A short time ago, the Ontario Court of Appeal released its decision in Celestini v. Shoplogix Inc., a case in which the common law “changed substratum” doctrine was at issue. Under this doctrine, provisions in a written employment contract that purport to limit the amounts payable to a dismissed employee may be unenforceable where there have been fundamental expansions in the employee’s responsibilities after the employment contract was made, such that the substratum of the employment contract has disappeared or substantially eroded, or it can be implied that the contract could not have been intended to apply to the role ultimately occupied by the employee.
In Celestini, the appellate court unanimously rejected Shoplogix Inc.’s (“Shoplogix”) appeal of the respondent’s successful challenge to the terms of his dismissal. In doing so, it affirmed the motion judge’s finding that the respondent’s duties had been altered over time to the point where his employer could no longer rely on the termination provision contained in the employment contract he had signed over a decade earlier.
The respondent was a co-founder and former Chief Executive Officer (“CEO”) of the appellant, Shoplogix.
In 2005, a venture capital firm purchased shares in Shoplogix from its founders, including the respondent. At that time, the respondent stepped down from his position as CEO and assumed the position of Chief Technology Officer (“CTO”) of the company, signing a written employment contract to that effect (the “Contract”). In particular, the Contract stipulated that in the event of a termination without cause, Shoplogix would provide the respondent with one (1) month’s written notice, continue his base salary and group health insurance for a period of twelve (12) months, as well as make a pro-rated payment on account of his annual bonus, in full satisfaction of all claims arising out of the termination.
Twelve years later, in 2017, Shoplogix terminated the respondent’s employment without cause in the course of an acquisition. The company took the position that the respondent’s rights were governed by the terms of the Contract and acted accordingly. However, the respondent disagreed, taking the position that the Contract’s termination provision had become unenforceable as a result of the operation of the “changed substratum” doctrine. More specifically, he was of the view that the substratum of the Contract had disappeared or been substantially eroded due to significant changes in his duties since 2005.
In light of the dispute, the respondent commenced an action against Shoplogix for wrongful dismissal. He maintained that the common law reasonable notice period to which he was entitled was substantially greater than the 12 months specified in the Contract.
The Motion Judge’s Decision
On a motion for summary judgment, the motion judge found that the respondent’s responsibilities had fundamentally and substantially increased over the course of his employment as CTO of Shoplogix and that, “[a]s such, the substratum of his  contract of employment disappeared and implicated the changed substratum doctrine which left the notice terms in his contract no longer enforceable”.
Specifically, the motion judge found that in 2005, the CTO role had involved duties pertaining primarily to the transfer of product and corporate knowledge within the company. However, significant subsequent changes to the respondent’s compensation plan were, in the motion judge’s view, consistent with fundamental and substantial changes to his role that began in 2008 under the direction of a new CEO. In particular, the respondent took on several new responsibilities, including managing important aspects of sales and marketing, directing managers and senior staff who were reassigned to report to him, travelling to pursue international sales, handling all of the company’s infrastructure responsibilities, and soliciting investment funds.
Because of the application of the “changed substratum” doctrine, the motion judge found that the respondent was entitled to damages at common law for Shoplogix’s failure to provide him with reasonable notice of termination. He determined that the appropriate notice period was 18 months, and awarded damages equivalent to six (6) additional months of base salary (as Shoplogix had already paid out 12 months in accordance with the Contract), bonus entitlements that the respondent would have received during the notice period (less the amount already paid on account of the respondent’s annual bonus under the Contract), car allowance entitlements, and lost life insurance benefits. The total damages award required Shoplogix to pay the respondent more than $420,000, in addition to the amounts it had previously provided to him pursuant to the Contract.
The Appeal Court’s Decision
Shoplogix appealed the motion judge’s decision. In its submissions, it argued that the motion judge had incorrectly expanded the “changed substratum” doctrine and erred in finding that any changes in the respondent’s duties were sufficient to properly engage the doctrine. Rather, in its view, the motion judge should have found that the termination provision in the Contract continued to be in force and, since Shoplogix had complied with it, dismissed the respondent’s claim. Alternatively, Shoplogix argued that the motion judge had erred in awarding damages for lost bonus entitlements and, in any event, had miscalculated them. The respondent also cross-appealed, arguing that the motion judge had erred in deducting from the damages award the amount he had received on account of his annual bonus at the time of the termination of his employment.
With respect to the alleged improper application of the “changed substratum” doctrine, Shoplogix advanced two different but related arguments on appeal. First, it argued that the doctrine requires there to have been fundamental changes to an employee’s duties arising from a promotion. In its view, it could not properly be applied to an employee who had always been a senior executive and who had always held the same job title. Separately, it also argued that the changes in the respondent’s duties were incremental, and not sufficiently dramatic or fundamental to justify abrogating the Contract.
The appellate court rejected both grounds for appeal outright. In respect of the first argument, the court held that it was inconsistent with the doctrine, properly understood, which does not require a change in title in order to apply. In respect of the second argument, the court held that it was inconsistent with the motion judge’s conclusions of mixed fact and law, which were entitled to deference. Moreover, it found that the motion judge had not committed a reversible error in the finding that there was a fundamental and substantial increase in the respondent’s responsibilities sufficient to engage the doctrine.
Regarding the award of damages for lost bonus entitlements, the appellate court similarly held that the motion judge’s finding that damages should be awarded during the notice period and his calculation of the amount of the bonus that would have been earned during that period were each entitled to deference. Again, it found that Shoplogix had not identified any reversible error justifying appellate interference with the motion judge’s determinations.
Ultimately, the appellate court dismissed Shoplogix’s appeal. It did, however, allow the respondent’s cross-appeal in part. It held that the motion judge had in fact made a reversible error in deducting the whole amount of Shoplogix’s payment to the respondent for the bonus he earned in the period before his termination under the Contract from the damages award. It explained:
Even though the 2005 Contract had become unenforceable, Shoplogix still had an obligation to pay the bonus up to dismissal. It was only entitled to a credit to the extent that, under the contractual bonus arrangements that were enforceable at the time of dismissal, the payment on termination represented an overpayment of Shoplogix’s obligations.
In Our View
Although the “changed substratum” doctrine does not necessarily arise frequently in employment litigation, it has now been recognized as part of the common law in Ontario for several decades. As a result, employers must be aware of its existence and the fact that it can, in some circumstances, oust termination provisions in employment contracts that they might otherwise wish to rely on in order to limit the amounts payable to an employee upon his or her discharge.
For more information, contact Jennifer Birrell at 613-940-2740 or Sarah Lapointe at 613-940-2738.