The fact that the prescribed consequences of a breach are held to be a legal penalty can be expected to raise some concern on the part of the non- defaulting party and, possibly, cause at least some smiles on the part of the defaulting party. How can the problem be met in an agreement?
* The obvious way is for the parties to make the agreed-to penalty reasonable in the context of the agreement. (Of course, there may be some problem defining what is “reasonable.”)
* If the court thinks the consequences of a breach of the agreement were arrived at by the parties making what they considered to be a reasonable estimate of the damages flowing from a breach and that they arrived at their penalty in light of this estimate, chances are the provisions will be enforceable and will not be held to be a legal penalty.
* If the penalty is one frequently used in the industry and both parties operate within, or are familiar with, the customs of that industry, the agreed-to consequences will probably not be a legal penalty.
* If the agreement is between “sophisticated” parties, the courts will tend to accept the negotiated provisions on the basis that sophisticated and knowledgeable parties should know what they are doing. If, on the other hand, the defaulting party is a “babe in the woods” and the court thinks that it was taken advantage of because of lack of sophistication, then look out]
As with most legal questions, the question of whether specific agreed-to consequences are or are not a legal penalty will depend upon all the circumstances and facts of the case as established by the courts. The above points are only some of the guidelines that may be looked to. Obviously, the longer the string of good points, the better. Conditions
Everyone who deals with agreements knows that conditions are events that must take place or be satisfied by one of the parties before the other is obligated to proceed under the agreement. Quite true, that is one of the types of conditions acknowledged by law. In order to make things thoroughly confusing for the “ordinary man,” the law has created two types of conditions — the condition precedent and the condition subsequent. Surprising as it may seem, the names are indicative of the types. A condition precedent is a condition that has to be fulfilled before something happens; a condition subsequent is one that is to be fulfilled after something happens.
In the context of an option to purchase land, the parties may agree that the optionee will have no obligations under the option agreement until the owner discharges a mortgage against the property (usually within a specified period of time and with specified waiver rights and possibly alternatives set forth for the optionee to pick). This is a condition precedent and if it is not fulfilled by the owner, the agreement will, in the absence of provisions to the contrary, terminate. On the other hand, a person may option a property on the condition that he perform a certain amount of work on the property within a year. This is a condition subsequent and failure by the optionee to fulfil it will, in the absence of provisions in the agreement to the contrary, result not in termination of the agreement but in a right of action for damages. In order to avoid having to worry about which type of condition is being dealt with in a proposed agreement, it is always best to provide specifically what the results will be if a condition (precedent or subsequent) is not fulfilled. Wrongful Dismissal
This is a legal euphemism for terminating the employment of an employee with out “just cause” and in breach of the employee’s right to “reasonable” grounds for termination (or payment in lieu of such notice). The phrase does not mean that the employer wrongfully dismissed the employee; it is merely the name of the action brought by the employee if he feels he was treated “unreasonably.”
It is interesting to note that, with respect to wrongful dismissal actions, the courts have held that the action may be maintained where there has been constructive dismissal of an employee. Constructive dismissal is a situation where the employer has not actually dismissed the employee, but, rather, where there has been a substantially negative change in the nature of an employee’s employment, such as decrease in salary, demotion or reduction in responsibility. An example of this type of situation might be where an exploration manager has responsibility for the whole of western Canada and then, during a corporate restructuring of the employer, the employee’s responsibility, and title, is changed to British Columbia, even though, say, the aggregate budget responsibility of the employee is not reduced. In cases where constructive dismissal has occurred, the courts say wrongful dismissal has occurred and the employee is entitled to the same treatment (i.e. payment in lieu of notice) as if he was actually shown the door. Serious Negotiations
This is a new concept in the law and was introduced by the courts in the case involving LAC Minerals and Corona Corp. over ownership of the Page-Williams gold mine, where, in part, the decision was based upon a finding at the trial that LAC and Corona were in “serious negotiations.” It is to be suspected that if parties are negotiating, they are probably taking themselves and the discussions seriously and, if they were asked if they were in “serious negotiations,” the answer would, in virutally all cases, be yes and might well be accompanied with a strange look. The courts have, however, now distinguished between negotiations and serious negotiations, so we will have to await some lawsuits in order for us to see what criteria the courts will establish to differentiate between them. You may rest assured that there will be some lawyers who will make every effort to assist the courts in this endeavor by presenting long and learned arguments on the subject. In the meantime, it is suggested that all negotiations be treated as “serious negotiations,” especially if your circumstances approach those of the LAC/ Corona case.
The point of the foregoing? When you and your lawyer are discussing things, make sure you are both speaking the same language. Karl J. C. Harries is a graduate mining engineer and partner with the Toronto law firm of Fasken & Calvin. The information in this article is summary and general in nature and is not intended to be taken or acted upon as legal advice.
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