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When Can an Employer Rely on a Limitation Period when Unilaterally Changing a Contract?

The Ontario Court of Appeal recently released its decision in Ali v O-Two Medical, which highlights the risks of taking a wait-and-see approach when giving notice of significant changes to employment terms and conditions.

The Employee worked primarily as an engineer for the Defendant.  However, he also had a commission agreement for selling the Employer’s products in Iraq (the “Agreement”).  In December 2006, the Employee reached an agreement on behalf of the Defendant with the Iraqi Ministry of Health (the “Deal”).

One week later, the Defendant informed the Employee that it would pay him the commission on the Deal, but at a lower rate than in the Agreement.  The Employee retained counsel in in an effort to press the Defendant to pay in accordance with the Agreement, without success.

Under the terms of the Agreement the Employee became entitled to commission payments on November 23, 2007.  The Defendant offered the Employee payment at the lower rate.

The Employee filed suit on September 16, 2009, almost 3 years after he had signed the Deal.  The Defendant brought a preliminary motion to have the case dismissed, on the basis that the limitations period for bringing the claim had passed.

The basic rule of the Limitations Act is that a claim must be filed within two years of the date of the events at the heart of the claim.  After this period, a claim cannot be filed regardless of its merits (there are some notable exceptions to this basic limitation rule, which are not relevant here).

The Employee argued that the claim arose when the commission was owing, on November 23, 2007.  The Defendant argued December 12, 2006 was the critical date, which was the date the Employee was informed that the Defendant would only offer the lesser rate.

This scenario is referred to as an “anticipatory breach”.  Essentially, this is a situation where one party to a contract tells the other that it will not be performing its obligations under the contract, but does so before it would have been required to perform.

In such cases, the innocent party has two options: 1. accept the contract as breached and sue for damages, or 2. refuse the repudiation of the contract and demand that the contract be performed by its terms.  The choice belongs to the innocent party alone. If the latter approach is taken, the contract is only considered breached when the party fails to perform as demanded.  However, if the performance at issue is not required under the contract until a certain point in the future, the failure to perform arises only once that point in the future is reached.

The Court found that the Employee had taken option two.  As a result, the Agreement was not breached until compensation was actually payable on the Deal and the Defendant offered/paid less than specified by the Agreement.

Consequently, the claim arose on November 23, 2007, and thus the claim was filed within two years.

This was only a preliminary motion in a dispute that began 7 years ago.  This case has still not gone to trial, and if a trial decision is appealed, this lawsuit could last well over a decade, despite being a relatively straightforward contractual matter.

What Employers Need to Know

It can often be difficult to discern without the benefit of hindsight whether an employee elected option one or two.  Employers that take a wait-and-see approach run the risk that the limitation period for any employee claim will not start running until the date in the future when performance would originally have been required.  Of course, this must be balanced against the likelihood that an employee would commence litigation.

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