By Graeme McFarlane

Imagine it—you’re on the verge of securing a big contract. In anticipation, you hire additional staff to hit the ground running. You are certain that the contract is in the bag, and the talent market is tight. As a result, during the recruiting process you tell potential candidates that the contract has been secured. However, at the last minute, the contract falls through, and you choose not to bring on the new hires as previously planned. By doing so, you just cost the company big money.

Look Before You Let Others Leap
In a pair of interesting cases, the Ontario Divisional Court has upheld the small claims award of damages to two consultants who were led to believe there was definite work for them to perform.

In 2010, Loblaw Companies Ltd. asked one of its IT consulting firms, Ajilon Consulting, to locate some additional analysts for its team. The two plaintiffs responded to the resulting recruiting efforts and eventually met with a senior manager at Loblaws who informed Ajilon that it would like the two to be engaged. Accordingly, Ajilon entered into consulting agreements with the two individuals. However, Ajilon did so before any agreement was executed as between Loblaws and Ajilon.

Before executing the consulting agreements, the two plaintiffs advised Ajilon that they had other opportunities for work. Ajilon informed them what Loblaws had told it, and the plaintiffs turned down their other offers.

Contract Provisions Fail to Protect
The terms of the consulting agreements were interesting because on their face, it would seem that Ajilon was protected from damages if the job with Loblaws didn’t go through. The contracts provided that the individuals would only be paid for the time worked on an hourly basis; moreover, there was no guarantee of hours, the contracts could be terminated by Ajilon on one day’s notice and contained an “entire agreement” provision that stipulated that no outside representations would affect the agreement’s terms.

The work order between Loblaws and Ajilon was never completed. On the day before the consultants were to start work, Ajilon received an email from Loblaws stating that it wished to push the start date back one week for the consultants. This date was further pushed back and Loblaws later indicated that it was now “still assessing the need for additional business analysts.” Loblaws gave no commitment to a new start date or even to the fact that the project would still occur.

Negligent Representation Draws Ire
Notwithstanding the communications it had received from Loblaws, Ajilon emailed the consultants acknowledging the frustrating circumstances. In that email, Ajilon stated that “the VP has promised to sign off officially on your contracts ASAP, this week, and we will get you on site at Loblaws this week.” This representation of Loblaws promise was false. In late February, Ajilon emailed the consultants advising them to pursue other opportunities, and in early March it sent letters terminating the consulting agreements pursuant to their terms.

The consultants then brought separate actions against Ajilon, not for breach of contract as one would expect, but for negligent misrepresentation. At trial the same judge held that the consultants had relied on the representations made by Ajilon about a firm job at Loblaws and that it was reasonable for them to have done so. Further the representations were misleading and the consultants had suffered damages because they had foregone opportunities to execute the consulting agreements.

Entire Agreement Provision Unenforceable
The judge went on to say that Ajilon should have informed the consultants that the work was still contingent on Loblaws’ execution of the agreements. The “entire agreement” provision would only be enforceable where the parties were “sophisticated commercial parties”, and the consultants were not. Further, he said that the clause would also not be enforced because it was not specifically brought to the consultants attention before the execution of the agreements.

Ajilon appealed the judgements. While it argued with the underlying court’s decisions regarding the misleading comments, its main focus was the protections that the “entire agreement” provision was meant to provide.

The Divisional Court summarized the case law regarding such provisions and found that “entire agreement clauses found in contracts induced by a negligent misrepresentation have generally been found to be unenforceable in the context of an unsophisticated party unless notice of the clause, or even notice of the clause’s intended effect, was brought home to the unsophisticated party during bargaining.”

Beware the Oversell
This concept was described as being related to the notion of unconscionability where a court will not let the stronger party in a bargaining relationship achieve unfair contractual language. He went on to say that such clauses should not be enforced in order that “recruitment companies should be prevented from leading potential recruits to believe they have secured work when they have not.”

While it was true that at the time the consulting agreements were executed, Ajilon had no idea that the jobs might not go through, it did not have an executed agreement. Furthermore, the Court seemed to suggest that Ajilon needed to inform the consultants that there was a chance that the work would not occur. What this means for employers is that it should not oversell work opportunities or else it could end up paying for any such conduct.

Graeme McFarlane is a partner at Roper Greyell LLP, a firm focused on partnering with companies to find solutions to workplace issues.

(PeopleTalk Spring 2015)