Court says employer must pay $240,000.00 to former employee after they discover he is working for a rival firm contrary to his non-competition agreement.

The recent decision of the Ontario Superior Court in Wilson v. Northwest Value Partners Inc., 2015 ONSC 4726 offers a timely reminder to employers to make sure former employees are abiding by their non-solicit or non-compete obligations before agreeing to settle any wrongful dismissal action.

In this case, the plaintiff Mr. Wilson was a senior executive with Northwest Value Partners Inc. (“Northwest”). He had signed a non-competition agreement that prevented him from working for a rival of Northwest for 24 months following his termination.  Northwest terminated Mr. Wilson’s employment in December 2013. Mr. Wilson sued Northwest for wrongful dismissal, claiming entitlement to an unpaid bonus.

A court-directed mediation of the action was held in January 2015. The evidence showed the parties had agreed to settle the action at this mediation, subject to the parties executing settlement documents. The settlement required Northwest to pay $240,000.00 to Mr. Wilson. Two days after the mediation was held, Northwest learned that Mr. Wilson was working for one of its rivals, contrary to his non-competition agreement. Northwest refused to proceed with the settlement, and instead brought an action against Mr. Wilson claiming damages for breach of the non-competition agreement. Mr. Wilson, in turn, brought a motion to compel Northwest to make the payments under the settlement agreement.

The court applied a two-step test. The first step was to determine whether the parties actually agreed to settle the action. The second step was to determine whether the settlement agreement should be enforced. The court agreed with Mr. Wilson and ordered Northwest to comply with the settlement.

The judge found that the evidence showed the parties clearly intended to settle the action. The terms of settlement in the notes of Mr. Wilson’s lawyer were the same as the terms identified in an email from Northwest’s CFO. Formal minutes of settlement were subsequently prepared and executed by both parties. Mr. Wilson then took steps to have his action discontinued against Northwest.

Northwest took the position that the settlement should not be enforced because: (1) Mr. Wilson made a material misrepresentation to Northwest by omitting to disclose the fact that he was working for a rival; (2) Northwest undertook the settlement discussions under the mistaken belief that Mr. Wilson was not employed by one of its competitors (called a “unilateral mistake”); and enforcing the settlement would interfere with Northwest’s action against Mr. Wilson for breach of the non-competition agreement.

All of these arguments were rejected. The court found that there was no legal obligation on Mr. Wilson to report his post-employment activities to Northwest. Northwest could not have had a mistaken belief that Mr. Wilson was not working for a competitor because its contractual obligation to pay the bonus to Mr. Wilson was not tied to his compliance with the non-competition agreement. Lastly, there was nothing in the settlement agreement that prohibited Northwest from proceeding with its action against Mr. Wilson for breach of the non-competition agreement.

Things would likely have gone quite differently for Northwest had it asked Mr. Wilson about his compliance with the non-competition agreement, or made any payment to Mr. Wilson conditional on his compliance with the non-competition agreement. As the Wilson case shows, it is essential for employers to make these inquiries before agreeing to settle legal disputes by paying large sums of money to their former key employees.