Employment contracts can have a significant impact on both employers and employees. It’s important for everyone involved in an employment relationship to understand their obligations to the other parties. One aspect to contract law that all involved should keep in mind is that even if two parties agree to a contract, it doesn’t mean it’s necessarily enforceable. Take for instance a situation between two real estate agents who recently appeared before the Ontario Superior Court of Justice.

The contract

The plaintiff is a real estate agent who started his own brokerage firm in April 2012. In order to recruit other agents to work for his form, he developed what the court described as a unique mentoring/training and marketing program. The program saw the plaintiff recruit up-and-coming real estate agents, whom he would train in the hopes of their becoming successful. In turn, the plaintiff hoped to benefit financially from their success.

The defendant was a newly licensed real estate agent who had worked with the plaintiff for a short period of time at another firm. When the plaintiff set up his own shop, the defendant followed him. They signed a contract on January 17, 2012. The defendant was operating as an independent contractor, and as part of the contract he was expected to work for the plaintiff for a period of two years. The contract contained a clause which would be triggered if the defendant terminated his “membership” with the firm prior to reaching his two year anniversary. The clause read,

“I agree to commit a minimum of 24 MONTHS. Should this agreement be terminated prior to the 2 YEAR anniversary all current projects and clients become property of the (plaintiff’s firm). If you terminate your membership within 2 YEARS your payment for training is agreed as follows:

▪  Leaving the team within 6 months of joining $20,000 (Twenty-thousand dollars) will be payable on the release

▪  Leaving the team between 6 months and 1 year of joining $15,000 (Fifteen thousand dollars) will be payable on release

▪  Leaving the team between 1 year and 2 years of joining $10,000 (Ten thousand dollars) will be payable upon release.”

The resignation

The two parties did not enjoy a long relationship together. After being suspended for two weeks on August 26, 2012 (for taking a vacation and failing to transfer an account to another agent) the defendant tendered his resignation on September 19, 2012.

Following the resignation, the plaintiff wanted to exercise the clause in the contract which required the defendant to pay a fee of $15,000. The defendant argued that the clause was a “penalty clause” and was therefore unenforceable. Penalty clauses are sections of a contract that require the offending party to pay a fee for breaching a term of a contract and are generally unenforceable because they tend to not be tied to actual damages suffered by the other party. In this case, the defendant’s argument was that the $15,000 he was being asked to pay was not reflective of actual damages suffered by the plaintiff.

Was it a penalty clause?

In order to determine whether the clause was a penalty clause, the court looked at whether a value could be tied to the training received by the defendant. If a real value could be tied to the training, then the clause might hold up. The court summarized the approach to be taken as follows,

“I must consider whether the plaintiff has proven damages for a breach of this agreement in any event. The damages of the plaintiff, if any,  are to be based on the plaintiff’s expectations under the contract. The assessment must take into account not only the value of the training and expense paid by the plaintiff but the monies generated for the plaintiff by his sharing of the commissions generated by the defendant.”

The plaintiff suggested the training received by the defendant was worth $42,000. He claimed the work the defendant would eventually bring in would allow this money to be recouped. However, the defendant claimed she received almost no training, and the court found “there was no credible evidence provided to support the training valuation asserted by the plaintiff at $42,000.”

The court concluded “the evidence presented by the plaintiff in an attempt to value the training was essentially of no probative value. There was no evidence presented to establish the quantum of commissions expected to flow to the plaintiff over the balance of the two year period.  I assess the damages, in any event, at nil.”

As a result, the court determined the clause to be a penalty clause, making it unenforceable.

Speak to the experienced employment lawyers at HMC Lawyers if you have questions about the legal implications of a contract you have signed or have been presented with. We assist our clients with contract review and negotiation, and can help you ensure that you are getting a fair offer. In addition, we can help if you are facing a dispute by helping you understand your rights and negotiate on your behalf. We can be reached online or by phone at 403-269-7220