Walking away not the Remedy: Ontario Court of Appeal confirms test for repudiation of settlement agreements

In Remedy Drug Store Co. Inc. v Farnham, recently released, the Ontario Court of Appeal clarified how the test for repudiation applies to settlement agreements. Repudiation occurs when one party breaches a term of a contract that is sufficiently important that the other party may treat the contract as being at an end and walk away from the contract.

The decision reminds parties implementing contentious settlement agreements that even strongly worded disputes over the terms of a settlement will not always amount to repudiation of the agreement.

Background

The employee was the general manager and executive vice president for Remedy Drug Store Co. Inc. After the employment relationship broke down, the employee forwarded a large number of emails to her personal computer and took a volume of printed documents from Remedy.

Remedy commenced an action against the former employee and brought a motion for interim injunctive relief relating to the information the former employee had taken with her. The former employee brought a counterclaim for damages relating to the end of her employment.

The parties attempted to reach an agreement through a series of email exchanges. As part of the settlement negotiations, the former employee offered to engage a third-party IT consultant, recommended by her lawyer, to wipe and purge her personal electronic devices and email account and certify they were clear of all of Remedy’s documents. Remedy responded that it wanted to use an IT consultant selected by its lawyers to “do the work at your cost.”

A dispute arose about the scope of work the IT consultant would do on the former employee’s devices. Although both parties agreed a settlement had been reached, Remedy claimed a forensic sweep of the electronic devices was part of the settlement. The former employee said she had only agreed to a simple wipe of her devices of Remedy’s information.

Remedy’s CEO said he “would not budge” on the forensic sweep of her systems and was “happy to continue and press forward” with the legal action. The former employee took the position that this and other heated communications amounted to a repudiation of the settlement by Remedy. Remedy then moved to enforce the settlement agreement.

Motion judge’s decision

The motion judge rejected Remedy’s interpretation of the settlement. He found that the former employee had not agreed to a full forensic sweep.

However, the motion judge rejected the former employee’s argument that Remedy had repudiated the settlement agreement. The motion judge held that, “It cannot be said that [Remedy’s] position was so patently unreasonable as to evidence an insistence upon terms and conditions which could not possibly have been reasonably implied in the circumstances.” The motion judge granted judgment enforcing the settlement on the terms advanced by the former employee.

Court of Appeal decision

The former employee appealed the decision.

Like the motion judge, the Court of Appeal held that Remedy’s conduct did not amount to repudiation of the settlement. However, the Court of Appeal rejected the “reasonability” test used by the motion judge. Rather, the Court of Appeal explained that the test is what a party’s words or conduct says about future performance of the settlement agreement. The test is objective.

The Court of Appeal held that on the facts of the case, a reasonable person would not conclude that Remedy had no longer intended to be bound by the settlement agreement. The threat to proceed with sweeping the former employee’s personal computer would not undermine the basic foundation of the settlement. Furthermore, the parties preserved the status quo until the court determined the proper interpretation of the settlement agreement.

Expressly underlying the Court of Appeal’s reasoning in Remedy is the judicial policy in favour of settlement. The Ontario Court of Appeal emphasized that repudiation should be considered an exceptional remedy in the context of settlement agreements. Remedy is consistent with previous appellate decisions holding that courts ought to hold parties to settlement agreements in all but the most exceptional circumstances.