PS Inc., a small consultancy in Ontario, Canada, was recently served with a wrongful dismissal suit by a recently terminated employee, LS. LS claimed that the severance pay package she received upon termination of her employment was insufficient. While this was a shock to PS Inc. management, as they thought the severance package they provided was generous and exceeded legal requirements, the lawyer they retained confirmed that they are, in fact, facing significant liability. 

Apparently, the minimal amounts specified in Ontario employment legislation are significantly below the amounts that are customarily granted by the courts. After rather protracted negotiations between PS Inc.’s lawyer, PL, and her counterpart retained by LS, a final settlement of a further compensation for a total of $51,000 was reached. The official agreement documents were drafted and the management team of PS thought that this unfortunate incident was finally behind them. However, on March 1, 2016 the management team received rather unpleasant news from PL: the other party is claiming they never agreed to the deal and are now demanding a settlement of $57,000. PL says she is absolutely shocked by this turn of events: she has a clear chain of emails indicating the agreement has been reached. Refusing to honor it at this point is illegal and a violation of professional ethics by LS’s Lawyer. In fact, PL says she will report the incident to the Law Society after the case is over. Nevertheless, the management team of PS now has to decide on a course of action. PL’s advice is to file an immediate motion with the court to enforce the agreement. While it will cost $2500 in legal costs to prepare the motion, she feels the chances that the court will agree to enforce the settlement are excellent. Moreover, should a positive outcome be reached, a further request to recoup the legal costs can be made; she estimates the chance of this request being successful of being 50-50. 

The board members are naturally concerned about the total exposure. What will happen, they wonder, in case the motion is turned down? PL replied that while this is an unlikely outcome, it is always a possibility whenever one goes in front of the court. The first thing that will happen is that the other side will file a motion to recoup their own legal costs (which should be in a similar ballpark) and will also have a 50-50 chance of being successful. Next, they will likely file a motion for summary judgement. In this case, PL continues, we should definitely try to settle, but I doubt they will settle for less than $70,000. After all, if the matter gets to court, they are very likely to prevail. Moreover, the amount of money they will be awarded is easy to predict – based on recent rulings, length of employment, etc., the award will be for $73,000. While I will provide the best defense I can, arguing that the original termination package that was paid was sufficient as it met the minimum requirements prescribed by the law, I cannot see our chances of winning being more than 10%. In this case, PS Inc. will be off the hook for the $51,000 settlement agreement as well. Moreover, the legal costs for me to prepare the case and represent PS inc. in court will be $10,000. To add insult to injury, in the event they are successful on the main matter, the other side will attempt to recoup their legal costs, which are probably similar, and will have a 50-50 chance of being successful. Of course, in the unlikely event that we win, not only will we

have no liability, we will also attempt to recoup the costs, with the same 50-50 probability of success. However, the winning scenario is entirely hypothetical. Thus, a pre-court settlement will be our best bet should our initial motion fail. However, as I already said, I really do not see why it should – the other side is acting preposterously! When pressed for her estimate that the motion to enforce the previous settlement will be successful, PL turns somewhat evasive. “Look”, she says, “even if I have the strongest case in the world, things can happen; I will never estimate my chances of losing at less than 25%, on any case!’. One of the senior members of the PS board, says: “I know this does not feel right and does not seem fair at all, but I actually think we should agree to their new demands of $57000 and put the matter behind us”. After a long pause, the chairman of the board, says: “while this feels like blackmail and riles every bone in my body, I am afraid you are right; we will probably have to agree to their new demands”. He asks PL whether the other side might not play the game again – demanding yet more money once they see that they can get $57000, but PL says that this will not happen – she already has a signed letter from the other party agreeing to this amount. 

Questions 

a) What is your advice to PS Inc.? What strategy would you recommend to them? Is $57,000 a fair settlement amount? 

b) How sensitive is your recommendation to the estimated probability of winning the initial motion, and to the probability of winning in court should the motion enforce be turned down? 

c) Suppose the management board follows PL’s original advice and files the motion. Suppose further that the motion is turned down. Do you agree that $70,000 will be a fair settlement amount at that point? VK, one of the board members, speaks up: “Actually, I disagree. I have been looking at this matter from LS’ point of view and, assuming her legal costs are similar to ours, I think she should be quite amenable to settlement for our original amount of $51,000 once she realizes we intend to proceed with our motion to enforce the agreement. In fact, in retrospect, even $51,000 may have been overly generous”. 

d) Perform the analysis from LS’s point of view. Do you agree with VK’s assessment?