No Binding Settlement Due to Tax Tricks

In Brink v. Xos Services (Canada), Inc., the B.C. Supreme Court considered an application for summary judgment to enforce a settlement. The court dismissed the application of the plaintiff, Ms. Brink. Guided by the legal principles set out in the case of Fieguth, the court determined that the “tax treatment” sought by Ms. Brink was not an agreed-upon term, and therefore, the settlement agreement was not binding.

Exchange of Offers

Ms. Brink was employed as Chief Revenue Officer of the defendants’ companies (collectively “EMV”). Upon the conclusion of her employment with EMV, the parties entered negotiations regarding a settlement of her claim for compensation.

The following correspondence occurred between the parties, which Ms. Brink sought to enforce as a binding settlement.

On August 26, 2024, EMV’s counsel presented a settlement offer which included a large payment “less applicable deductions” and a release acceptable to EVM. 

Ms. Brink’s counsel responded to accept the offer “provided that… the form of release is mutually acceptable…; and “payments are made in a tax efficient manner…Ms. Brink requests that…the balance be paid as a 1099 (no withholdings at source).”  

Analysis

The primary question was whether the exchange amounted to a binding settlement agreement.

Ms. Brink argued that her additional condition—that the settlement payment be made in a tax-efficient manner—was an integral part of the settlement agreement. She further argued that this term, along with the form of release, related to the performance of the agreement, not its formation.

EMV objected to the inclusion of the tax-efficient payment term, arguing that it would result in a significant financial benefit to Ms. Brink by significantly reducing her tax liability. EMV argued that this term deviated from their original offer which stated, “less applicable deductions” and effectively constituted a counteroffer from Ms. Brink.  

Decision

The court determined that the tax treatment of the settlement amount was a fundamental issue for both parties, as there was a significant discrepancy in how each party approached this term.  Ms. Brink expected to receive the full settlement amount without any tax deductions, which would have resulted in an estimated tax saving of $143,000. In contrast, EMV’s offer explicitly stated that the payment would be made “less applicable deductions,” to avoid adverse tax consequences.

The court found that no binding settlement agreement had been reached and dismissed Ms. Brink’s application for summary judgment. The court emphasized that contractual terms cannot be unilaterally altered to suit one party’s preferences and then enforced as if they were mutually agreed upon. In this case there was a substantial divergence in understanding and intention surrounding a key term.

Key Takeaways

This case illustrates the importance of parties coming to an agreement on essential terms. Citing the case of Fieguth, “the first question is whether the parties have reached an agreement on essential terms.” In this case, the parties had not come to an agreement on the tax treatment of the settlement amount.

Employers (and employees) should keep in mind the need for mutual agreement on essential terms when trying to reach and enforce a settlement. 

This case serves as a reminder that a conditional acceptance of an offer is a counteroffer.    

If you have questions about this topic or other workplace law issues, feel free to reach out to Scott Marcinkow or any member of our Workplace Law team. For more insights, be sure to check out our latest blog posts.