that such bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period"¹⁰. Recognizing the vulnerability of an employee at the time of dismissal and the need to encourage employers to minimize the adverse effects of the termination process on employees, Mr. Justice Iacobucci went on further to state "to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period"¹¹. To be clear, there was absolutely no distinction made in Wallace that would warrant the proposition in Barnard that an employer with a written contract of employment could abdicate its obligations of good faith and fair dealing in the manner of dismissal.

In January, 1989 Gary MacKenzie was hired as a probationary private investigator by King-Reed & Associates Ltd. Mr. MacKenzie signed the original employment contract with King-Reed and, on July 8, 1989, he signed a second written contract of employment as a result of the change in the corporate status of his employer.

Some 12 years later, in September, 2001, Mr. MacKenzie was terminated by his employer for allegedly falsifying an investigation report. At the time, MacKenzie had risen from his original role of investigator, earning $11.50 per hour, to the position of manager, earning $26 per hour. Following his termination, Mr. MacKenzie brought an action for wrongful dismissal against his former employer.¹²

The employer alleged that it had just cause for the termination of MacKenzie's employment due to the falsification of an investigation report. Alternatively, it relied upon the written contract of employment (following an amendment of its defence in the middle of the trial), adopting the position that, in any event, MacKenzie was limited to the 16 weeks' notice set out in the contract.

The trial judge first found that the employer did not have cause for the termination of MacKenzie's employment and, then, he turned his mind to the employment contract, in consideration of the proper award of damages. Killeen J. stated [at p.246]:

I cannot.conclude this agreement is unenforceable today. It provided for the hiring of Mr. MacKenzie as an hourly rate employee at $11.50 an hour. When he was fired he had risen to the level of a manager at $26 per hour, but had been more or less frozen at that hourly rate since 1995. The contract is a straight-forward one and in paragraph 21 it says this: "The employee agrees that the terms of this agreement will continue to apply to the employee's employment with the employer notwithstanding any changes in job title, duties, responsibilities, salary or benefits." If ever a contract clause was couched in clear, unambiguous language that one is. It seems to me I must give effect in accordance with its plain terms. I cannot identify in the evidence any waiver of the agreement on the part of the employer and equally I conclude that I must give effect to the notice proviso in paragraph 17 dealing with termination without cause which effectively puts a cap on damages at 16 weeks. That proviso, too, is reasonably clear to me and I think must have been reasonably clear to the parties.[N]or can I conclude that the notice proviso containing the cap of 16 weeks is unconscionable. It may be low but in my view it would be a naked arrogation of judicial power for me to say that it is unconscionable. Thus I must enforce it.

The trial judge then went on to consider whether he could, in the circumstances, add incrementally to the notice period contained in the written contract of employment as a result of the bad faith exhibited by the employer in the manner of MacKenzie's termination. Relying upon the decision of Wallace v. United Grain Growers Ltd. (1997), 152 D.L.R. (4th) 1, [1997] 3 S.C.R. 701 [*097307115 - 73 pp.], the trial judge determined that the employer's predetermined behaviour against MacKenzie was shocking. As a result, he concluded that it was appropriate in those circumstances to extend the notice period set out in the written contract of the employment by an additional three months.

Moreover, the trial judge went further [at p. 248] and determined that the extended notice period of a further three months' salary was to be administered in the judgment, "without deduction or credit against that extended notice award for salary earnings from the other employer [the amounts MacKenzie had earned in mitigation of his damages] because, in my view, such an award should not, appropriately considered, ever be subject to that kind of deduction having regard to its character as analogous to aggravated damages".

This case illustrates three interesting features of a written contract of employment. First, carefully selected language can insulate a written employment contract from the passage of time, or a change in responsibility or earnings over the course of time.

Secondly, damages for the bad faith manner of termination can, and in their appropriate circumstances will, add to a contractual notice period, as set out in a written contract of employment. Thirdly, those bad faith damages may not be, and in this case were not, subject to any deduction for moneys earned over the same period of time from alternative sources of employment in what might otherwise had been considered to be mitigation of damages.¹³

IV SPECIAL CONTRACTUAL TERMS: INTELLECTUAL PROPERTY OWNERSHIP, NON-COMPETITION AND NON-SOLICITATION

The knowledge-based economy has given rise to new employer concerns. As employers now increasingly depend on employees who can bring creativity, technical sophistication and superior intellectual ability to the workplace, the business of employers is exposed to a host of different risks such as disputes over intellectual property rights and the transfer of sensitive business information to competitors through former employees. To compound these challenges, the high level of compensation and demand for certain employees has allowed them to become highly mobile and as a result, much less loyal to their employers. Employers have responded by insisting on having employees agree to restrictive covenants such as non-competition and non-solicitation agreements. Moreover, employers are now requiring their employees to sign employee technology agreements to secure the employer's rights to intellectual property developed by their employees. This section addresses the employment law issues that employers should be aware of where they intend to rely on these types of contractual provisions.

