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“Privity of contract” is a common law tradition. The rights and obligations imposed by contracts are private – strangers to the contract generally have no entitlement to enforce such rights or obligations. But what happens when the employee of the seller of a business sues the buyer for wrongful dismissal after settling all employment-related claims with the seller before the sale?

The Superior Court recently considered this issue in Manthadi v. ASCO Manufacturing, 2019 ONSC 5572 (CanLII). The plaintiff, Manthadi, had been employed by Asco Manufacturing Limited (“AML”) since February 1981. On September 28, 2017, AML advised her that AML was being sold effective November 24, 2017. AML offered her a “Settlement and Release Agreement” which, among other things, offered Manthadi termination/severance pay in exchange for a release against AML for all employment-related claims. Manthadi accepted the Settlement and Release Agreement.

On November 2, 2017, AML sold its assets to 2603420 Ontario Inc. As a term and condition of the asset purchase agreement (the “APA”), AML represented and warranted that it was provided notice of termination to all its employees. It further agreed to indemnify the purchaser from any financial loss, legal liability, damages or expense associated with a breach of such warranty.

Effective November 6, 2017, 2603420 started operating under its registered business name, Asco Manufacturing (“Asco”). Manthadi continued her employment with Asco without layoff or interruption.

Manthadi’s last day of employment with Asco was December 13, 2017. Her Record of Employment (which she did not receive until February 9, 2019) indicated that her employment was terminated due to a “shortage of work” as of December 13, 2017. She sued Asco for wrongful dismissal and requested a reasonable notice period of 24 months, based on her length of service going back to 1981. Asco alleged that her length of employment was less than 3 months based solely on her service for Asco following the sale of AML’s assets to Asco.

The court held that, for the purposes of the common law, Manthadi’s service with AML (before it sold its assets to Asco) should be considered when determining her notice period. Specifically, Asco never provided notice to Manthadi that it would not be recognizing her former service with AML. Pursuant to Ariss v. NORR Limited Architects & Engineers, 2019 ONCA 449, the Court held that in the absence of such notice, recognition of her former service was “deemed” to be part of Manthadi’s employment contract with Asco. 

The court further held that Asco could not rely on the Settlement and Release Agreement between AML and Manthadi because Asco was not a party to the contract. Asco’s only option was to seek recovery or indemnity against AML for a potential breach of the APA. The court awarded Manthadi damages representing a notice period of 20 months, and costs of $11,958.96.

This case is a reminder that there are unique employment-related issues that should be considered by both buyers and sellers during a sale of business. A failure to specifically consider such issues during due-diligence can lead to significant – and unexpected – liability. 

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