Earlier this month the Georgia Court of Appeals affirmed rejection of a former CFO's attempt to recover severance pay after the non-renewal of his employment contract. The case, Brazeal v. New Point Media Group LLC, illustrates the importance of clear and unambiguous compensation terms in employment contracts, and highlights the risks to both executives and their employers when important contract terms lack sufficient clarity to permit ready application, whether by the contracting parties or the court. Indeed, severance provisions like that contained in Mr. Brazeal's contract are not uncommon in executive employment agreements, so the lessons taught by the case are important ones to remember. In sum, the court concluded that the contract unambiguously limited severance pay to instances of termination without cause. Because the CFO's contract treated non-renewal separately from termination without cause, the non-renewal of his contract did not trigger the company's severance obligations. In other words, the contract terms were sufficiently clear in limiting the severance obligation only to instances of termination without cause so that the employer escaped liability for severance upon non-renewal. A few more details about the contract and the events that led to the lawsuit shed further light on the case's lessons. The employer New Point Media Group hired plaintiff David Brazeal as its CFO in June 2012. Brazeal's contract with New Point provided for a one-year term of employment, which would renew automatically for subsequent one-year periods unless either party provided written notice of non-renewal at least 90 days prior to the expiration of the initial or any subsequent renewal term. In a separate section, the contract conferred upon both parties the right to terminate the contract at any time and for any reason. Such terminations without cause required 30 days written notice, but terminations with cause were effective immediately. And in yet another section, the contract specified the company's obligations upon terminating the agreement without cause, including payment of nine months' salary as severance. In March 2013, the company provided timely written notice to Brazeal that it would not be renewing his employment contract upon expiration of the one-year term. His employment therefore terminated in June 2013. Brazeal sought nine months' severance pay, but the company refused to pay, contending that his non-renewal didn't trigger their severance obligation.
The central dispute in the lawsuit was therefore whether the employer's promise to pay nine months' severance applied in case of a non-renewal. Brazeal contended that it did, on the theory that the broader term "termination," to which the severance obligation attached, encompassed not just termination during a one-year term but also a non-renewal at any one-year juncture. The court, however, disagreed. Indeed, the trial court found the contract terms sufficiently unambiguous that it not only denied the plaintiff's motion for summary judgment but also granted the employer's cross motion, holding that the contract clearly evinced the parties' intent to provide severance only in case of termination without cause and not non-renewal. The Georgia Court of Appeals agreed and affirmed the trial court's conclusion.
Key to the court's interpretation was the contract's provision for non-renewal and termination without cause in separate sections. Section 1 set the term of the contract and provided for subsequent one-year renewals, subject to non-renewal upon notice as described above. Separately, Section 6 permitted either party to terminate the employment relationship at any time, including without cause. And Section 7 defined the company's "Termination Obligations," including the payment of severance "[f]ollowing the company's termination of Employee's employment without Cause." Viewing the contract as a whole, the court concluded that Section 7's "Termination Obligations" apply by their very terms only to "termination...without [c]ause." As such, its non-renewal after the first one-year term did not give rise to any severance obligations or rights.
The lesson of clearest import here -- albeit far from groundbreaking -- is that both employer and employee are well advised to think through all pertinent terms before executing a new employment agreement to ensure that those terms are clear as to the rights and obligations of each party. This lesson applies to any and all terms in the contract, but is especially important as to key provisions affecting contract term, compensation, and the rights and obligations pertinent to any type of termination. In this case, the company ended up prevailing on its suggested interperation, but that doesn't mean the terms couldn't have been even clearer, perhaps evading the expense of a lawsuit altogether. For instance, instead of simply treating non-renewal separately from termination, the contract could have stated explicitly that severance would not be payable upon any non-renewal. Had the contract so stated, perhaps the suit would never have been filed. And these lessons apply equally to executives entering into employment agreements. The point may seem to obvious to state, but as cases like this demonstrate, there is no substitute for unmistakable clarity in any contract term.