How far does a general release in a settlement agreement extend in employment disputes? The recent decision from the Court of Appeal for Ontario (Preston v. Cervus Equipment Corporation, 2024 ONCA 804) provides helpful guidance on the enforceability of broad release clauses and the need to define settlement terms closely.
Background
The respondent, Matthew Preston, was an employee of Cervus Equipment Corporation (Cervus) from 2014 to 2018. As part of his compensation, he participated in Cervus’ Deferred Share Plan (the Plan), which allowed him to purchase stock units using his annual bonus, with Cervus matching those purchases through additional stock units that vested over three years. When Preston was terminated without cause in January 2018, he had 4,964.04 vested stock units (valued at $75,949.81) and 4,499 unvested stock units, which were forfeited in accordance with the Plan terms. His termination letter advised that the vested units could be redeemed through the Plan.
Preston initiated a wrongful dismissal action and the matter was settled in July 2018 for $100,557.12. Along with the minutes of the settlement, Preston signed a Release and Indemnity (the Settlement Documents) which stated that the settlement amount was inclusive of any and all entitlements related to his employment, including any claims under any bonus, share award, stock option, deferred share or similar incentive plan. Preston signed the Settlement Documents and requested payment for the vested stock units. Cervus declined, claiming that the release prevented any claim for the vested stock units. Subsequently, Preston brought an action for damages in the amount of the value of the vested units.
Superior Court Decision
The motion judge found in favour of Preston, concluding that:
- The original wrongful dismissal action did not include a claim for stock units, thus they were not part of the settlement.
- The Plan’s terms provided for the automatic redemption of the vested stock units upon termination, which meant that they were already the property of Preston.
- The release should be interpreted narrowly, as the settlement would make no economic sense if Preston were required to give up the $75,949.81 he was already entitled to.
Accordingly, Preston was awarded $75,949.81 by the court.
Court of Appeal Decision
The Court of Appeal for Ontario overturned the decision from the Superior Court and held that the Settlement Documents unequivocally precluded Preston’s claim for the stock units. The Court of Appeal identified three major problems with the reasoning of the motion judge:
- Failure To Give Effect To The Clear Language Of The Release
The Court of Appeal noted that, while the terms of a release should be interpreted having regard to the factual matrix or surrounding circumstances, the surrounding circumstances cannot be permitted to overwhelm the actual wording of the release. In this case, the Settlement Documents specifically stated that Preston had no other claims in connection with any bonus, share award, stock option, deferred share or any other similar incentive plan. The Superior Court’s conclusion that the release only applied to unvested stock units was not based on the language of the Settlement Documents and effectively rewrote the contract between the parties.
- Incorrectly Applying the Superior Court’s Guidance on the Interpretation of Broad Releases
The motions judge relied on Corner Brook (City) v. Bailey, 2021 SCC 29, which suggests that in certain situations, a broad release may be construed restrictively in order to prevent the unintentional extinction of the rights that were not contemplated at the time of the settlement.
However, the Court of Appeal ruled that this principle did not apply in this case because the release was not overly broad or ambiguous: it mentioned stock-based compensation specifically. The Court of Appeal also noted that Preston received independent legal advice before he executed the Settlement Documents, which clearly released his entitlement to the stock options.
- Assessing the Economic Feasibility of the Settlement Rather Than Its Legal Ramifications
The motion judge explained that the settlement would have been economically irrational for Preston to forfeit the stock units. The Court of Appeal rejected this approach, holding that courts should not evaluate the financial soundness of a settlement unless the party is under a legal disability.
The appeal from Cervus was successful, and Preston’s claim was dismissed.
Key Takeaways
This decision provides important guidance on the interpretation and enforceability of settlement releases in employment disputes:
Broad Releases Are Enforceable When Clearly Drafted: A well-drafted release that explicitly covers all claims related to employment, specifically including incentive compensation, will generally be upheld by the courts.
Plain Language Interpretation Prevails: Courts should not let the surrounding circumstances of a settlement overwhelm its wording. Employees should not assume that certain entitlements remain outside the scope of a release unless expressly stated.
Economic Rationality Is Not a Factor in Contractual Interpretation: A court will not assess whether a settlement made financial sense only whether it was legally valid and properly executed.
Independent Legal Advice Matters: Employees who receive legal advice before signing a release will have difficulty arguing that they did not understand its terms.
Preston v. Cervus Equipment Corporation is a significant decision reinforcing the principle that clear and comprehensive releases will normally be enforced as written. Employers should ensure that settlement agreements and release are carefully drafted to cover all employment-related entitlements, including stock-based compensation where applicable.