4.1 Restrictive Covenants: Take A Reasonable Approach

While employers have long recognized the need to institute measures to minimize the loss of confidential information and trade secrets when faced with an employee's departure, many employers fail to appreciate the significance of selecting an appropriate restrictive covenant to safeguard against these potential losses. Typically, restrictive covenants fall into one of three categories. The first is the non-solicitation provision, which usually serves to prohibit an employee from either contacting or soliciting other employees or the employer's clients away from the employer for a specific period of time. The second category involves some form of confidentiality provision whereby the employee agrees not to disclose certain types of information that the employer wants to protect. The third category involves non-competition provisions, which stipulate that the employee is not permitted to compete with the employer for a specific term and within a certain geographic territory.

Employers who insist on having their employees enter into an agreement containing a non-competition covenant fail to realize that such provisions are, with some exceptions, generally not enforceable. The courts will typically take a negative view of such terms, as they are contrary to both the public interest, for stifling competition, and the employee's private interest, insofar as it may pose an unreasonable barrier to alternative employment¹⁴. An employer who relies a non-competition provision is required to demonstrate to the court that it is reasonable and not contrary to the public interest in light of three central factors:

A court faced with determining whether the non-competition clause is enforceable will attempt to strike a balance between the legitimate employer interests to protect its business with the employee's liberty to work in a chosen field and in a particular geographic market.

The Ontario Court of Appeal has provided employers with some recent guidance on how to structure restrictive covenants to ensure that they are judicially enforced. In Lyons v. Multari (2000) 50 O.R. (3d) 526 (leave to appeal to the Supreme Court of Canada dismissed)¹⁵ the Court of Appeal sent a clear message to employers that non-competition clauses will not be enforced where a non-solicitation clause would have sufficed. While this case did not deal with a "new economy" business, the decision is important to employers who are seeking to protect their business operations from former employees who become competitors.

In Lyons, two dentists agreed to share office space and as part of the arrangement, the senior dentist agreed to refer patients to the junior dentist. The written agreement between the two dentists included a non-competition clause whereby the junior dentist agreed not to compete with the senior dentist for three years and within a five-mile radius of the senior dentist's practice. The relationship lasted seventeen months. Six months later, the junior dentist left the practice and opened up one of his own in the same city and within the five-mile radius, in contravention of the non-competition clause to which he had agreed.

The senior dentist brought an action for breach of contract and was successful at trial. However, on appeal, the trial decision was overturned. The Court of Appeal determined that while the senior dentist had a legitimate proprietary interest in the client base of the dental practice, the non-competition clause was too broad and went too far in protecting that interest. The Court reasoned that the Elsley decision stands for the proposition that non-competition agreements are generally not enforceable, and further that in circumstances where a non-solicitation clause will suffice a non-competition clause would fail. It is only in very rare or exceptional circumstances that a non-solicitation agreement would not suffice.

In Kohler Canada Co. v. Porter [2002] O.J. No. 2418, the Ontario Superior Court of Justice recently had the opportunity to determine whether an employer was entitled to an injunction which would have prevented a former employee from working for a competitor on the basis of a non-competition agreement signed by the employee. Mr. Porter had worked for Kohler Canada for many years and was asked to sign an employment agreement in 2001. The agreement contained a provision that stated:

for a period of one (1) year from the date of termination of my employment (whether voluntary or involuntary), I agree not to render services directly or indirectly for my own account or any person, partnership or corporation in North America in a line of business which is competitive with the line(s) of Kohler's business in which I worked. It is understood, however, that I may accept employment with a diversified company, so long as my new employment pertains solely to that part of its business which is not in competition with any business of Kohler.

Interestingly, the non-competition provision also provided that where an employee is involuntarily terminated, Kohler would pay a monthly salary to the employee for a period of one year following termination if they are unable to obtain a job without violating the non-competition clause. This was not at issue in this case since Mr. Porter left the employment relationship on his own initiative when he decided to accept a Regional Sales Management position with a competitor in the plumbing industry.

Molloy J. relied on Elsley and Lyons in concluding that the non-competition clause was invalid. The wide breadth and the extent to which the non-competition provisions applied were unnecessary to protect Kohler's interests. It went well beyond the geographic area in which Mr. Porter had contacts with Kohler's customers and covered the entire North American continent. The Court found that since Mr. Porter was in sales and not in possession of sensitive information, a non-solicitation clause would have provided Kohler with adequate protection in the circumstances of this case. In consequence, Kohler's motion for an injunction against Mr. Porter was dismissed.

Employers should strongly consider whether it is absolutely necessary to include a non-competition clause in an employment agreement. There should be clear and legitimate reasons for supporting this measure in relation to the particular employee and their position within the employer's organization. The courts have consistently maintained that a non-competition clause should only be used in exceptional circumstances. In light of the difficulty that employers typically face when attempting to enforce non-competition provisions, it is recommended that employers include a non-solicitation clause in the majority of cases. Where non-competition and non-solicitation clauses are used in the same agreement, they should be separated so that they do not fall under the same provision. In addition to separating the two restrictive covenants, a severability clause should also be incorporated into the agreement so that if one provision is held to be invalid, the rest of the agreement will remain intact.

