Summary Judgment Ruling Emphasizes the Importance of Employment Contracts

The decision of McNeely v. Herbal Magic Inc. once again confirms that well drafted employment agreements are effective in minimizing potential damages that can arise at the time of dismissal.

Mr. McNeely was a senior executive at Herbal Magic for over 2 years before Torquest, a company controlled by Mr. Belzberg, acquired the business.  The new company appointed McNeely President and CEO and placed him on the Board of Directors immediately following the acquisition.  Seven (7) months after Torquest acquired Herbal Magic McNeely’s employment was terminated and he was removed from the Board of Directors.  Upon termination, McNeely was paid everything stipulated in his employment agreement.  Nevertheless, he sought damages from Herbal Magic, Torquest and Mr. Belzberg for breach of a collateral agreement and negligent misrepresentations allegedly made during the time his employment agreement, security holders’ agreement and the acquisition of Herbal Magic were negotiated.

McNeely, a sophisticated businessman, was involved in the negotiations and was represented by counsel when negotiating both his security holders’ and employment agreements.  He was interested in becoming the President and CEO of the company during these negotiations though he alleges that he was disinclined to become a significant shareholder.   McNeely alleges that Mr. Belzberg told him that he was the principal reason the company was being purchased, that other private equity firms would say the same thing and fire him six months later which Torquest would not do, that Torquest would not purchase Herbal Magic unless he committed to being part of the package and that Mr. Belzberg personally wanted him to be the President and CEO.  McNeely also alleged that he was induced to invest $2.5 million in the company on the “faith and strength” of Mr. Belzberg’s statements and on the basis that he would be a director of the company.

The defendants did not dispute that the statements were made and brought a motion for summary judgment on the basis that there was no genuine issue requiring a trial.  Specifically, the defendants relied upon the “entire agreement clauses” contained in both the employment agreement and the security holders’ agreement to support the position that the plaintiff did not have a cause of action.   These clauses are included in employment agreements where the parties want to take the position that only the terms of the written contract apply and nothing more.  In other words, a properly drafted “entire agreement clause” would not bind the parties to their prior or contemporaneous extrinsic statements unless they are written into the agreement, found to be part of a separately enforceable agreement or mistake and/or fraud can be established.

The motions judge found that the “entire agreement clauses” were properly constructed and that they were fatal to McNeely’s claim for damages for breach of a collateral agreement and for negligent misrepresentation.  Justice Hainey determined that the agreements as written were intended to be the whole of the agreement and that any prior representations or discussions on the subject matter were immaterial.

This case emphasizes the value of written employment agreements.  A properly drafted employment agreement that sets out the bargain agreed to between the parties can protect employers from having to defend questionable causes of action that normally only arise after the parties have ended the employment relationship.  The employment agreement in this case allowed the employer to utilize the summary judgment process to have the employee’s claims dismissed at the early stages of litigation thus saving the employer unnecessary legal fees and time defending the claim through to trial.

The CCP team can assist employers with the drafting and negotiation of enforceable employment agreements and in revising existing agreements.  Consider consulting the lawyers at CCP if you are considering entering into a written employment agreement or have any questions about this case.

Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.


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