How Binding is Your Term Sheet? A Cautionary Tale For Employers

How Binding is Your Term Sheet? A Cautionary Tale For Employers

A recent decision issued by Ontario’s Superior Court of Justice – Giacomodonato v PearTree Securities Inc. (“Giacomodonato“)[1] – is a cautionary tale for employers that use so-called “term sheets” when negotiating terms and conditions of employment with prospective new hires.

Background

In 2016, David Donato was recruited to join PearTree in order to serve as its President and Co-Head of Banking.  The sequence of events leading to Mr. Donato’s hiring was as follows:

• In March 2016, PearTree sent Mr. Donato an initial draft of a document that the parties referred to as the “March Term Sheet”.  Among other things, the March Term Sheet contemplated that:

1. 1. Mr. Donato would be a full-time employee for a fixed-term of two years, commencing May 2, 2016.
   2. Mr. Donato would earn an annual salary of $240,000.
   3. Mr. Donato would receive a $50,000 annual bonus if PearTree met a specified revenue threshold.
   4. Mr. Donato would receive a variable payout equal to a percentage of PearTree’s revenue.
   5. Revenue and income would be shared with Mr. Donato as PearTree expanded its product offerings.
   6. Mr. Donato would be covered by “standard confidentiality provisions for employees”.
   7. Mr. Donato would be covered by non-compete and non-solicit covenants as specified in the document.

• In April 2016, Mr. Donato signed the March Term Sheet after changing the start date to June 1, 2016.  PearTree accepted the change and countersigned it back to Mr. Donato.
• However, Mr. Donato’s employment did not commence on June 1, 2016.  Instead, on June 9, 2016, PearTree sent Mr. Donato an initial draft of a document that the parties referred to as the “July employment agreement”.  In addition to making significant changes to Mr. Donato’s compensation structure, the July employment agreement contemplated that:

1. 1. Mr. Donato would be a full-time employee for an indefinite term, terminable upon salary continuance until the earlier of July 10, 2018 or the date that he commenced alternative employment.
   2. Mr. Donato would be covered by expanded 24-month non-compete and non-solicit covenants.
   3. Mr. Donato would receive two weeks of additional paid vacation.

• On July 11, 2016, Mr. Donato signed the July employment agreement.
• On July 22, 2016, Mr. Donato was added to PearTree’s payroll.

In January 2018, Mr. Donato’s employment with PearTree was terminated without cause.  Mr. Donato subsequently commenced an action for wrongful dismissal and amounts he claimed that PearTree owed under the March Term Sheet (between $3.194-million and $3.927-million), on the basis that it was a binding employment agreement.

In its defence, PearTree argued that the March Term Sheet was a non-binding term sheet that was too brief and skeletal to constitute a binding contract.

Trial Judge’s Decision

The trial judge agreed with Mr. Donato and found that the March Term Sheet was a binding employment agreement.

According to the trial judge, the March Term Sheet – which was drafted by PearTree – contained language demonstrating that the company intended to be bound by its terms (e.g., “[PearTree] would be pleased to engage you to provide investment banking and other related services on the following terms …”).  Further, there was no language indicating that PearTree retained any element of discretion over whether to execute another agreement.

The fact that the March Term Sheet did not address “every conceivable issue” (e.g., vacation, expense reimbursements, etc.) did not mean that the document was not an enforceable agreement.  In the trial judge’s words, a reasonable person would conclude that PearTree intended to enter into a binding agreement with a prospective employee on the terms set out in the document:

“[The March Term Sheet] is an enforceable contract. It manifests offer, acceptance, and consideration. It contains the essential elements of an employment contract. It was a bargain, and it is worthy of enforcement.”

Fortunately for PearTree, the trial judge’s analysis did not end there.  His Honour went on to find that PearTree had repudiated the March Term Sheet in July 2016 when the company’s Chief Executive Officer made it clear to Mr. Donato that the July employment agreement was a “take it or leave it” proposition.  Mr. Donato then had three options: (1) accept the terms of the July employment agreement; (2) reject the July employment agreement and sue for damages under the March Term Sheet; or (3) make it clear that he was rejecting the July employment agreement and put PearTree to its election on how to proceed.[2] By signing the July employment agreement (after more than a month of negotiations and with the benefit of legal counsel), the trial judge found that Mr. Donato had chosen option number one.

The trial judge also opined that Mr. Donato received sufficient consideration in exchange for the July employment agreement.  In particular, he received two weeks of additional paid vacation and a $40,000 payment to help offset certain financial implications related to departing his previous employment (even though the agreement did not actually contain any reference to this payment).  Therefore, the July employment agreement was valid and enforceable.

In the result, the trial judge ordered PearTree to pay damages pursuant to the revised compensation structure set out in the July employment agreement (as opposed to under the March Term Sheet).  The Company was also ordered to pay Mr. Donato’s base salary to the earlier of July 10, 2018 or the date that he commenced alternative employment, as well as any other statutory amounts owing as at the date of termination.

Takeaways for Employers

Non-binding term sheets can be a useful tool for employers when it comes to recruiting and, eventually, hiring key employees.  However, due to the pitfalls highlighted by the trial judge’s decision in Giacomodonato, they should be used sparingly and with caution.

Importantly, the term sheet must contain clear and unambiguous language demonstrating the parties’ intention that the document is a mere “stepping stone” towards an eventual employment agreement.  For example:

“Binding and enforceable agreements regarding the employment arrangement described herein will not occur unless and until the parties have negotiated, duly authorized, approved, executed and delivered a separate employment agreement.  Until due authorization, execution and delivery of the employment agreement, each party shall have the right to terminate this non-binding term sheet at any time.”

Given the risks associated with term sheets, savvy employers will also plan to keep some consideration in their back pockets (such as a one-time signing bonus, an additional equity grant, etc.) for when it comes time to sign the subsequent employment agreement. Doing so will help ensure that the employment agreement – and not the term sheet – governs the relationship between the parties.

[1] 2023 ONSC 3197
[2] Wronko v. Western Inventory Service Ltd., 2008 ONCA 327

by Paul Boshyk

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023