SCC ruling will impact on business asset purchasers

Following the Supreme Court of Canada’s dismissal of the leave application in Krishnamoorthy v. Olympus Canada Inc., purchasers of business assets can rest assured that offers of continuing employment to vendors’ staff are in themselves sufficient consideration to support the validity of new employment agreements.

The dismissal of the leave application leaves intact the Ontario Court of Appeal’s ruling that an offer of continuing employment by a purchaser to a vendor’s employee can be binding consideration for a new employment agreement and any termination clause therein.

The OCA’s decision vacated the judgment of Justice Grant Dow of the Superior Court of Justice, who reasoned that an offer of continuing employment did not constitute valid consideration supporting a new employment agreement.

“Dow’s decision meant that every employment agreement that was entered into after an asset deal was completed would have been unenforceable unless there was consideration other than the offer of employment by the new owner,” says George Avraam, a civil litigation partner in Baker & McKenzie LLP’s Toronto office, who, with Jeremy Haan, of counsel in the firm’s labour, employment and regulatory law group, represented Olympus.

“Had the decision stood up, it would have put a wedge into what was believed to be settled law.”

The case arose when Nadesan Krishnamoorthy, a senior finance executive, was dismissed without cause after 10 years of service at Olympus, a United States-based optical sciences business.

Krishnamoorthy’s employment agreement with the company contained a clause that limited Olympus’ exposure on termination to 10 months’ notice.

Krishnamoorthy had previously worked at Carsen Group Inc. for five years.

Carsen and Olympus were unrelated, but Carsen was an exclusive distributor of Olympus’ products in Canada. Olympus purchased Carsen’s assets and set up Olympus Canada to run the business.

Olympus Canada then offered Krishnamoorthy employment.

Krishnamoorthy accepted the offer and signed an employment agreement containing the 10 months’ termination clause.

The agreement also provided that Krishnamoorthy would be treated as a new employee and that his previous service would not be recognized other than as required by Ontario’s Employment Standards Act.

Krishnamoorthy received no additional compensation or bonus for signing on with Olympus.

He also received no severance pay or pay in lieu of notice from Carsen.

On his termination by Olympus, Krishnamoorthy sued for wrongful dismissal, claiming common law reasonable notice based on his combined employment of 15 years.

Krishnamoorthy’s lawyers, Lecker & Associates’ employment law partner Matthew Fisher (who did not respond to an interview request) and associate Ian Hurley of Toronto, argued that the Olympus employment agreement was unenforceable as lacking in consideration. They also relied on s. 9(1) of the ESA, which treats subsequent employment with the purchaser of a business or part of a business as continuous employment “for the purposes of this Act.”

“Previous decisions had made it clear that s. 9(1) protected statutory expectation, but the courts had not dealt with that provision in the common law notice context,” Avraam says.

Dow ruled that s. 9(1) applied to make Krishnamoorthy’s employment continuous.

The upshot was that Olympus’ offer of employment added nothing to his benefit and, therefore, was lacking in consideration.

Consequently, the agreement and 10 months’ limitation on termination entitlement were invalid.

The appropriate notice period, Dow ruled, was 19 months.

“The main consequence of Dow’s decision was that a purchaser of assets would have to offer fresh consideration, apart from continuing employment, if the purchaser wanted an employment agreement that differed from the terms under which the employee was working for the vendor,” says James Fu, a human resources law partner in the Toronto office of Borden Ladner Gervais LLP.

On appeal, Justice Sarah Pepall, writing also for a unanimous bench composed also of Chief Justice George Strathy and Justice Eleanore Cronk, ruled that s. 9(1) did not ensure continuity of employment for all purposes.

“Section 9(1) of the ESA does not deem the employment contract between an employee and an employer to bind a subsequent purchaser of some of that employer’s assets as was the case here,” Pepall wrote.

“Nor does s. 9(1) of the ESA require the purchaser of a business’ assets to offer employment to employees of that business on the same terms as their original contracts as claimed by Mr. Krishnamoorthy. He cannot rely on s. 9(1) to achieve either of these effects. He can only rely on s. 9(1) to claim those entitlements that are set out in the ESA itself.”

In the result, Krishnamoorthy was limited to 10 months’ notice.

“The Court of Appeal ruling confirmed what had been the understanding of the employers’ bar for an appreciable period of time,” Fu says.

Exactly what Krishnamoorthy is entitled to, however, has yet to be determined at trial.

“The Court of Appeal did not address whether or not the termination provision complied with the employee’s statutory entitlements,” says Martin Thompson, an Ottawa partner in McMillan LLP’s employment and labour relations and advocacy and litigation groups.

Still, the fact remains that Krishnamoorthy does not give purchasers a blank slate to change terms of employment.

“It remains very important that employers distinguish [between] a situation where a purchasing employer can offer new terms without providing additional consideration and a situation where an employment contract with the purchaser is already in existence, in which case the purchaser cannot vary the terms without fresh consideration,” Thompson says.

Krishnamoorthy, Thompson adds, is also a reminder that, in asset purchases, changes to terms of employment should be implemented at the time of the offer letter or closing.

“And the offer letter should be carefully reviewed to ensure that it does not offend employment standards rules,” he says.