"For Cause" May Differ For Purposes of Termination or Severance

Posted 5:47 PM by Michael Fox

Hired as a consultant, Lynn Joy was given a contract that entitled her to one year's base salary (which was $210,000) if she was terminated, provided she was terminated "for reasons other than cause," a word not defined in the contract. When she was terminated for failing to meet a billing requirement, her employer claimed it was "for cause" and denied the severance pay.

The Court first noted the problems with dictionary definitions in ascertaining the intent of drafters since they usually give a range of "linguistic possibilities," but "rarely do they help a court decide which one the drafter of the contract or statute in question intended." Here it was even worse, as the court picked a definition which Judge Posner finds it clear that the contract actually precluded.

The employer, apparently recognizing the error, didn't attempt to defend the judge's choice but posed its own -- "cause" meant unsatisfactory performance as judged by it. The employer backed it up with a string of citations which do in fact uphold terminations based on such a definition. Unfortunately, for the employer, Judge Posner one of the most prolific writers ever to sit on a bench, could envision a difference between what is meant in a clause allowing termination of a contract as opposed to one granting severance pay. As he explained:

Business firms almost always reserve the right to fire an employee (unless the employee is protected by a collective bargaining agreement) if the firm decides that the employee's performance is unsatisfactory. But it is precisely because of the insecurity of such employment -- the determination that Joy's performance was unsatisfactory was based on a criterion selected by the firm after she went to work for it, rather than being specified in her employment contract -- that employment contracts often provide for severance pay. Joy was leaving a good job to go to work for HGI and in doing so may have been taking a risk (though, with her mentor leaving Hewitt, maybe there would have been a risk in her remaining there), especially since she was going to be working in what was a new line of business for HGI. If she lost her job she would need money to tide her over while she looked for a new job. Hence the severance-pay provision in her employment contract with HGI.

And because of this, Judge Posner notes, with, as he says "considerable irony":

The precise meaning that the word bears in the contract cannot be determined just from reading the contract, as HGI argues. It is a considerable irony that a firm that is in the business of consulting on executive compensation failed to draft a contract that clearly specified the compensation rights of one of its own executives.

Bottom line, there is joy in the Joy household as the summary judgment was reversed and sent back for further proceedings. Joy v. Hay Group, Inc. (7th Cir. 4/8/05) [pdf].

Although that is the important part for Ms. Joy, Judge Posner is not through educating, noting the different circumstances where evidence might be allowable to determine the meaning of "cause" in this contract. Even if the meaning of the contract had been clear on its face, that did not necessarily mean all extrinsic evidence is excluded:

Extrinsic evidence, which is to say evidence besides just the written contract itself, is admissible to demonstrate that the contract may not mean what it says, provided the evidence used to show this is "objective" in the sense of not being merely self-serving, unverifiable testimony.

The latter clause is important as it would have excluded what Joy had offered here, testimony by two ex-employees, both of whom had grudges with the employer. But since in this case the meaning was not clear, any admissible evidence is available at the trial, including her two witnesses. Admissible -- yes, but as Judge Posner noted in closing, "whether they will be believed is, of course, another matter."

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