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Avoid the Hassle of Litigation’s Draft your Agreements with Care

In a recent decision, Downey v. Encore International Inc., the Ontario Court of Appeal took a flexible approach based heavily on the factual circumstances in finding that a confidentiality agreement was enforceable.

The company, Encore, had been in discussions with the plaintiff, Downey, to enter into an employment relationship. However, for tax purposes, Downey proposed that that his services be provided as a consultant through his consulting agency. A consulting agreement was executed between Encore and Downey’s company CSR Industries Inc. (“CSR”). Downey was named a “key person” in the agreement.  The consulting agreement required CSR to execute a copy of Encore’s standard confidentiality agreement. However, the confidentiality agreement that was executed was done so by Downey personally and it was the standard agreement for employees and contained language to that effect. The issue arose as to whether there was any consideration for the confidentiality agreement.

The Court of Appeal analyzed the entire factual matrix in coming to its conclusion that the confidentiality agreement was binding on Downey. The purpose of having a consulting relationship instead of an employment relationship was for tax reasons. This business reality did not change the intent of the parties.  In addition, the court found that the transaction between the parties was effected by the execution of both contracts. The consulting agreement and the confidentiality agreement were related, as the former was executed on the faith that the later would be as well. In its analysis, the court read the two contracts together, finding that the wording of the agreements and the factual matrix revealed that the de facto relationship was between Encore and Downey, not Encore and CSR.

Lack of attention to detail and other errors in a contract can have detrimental effects on a party attempting to rely upon its terms. One party may be relieved of its obligations under the contract on a technicality. In this decision, the Court of Appeal emphasized the true intentions of the parties and the factual realities associated with the two agreements. It took a flexible approach, focusing on the factual matrix instead of the precise wording of the agreements.

As a result, the company was able to enforce the confidentiality agreement against the consultant. However, it is important for companies to ensure that agreements are carefully drafted. Relying on a standard template agreement without reviewing its language is risky as this could affect its enforceability, or could lead to inadvertently agreeing to different terms than intended. Before a contract is executed it should be carefully reviewed. It is important to be familiar with the precise terms of the agreement, the obligations of each party to the agreement and the identity of the parties.

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