Canada: Fraudulent Dealings: Why A Mutual Release May Not Be Iron-Clad

It has long been a routine part of the settlement of a matter or the severance of an employee to exchange mutual release agreements. These releases typically provide that both parties to a dispute agree to give up all legal claims, whether or not these claims are known at the time of signing, that they may have against each other.

From an employer perspective, obtaining a release from a departing employee allows you to close your file and know that should the employee come back later with a further claim, you have a shield. However, giving such a release to a departing employee also significantly limits an employer's recourses when issues are discovered postdeparture.

While the release might be upheld in some circumstances, recent case law, stemming from the Ontario Court of Appeal, York University v Markicevic, 2018 ONCA 893, indicates that a mutual release agreement can be set aside when a party makes a fraudulent misrepresentation, ultimately inducing the other party to enter into the agreement.

Educational institutions are not immune to instances of dishonest behavior, as the York University case shows clearly. Therefore, colleges and universities should be aware of the law surrounding mutual releases and how to proceed if, after entering into a mutual release with a departing employee, it is discovered that the employee fraudulently misrepresented material facts.

THE CASE OF YORK UNIVERSITY

Michael Markicevic was employed as the Assistant Vice President of Campus Services and Building Operations at York University ("University"). Between 2007 and 2009, Mr. Markicevic misappropriated almost one million dollars from the University. Mr. Markicevic falsely invoiced York University for work that was not actually done. He and his co-conspirators then pocketed the cash associated with these invoices. Furthermore, Mr. Markicevic inflated quotes for University repairs, and used the excess funds for improvements on his personal residence. York University employees performed work on Mr. Markicevic's personal residence and were paid by the University for this work. The court's decision describes elaborate schemes set up by Mr. Markicevic and accomplices in order to enrich themselves at the University's expense.

On February 1, 2010, prior to obtaining knowledge of the extent of his dishonest activity, York University terminated Mr. Markicevic's employment without cause. Complaints had been made and York University was in the process of investigating the claims. The termination was made due to the allegations, but before anything was proven. Mr. Markicevic "vehemently denied" any wrongdoing or fraudulent activity during the course of his employment. Consequently, the University negotiated and finalized a severance agreement, which contained a mutual release and a generous severance payment. This mutual release meant both York University and Mr. Markicevic agreed to give up all legal actions against one another.

When details of Mr. Markicevic's dishonest activities came to light, York University sought to set aside the mutual release, as well as to recover the money stolen and repayment for the employment severance package. Ultimately, York University was successful at both trial and an appeal.

Mr. Markicevic's fraudulent misrepresentation resulted in the setting aside of the mutual release agreement.

The court concluded that York University was induced to enter into the severance agreement through Mr. Markicevic's fraudulent misrepresentation that he had not engaged in financial dishonesty.

When faced with allegations of his participation in fraudulent activity, Mr. Markicevic wrote to both York University's Vice President of Finance and Administration, and General Counsel, describing the allegations as "unfounded, libelous, and slanderous". He reacted to the allegations with an "attitude of absolute denial and almost outrage". The fraudulent misrepresentations were supported by the evidence and testimonies indicated that York University would not have entered into the severance and mutual release agreement, had it been aware of Mr. Markicevic's dishonest activities.

Representatives from York University testified that even after Mr. Markicevic's termination was complete, they still believed him, mainly due to his vehement denials. They further testified that had they known of Mr. Markicevic's actions, they would have approached the severance negotiations much differently. In fact, as York University believed Mr. Markicevic was not, in fact, acting dishonestly, the severance amounted to three years' pay.

A general principle of contracts prescribes that "a contracting party who is induced to enter into a contract as a result of a fraudulent misrepresentation is entitled to rescission, and restoration of the benefits conferred on the other party to the contract."¹ Given the misrepresentation and inducement, York University was entitled to have the mutual release set aside, and recover both the money stolen as well as the money given to Mr. Markicevic under the severance package.

The Court of Appeal further commented that it would be difficult to imagine circumstances in which an employer acting responsibly would pay such severance to an employee it knew had misappropriated large sums of money from it.

THE TAKE AWAY

This case suggests that there are instances where a mutual release agreement will not be honoured by the courts. If one party is induced to enter into a mutual release based on the fraudulent misrepresentations of the other party, then a judge has the ability to set aside the mutual release and allow the aggrieved party to recover its losses.

This provides a pathway for recourse for parties who have fallen victim to dishonest behaviour and have been misled in the process of agreeing to a mutual release.

The case also illustrates the dangers of entering into a mutual release before all facts are known. York University had received allegations of fraud and misappropriation of funds against Mr. Markicevic, yet it chose to provide him with a release before all the facts were known. Had York University waited until its investigation was complete to provide the release, it would have avoided at least part of the extensive litigation that followed, as well as considerable embarrassment.

Mutual releases may be routine, but they are not benign. They have a significant impact on your legal recourses against departing employees and should not be entered into blindfolded. While there are circumstances, such as those described here, in which a court would be prepared to set aside a release, they are the exception and not the rule. It remains easier to avoid entering into an improvident release than to have it set aside.

Footnote

1. S.M Waddams, The Law of Contracts, 7th ed. (Toronto: Thomson Reuters, 2017), at para. 421; York University v Markicevic, 2018 ONCA 893 (CanLII), at para. 21.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.