Rather than getting the 2.5 years, the court determined this severance to be unconscionable and an unenforceable penalty since it bore no resemblance to Zielinski’s actual damages, as it would be paid whether he was terminated after one day or 50 years. That was despite the fact that both parties had agreed to the severance. He was instead awarded $8,400.

How many negotiated termination clauses could be overturned in that way for precisely the same reason. I see such at-risk contractual severances regularly. But few Canadian employers put their minds to that possibility when a new board inherits an employee with an unreasonably extravagant termination provision or other compensation.

What if you have negotiated a fair compensation through a transparent process and no one is out for your blood? Good start, but you are not yet home free. Scrupulous honesty is necessary, not only during the negotiations, but even after.

The case of Geocamp Data Management Inc v International PBX Ventures Ltd, heard by the B.C. Supreme Court in 2015, involved George Sookochoff, a long-time junior mining veteran and an expert in data management. He started working with PBX Ventures and two years later became its CEO and ultimately, president and chief executive officer. He entered into a management agreement with PBX through his company, Geocamp, which was later extended. He did not vote on the initial agreement when it was made — wise. After the management agreement expired, he continued to invoice PBX and those invoices were paid largely by cheques signed by his subordinates.

PBX became insolvent and he resigned as president but stayed on as CEO, at which point he was granted stock options. The board determined that PBX would enter into no management or employee contracts until its financial position improved. Sookochoff was responsible for addressing reductions of salary and other cost savings. In other words, he knew it had to watch its pennies.

An investor came along willing to provide emergency funding but dictated that money could not go to salaries. The president of PBX understood, from talking to Sookochoff, that he would receive no remuneration during this period. Nevertheless, Geocomp continued to invoice PBX and Sookochoff did not advise senior management that his management contract had expired. As result, senior management was under the mistaken belief that Sookochoff continued to have a contractual right to be paid.

The court held that Sookochoff breached his fiduciary duties in continuing to invoice PBX and not disclosing that his agreement had expired. He therefore was denied recovery of his invoices, other than $100,000 of services representing the work the court determined that he had performed.

The point is that not only must a contract be negotiated fairly but be performed fairly. If there is anything less than scrupulous honesty, an executive will end up on the wrong side of a lawsuit.

It can be difficult for shareholders, directors or officers who inherit companies with executive compensation problems. When that occurs, they should move quickly to ask the court to set the offending employment agreements aside. If your company has an executive who breach their fiduciary duty, you should consider asking a court to do just that.

I will discuss further instances of this issue next Saturday.