4.2 Intellectual Property Provisions

Employees who are able to bring innovative ideas and creative talents to the workplace are highly sought after in the knowledge-based economy. Where an employee's labour generates intellectual property there is strong potential for an ownership dispute to arise. Traditionally, employees were deemed to have held inventions created during their employment in trust for the benefit of their employers¹⁶. However, the traditional approach to employee inventions is falling into disfavour with Canadian courts. It is increasingly important for employers to take proactive steps to protect their intellectual property rights. Without express contractual terms providing that the employer retains ownership over any inventions created by the employee or where the employee is not specifically hired to invent, the employer may not have ownership rights in the invention.

According to the Federal Court of Canada in Comstock Canada v. Electec Ltd. (1991), 38 C.P.R. (3d) 29 (Fed. T.D¹⁷) , the notion that an employer owns any invention developed by its employee is no longer accepted. The Court in Comstock reasoned that where the invention falls outside the scope of the employment relationship, the employee should be entitled to retain their ownership rights and be accorded the benefits derived from the invention. Notwithstanding that the Court in Comstock endorsed a reversal of the traditional presumption favouring employer ownership, it made it clear that employers could enter into contracts requiring their employees to assign exclusive ownership rights in their inventions to the employer¹⁸.

A clear term that provides for exclusive employer ownership of an employee's inventions is a critical asset in any "new economy" employment agreement. Intellectual property provisions should be drafted broadly so as to include all inventions that are created using the employer's resources, even where the invention may not be within the normal scope of the employee's regular duties. These contractual provisions will assist an employer in establishing that the parties intended that the employer would be the beneficiary of any employee inventions.

V CONCLUSION

Employment contracts, if carefully drafted, protect employers from unnecessary lawsuits. There is a growing awareness among both employers and employees that more certainty is required in their relationship and the appropriate vehicle to assure clarity and certainty is the carefully considered employment contract. It is imprudent to rely on the good-will of the employer or on the assumptions made by the employee on hiring or even the provisions of the common law with regard to "notice" or "cause". It is prudent to address these issues in a fair and precise way at the time of hiring by a written contract. Thus one avoids the guessing game of "who is entitled to what" that is too often the consequence of no contract or a poorly drafted one.

Brian A. Grosman, Q.C.
Grosman, Grosman & Gale LLP
Barristers & Solicitors
111 Richmond Street West, Suite 400
Toronto, ON M5H 2G4
Tel: (416) 364-9599
Fax: (416) 364-2490
E-mail: lawyers@grosman.com
Website: http://www.grosman.com

Copyright © June 2003.
Not to be reproduced In whole or in part unless permission obtained in writing from Brian A. Grosman.

¹ See for instance Wallace v. United Grain Growers Ltd. (1997), 152 D.L.R. (4th) 1, [1997] 3 S.C.R. 701 [hereinafter referred to as Wallace] and Gismondi v. Toronto (City) (2002), 16 C.C.E.L. (3d) 97 (Ont. S.C.J.) [hereinafter referred to as Gismondi].

² (Hereinafter referred to as Stott)

³ S.O. 2000, c.41.

⁴ Grosman, M. Norman. "Written Employment Contracts: Another Wake-Up Call For Employers" 11 Emp. Bul., No 1 (March, 2001).

⁵ See for instance K. Swinton "Contract Law and the Employment Relationship: The Proper Forum for Reform" in B.J. Reiter and J. Swan, eds., Studies in Contract Law (1980), 357 at p.363 approved by the Supreme Court of Canada in Wallace

⁶ See for instance the Ontario Court of Appeal's decisions in Greenberg v. Montreal Trust Co. et al. (1985) 9 O.A.C. 69. (hereinafter referred to as Greenberg) and Trucker Garage Inc. v. Krell (1993), 3 C.C.E.L. (2d) 157 (Ont. C.A.) (hereinafter referred to as Krell)

⁷ (hereinafter referred to as Meyer)

⁸ (Hereinafter referred to as Barnard)

⁹ Supra note 7.

¹⁰ Supra note 1 (Wallace) at para 88

¹¹ Supra note 1 (Wallace) at para 95

¹² MacKenzie v. Rau (2002), 22 C.C.E.L. (3d) 238 (Ont. S.C.J.)

¹³ See Norman Grosman "Key Contract Clause Save 12-Year Old Contract" 13 Emp.Bul., No.2, May 2003

¹⁴ See for instance Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. [1894] A.C. 535 at p. 552 (H.L.) and J.G. Collins Insurance Agencies v. Elsley (1978) 83 D.L.R. (3d) 1 (S.C.C.) (hereinafter referred to as Elsley).

¹⁵ Hereinafter referred to as Lyons.

¹⁶ England et al. "Employment Law In Canada" 3rd ed, vol. 2 (Markham: Butterworths Canada Ltd., 2002 ) at 11.122.

¹⁷ (hereinafter Comstock)

¹⁸ Supra note 14 at 11.124.

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