Remedy Drug Store Co Inc v Farnham: Repudiation is a Particularly Exceptional Remedy

Introduction

Remedy Drug Store Co Inc v Farnham, 2015 ONCA 576, is centered on a dispute over whether the parties reached a settlement agreement arising out of the breakdown of an employment relationship.

The Ontario Court of Appeal reaffirmed its attitude to settlements: “it is in everyone’s interest that litigation be concluded by the parties’ agreement.” The decision reminds parties implementing contentious settlement agreements that it will be rare for conduct subsequent to a settlement agreement to amount to repudiation.

Repudiation or anticipatory repudiation continues to be treated by courts as a particularly exceptional remedy. When a deal is struck before the documentation is complete, the settlement will be binding if there is agreement on the essential terms. If a dispute arises after a written document setting out the terms of settlement is created, the question will seldom be one of repudiation, but rather one of an interpretive dispute. In such cases, parties who reach a settlement will usually be held to their bargains.

The Facts

The appellant, Jane Farnham, worked as a General Manager and Executive Vice President for the respondent, Remedy Drug Store Co Inc. When the employment relationship broke down, Ms. Farnham forwarded a vast number of emails to her personal computer. She also took a volume of printed documents from Remedy’s premises.

Remedy commenced an action against Ms. Farnham for breach of her fiduciary duties and duty of confidentiality. Remedy also brought a concurrent motion for interim injunctive relief relating to the breach of confidential information. Ms. Farnham counterclaimed for damages arising out of the termination of the employment relationship.

The parties attempted to settle their differences. However, following the settlement, Ms. Farnham refused to sign the minutes of the settlement prepared by Remedy’s lawyers, because the parties disagreed about the scope of the forensic sweep of Ms. Farnham’s personal electronic devices to search for Remedy’s confidential information. Ms. Farnham took the position that she only agreed to a simple wipe of her devices of all information pertaining to Remedy, while Remedy insisted on performing a forensic search.

Remedy subsequently threatened to proceed with legal action to enforce the settlement and the related injunction if Ms. Farnham failed to sign the minutes of the settlement on the terms set out by Remedy’s lawyers. Ms. Farnham claimed that Remedy repudiated the agreement by insisting on terms that were not agreed upon in the original settlement (i.e., a broad forensic sweep of her personal devices), and by refusing to perform its obligations under the agreement. Remedy obtained an adjournment of the interim injunction motion, and brought a motion to enforce the settlement.

Motion Judge’s Decision

The motion judge rejected Remedy’s interpretation of the settlement. He found that the parties did not agree to a full forensic sweep of Ms. Farnham’s computer. He further held that Remedy had not repudiated the agreement, because “Remedy’s position was not so patently unreasonable as to evidence an insistence upon the terms and conditions, which could not possibly have been reasonably implied in the circumstances.” The motion judge granted judgment enforcing the settlement on the terms advanced by Ms. Farnham.

Court of Appeal Clarifies the Legal Principles Governing Repudiation

Justice Epstein writing for the Court of Appeal clarified that “anticipatory repudiation is essentially the same as repudiation simpliciter—the only difference is timing.” Anticipatory repudiation arises in situations where, before the time of performance has arrived, one party to a contract evinces to the other party that despite having no justification for its position it is no longer prepared to perform its contractual obligations. For example, there will be an anticipatory repudiation if the words and conduct evince an intention to breach a term of the contract.

Test for Anticipatory Repudiation

The Court of Appeal further clarified that the test for anticipatory repudiation is an objective one: “the court is to ask whether a reasonable person would conclude that the breaching party no longer intends to be bound by it.” In order to objectively assess the breaching party’s intention, the court will consider surrounding circumstances. Specifically, the court will look into the following factors: (1) nature of the contract, (2) the attendant circumstances, (3) the motives, which prompted the breach, and (4) the seriousness of the conduct. The Court noted that subjective intention of the parties is irrelevant. For example, a party can repudiate a contract without subjectively intending to do so. Nonetheless, the subjective intention may still be considered in determining what the objective intention was.

A Note on the Seriousness of the Conduct

The Court of Appeal emphasized that a finding of anticipatory repudiation is reserved for cases in which the conduct at issue can be said to be serious. In other words, the breach must deprive the innocent party substantially of the whole benefit of the contract. According to the Court of Appeal, “a breach that allows the non-repudiating party to elect to put an end to all unperformed obligations of the parties is an exceptional remedy that is available only in circumstances where the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided.”

The Court of Appeal Decision 

The Court of Appeal noted that the motion judge fell into error articulating the legal principles in determining repudiation. The proper legal principle to assess repudiation is not whether the term insisted upon by the party can be reasonably implied from the agreement. The correct analysis focuses on what the purported breaching party’s conduct says about its objective intention in relation to the future performance of the contract.

The Court of Appeal found that in this case, Remedy’s insistence on the new term and threats of legal action if the other party refused to agree to the new term did not amount to conduct repudiating the agreement. Considered objectively and in the light of the surrounding circumstances, Remedy did not exhibit an intuition to not be bound by the contract. Further, the precise scope of the technological sweep of Ms. Farnham’s computer was not sufficiently material to the contract in a way that it would deprive her of substantially the whole benefit of the contract; namely, the financial package and a full final release from all claims arising out of her use of Remedy’s confidential information.” As such, the appeal was dismissed.