The Ontario Superior Court of Justice has released a decision addressing the legal consequences that arise when a terminated employee fails to disclose new employment while receiving salary continuance payments under a settlement agreement. In Cross v. Cooling Tower Maintenance Inc., the court was asked to determine whether an employee’s failure to notify his former employer about a new job constituted a repudiation of their settlement contract, which would have potentially forfeited his right to a significant lump sum payment. The case highlights the distinction between a breach of a specific contract term and the repudiation of an entire agreement, providing clarity on how courts assess the severity of contractual breaches in the context of employment settlements.
The dispute centered on Mitchell Cross, a long serving employee of Cooling Tower Maintenance Inc., who had worked for the company for approximately twenty six and a half years. His employment was terminated without cause on August 22, 2023. Following his termination, Mr. Cross alleged that he had held a senior role and made significant contributions to the company’s operations, arguing that the notice provided upon his termination was inadequate. The parties subsequently entered into negotiations to resolve the wrongful dismissal claim without proceeding to a trial.
On October 3, 2023, Mr. Cross and Cooling Tower Maintenance executed a binding Settlement Agreement. Under the terms of this deal, the company agreed to provide Mr. Cross with a salary continuance package for up to twenty four months. This package included a base salary of over one hundred and eighty three thousand dollars per annum, an annual bonus of forty thousand dollars, deferred profit sharing plan contributions, and payments in lieu of group and vehicle benefits. The total value of the package was substantial, reflecting his tenure and seniority within the organization.
A critical provision of the Settlement Agreement addressed the possibility of Mr. Cross finding new work. The contract stipulated that Mr. Cross was required to notify Cooling Tower Maintenance immediately if he obtained new employment or became self employed during the salary continuation period. If he secured a new position, the regular salary continuance payments would cease. Instead, the company would pay him a lump sum equivalent to fifty percent of the remaining amount owing under the agreement. This type of “clawback” or modification clause is common in severance settlements to encourage mitigation while allowing the employer to save funds if the employee finds work quickly.
Furthermore, the agreement contained a specific reimbursement clause. It stated that if Mr. Cross failed to notify the company upon obtaining new employment, Cooling Tower Maintenance would be entitled to be reimbursed for any monies paid to him subsequent to his commencing such employment. This clause was designed to prevent the employee from “double dipping,” or receiving full severance pay while simultaneously earning a salary from a new employer.
The events leading to the litigation began in early 2024. Evidence presented to the court showed that Mr. Cross received an offer of employment from a company called Evaporative Tower Services prior to December 21, 2023. He began working for this new employer on February 19, 2024. Despite the clear requirement in his settlement agreement to notify his former employer immediately, Mr. Cross did not inform Cooling Tower Maintenance that he had started a new job. Consequently, Cooling Tower Maintenance continued to pay his full salary continuance and benefits as if he were still unemployed.
This state of affairs continued for nearly four months. It was not until June 2024 that Cooling Tower Maintenance made inquiries regarding Mr. Cross’s employment status. Following these inquiries, Mr. Cross confirmed that he had indeed been working for another company since February 19, 2024. By that time, Cooling Tower Maintenance had paid him over forty five thousand dollars in funds that he was not entitled to receive under the modified terms of their agreement.
Upon discovering the breach, Cooling Tower Maintenance took a hardline position. On June 10, 2024, the company ceased all payments to Mr. Cross. They argued that by failing to disclose his new employment, Mr. Cross had repudiated the entire Settlement Agreement. In contract law, repudiation occurs when one party acts in a way that indicates they no longer intend to be bound by the contract, allowing the other party to treat the contract as at an end. Cooling Tower Maintenance asserted that they no longer owed Mr. Cross the lump sum payment—calculated at over one hundred and sixty thousand dollars—because his dishonest conduct had shattered the foundation of their deal.
Mr. Cross initiated a lawsuit to enforce the Settlement Agreement. He admitted that he had failed to notify the company and acknowledged that he owed them reimbursement for the overpayments he received between February and June. However, he argued that this was an oversight and did not amount to a repudiation of the entire contract. His position was that the specific penalty for his failure to notify was already written into the contract: he had to pay back the extra money. He sought a summary judgment ordering the company to pay him the fifty percent lump sum owed upon re-employment, minus the amount he had been overpaid.
