Setting Aside the Unfair Contract

Written on behalf of Peter McSherry
person offering document and pen to another person who has their hands folded due to unfairness of contract
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In very exceptional circumstances, a court will refuse to enforce an agreement which is unfair. This is a difficult argument to make successfully, but it can be done in employment cases. The glaring example of this legal argumment, which is called “unconscionability” is the little old lady who sells her house for $100 without any legal advice.

The Test

The essentials of the legal argument are as follows:

  1. There is proven a grossly unfair contract;
  2. The person lacked independent legal advice;
  3. There existed an overwhelming imbalance in bargaining power;
  4. The other party knowingly took advantage of the person’s vulnerability.

As expected, this is a tough test to meet. One such modern case did consider the argument and applied it in favour of the employee.[1]

The Recent Application

The individual had suffered certain medical issues. He applied for short term disability which were paid for 6 months. He then received long term disability benefits for two years which were paid as he was unable to perform his “own occupation”. The employer then denied further benefits based on the lower test of “any occupation”. The plaintiff appealed this decision. Pending the appeal, his employment was terminated. He was offered a severance payment of 43 weeks. He was then able to negotiate a higher offer of 60 weeks.

To obtain this settlement sum, he signed a release agreement by which he also agreed to give up any payments related to long term disability benefits.

On the face of the documents, he had given up his LTD claim, appeal and all. This was the issue presented to the judge on a motion made by the company to dismiss the claim which he had advanced for LTD benefits. Was this contract to release the company from the LTD claim binding ?

Judge Sides with Plaintiff

The judge agreed with his argument and found that the agreement to provide a release of his LTD claim was “grossly unfair” or “unconscionable”. One point that the judge noted was that a successful LTD claim would have been valued at roughly $300,000. Essentially the judge found that the bargain was “grossly unfair” as there was no meaningful additional compensation offered for the pending LTD claim.

Ironically, had the individual used legal counsel to negotiate this agreement, his case would have been futile as the existence of legal representation would deny the argument. The plaintiff had in fact retained a disability lawyer but he took no part in the negotiations of the release and suggested that he retain an employment lawyer. The judge also found that the plaintiff did not know how to deal with his pending LTD appeal in the severance negotiations, that he was suffering from health issues and was financially vulnerable.

Take Away

This case was certainly a close call. It does illustrate the sympathies of the judge to an individual in a delicate situation. It also reflects the principle that words written in a document do not rule the day.

Legal Advice Opens the Doors

If you have questions about your rights on termination of employment, contact the offices of Guelph employment lawyer Peter McSherry. We can guide you through the issues, help you understand your rights, and defend your position. Contact us online or by phone at 519-821-5465 to schedule a consultation



[1] Swampillai v Royal & Sun Alliance