The company filed a counterclaim, seeking repayment of the funds advanced since February 2024 and arguing unjust enrichment. They also sought punitive damages of fifty thousand dollars, alleging that Mr. Cross had breached a duty of good faith and fidelity by accepting employment with a direct competitor. The company urged the court to find that the breach was so significant that it relieved them of any further obligation to pay the lump sum settlement.
Justice Wilkinson presided over the summary judgment motions brought by both parties. The court first addressed the nature of Mr. Cross’s failure to notify. Mr. Cross had claimed in his affidavit that the failure was partly due to “procrastination” and was an unintentional oversight. Justice Wilkinson rejected this explanation. The court noted that Mr. Cross was a senior employee receiving significant income from a new job while simultaneously receiving checks from his old employer for four months. The judge stated that it defied logic and common sense that he could simply forget to disclose the new job. The court utilized its powers under the Rules of Civil Procedure to make a finding of fact that the failure to disclose was intentional.
However, the finding that the breach was intentional did not automatically result in a victory for Cooling Tower Maintenance. The court had to determine whether this intentional breach constituted repudiation. Justice Wilkinson relied on established case law which dictates that repudiation is an exceptional remedy reserved for circumstances where the entire foundation of the contract is undermined. The test is whether the innocent party has been deprived of substantially the whole benefit of the contract.
In applying this test, the court examined the purpose of the Settlement Agreement. The primary benefit Cooling Tower Maintenance received from the deal was a full and final release from Mr. Cross’s potential wrongful dismissal claims. By entering the agreement, the company avoided a lawsuit over the termination itself. Mr. Cross had upheld this side of the bargain; he did not sue for wrongful dismissal, he maintained confidentiality, and he did not denigrate the company.
The court found that while the failure to notify was a material breach, it did not deprive Cooling Tower Maintenance of the main benefit of the settlement. The company was still protected from the wrongful dismissal litigation. Furthermore, the agreement itself contained a specific remedy for a failure to notify: reimbursement. This suggested that the parties had contemplated the possibility of such a breach and agreed that the consequence would be repayment of overpaid funds, not the cancellation of the entire contract.
Justice Wilkinson noted that the company’s financial position would be rectified by the repayment. Had Mr. Cross informed them immediately, they would have owed him the lump sum of roughly one hundred and sixty one thousand dollars. The fact that he informed them late did not change the underlying financial obligation, provided he paid back the funds he wrongly received in the interim. The court concluded that a reasonable person would not view the delay in notification as undermining the entire foundation of the agreement.
Consequently, the court ruled that Mr. Cross had not repudiated the agreement. The contract remained valid and binding. This meant that Cooling Tower Maintenance was in breach of the agreement by refusing to pay the lump sum entitlement. The court ordered the company to pay Mr. Cross the sum of $161,212.87, representing the fifty percent payout required under the settlement terms.
On the other side of the ledger, the court enforced the reimbursement clause against Mr. Cross. He was ordered to repay the $45,825.27 that he had received from Cooling Tower Maintenance between the start of his new job and the time the payments were stopped. Both amounts were subject to prejudgment interest.
The court also dismissed Cooling Tower Maintenance’s counterclaim for punitive damages. The company had alleged that Mr. Cross breached a fiduciary duty or duty of fidelity by working for a competitor. However, the judge noted that on a summary judgment motion, parties must “put their best foot forward” and produce evidence to support their claims. Cooling Tower Maintenance failed to provide any evidence that Mr. Cross owed them a heightened duty of loyalty after his termination, or that his new employment breached any specific non-competition covenants. Without evidence to support the allegations of bad faith regarding the competitor status, the claim for punitive damages could not succeed.
The final aspect of the decision concerned legal costs, which often follow the successful party. While Mr. Cross was successful in enforcing the agreement and securing a net judgment in his favor, the court expressed disapproval of his conduct. Justice Wilkinson reiterated the finding that Mr. Cross had intentionally failed to disclose his new employment. Due to this dishonest behavior, the judge indicated an inclination not to award costs to either party, despite Mr. Cross’s legal victory. The court granted the parties permission to make brief written submissions if they wished to argue for a different cost result, but the decision signaled that Mr. Cross’s lack of candor would likely prevent him from recovering his legal fees.
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