In the recent Court of Appeal decision in Howard v. Benson Group Inc., 2016 ONCA 256, the employer learned a very costly lesson when it was ordered to pay an employee more than $200,000.00 following the employee’s termination under a fixed term contract. The decision highlights the need for employers to pay very close attention when drafting early termination clauses in fixed term contracts.
The employee had entered into an employment contract for a 5-year fixed term. His employer terminated his employment, without alleging cause, 23 months into the contract. Employee sued for breach of contract claiming payment of compensation for the unexpired term of the contract i.e more than three years’ salary. On the employee’s motion for summary judgment, the judge granted the motion but not the relief sought by the employee. Instead the motions judge awarded the employee common law damages for wrongful dismissal.
The contract in issue contained an early termination provision that stated as follows:
“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.”
Based on that clause, the employer had argued that its liability was limited to two weeks’ salary in lieu of notice. The motions judge held the language used in the early termination provision to be sufficiently ambiguous as to the true extent of the employee’s entitlement under the Employment Standards Act (the “ESA“) and in the result, construed that ambiguity against the employer having regard to the “power imbalance that exists between an employer and employee as a matter of course.” Much of the argument as to the ambiguity of the clause focused on its failure to expressly provide for the continuation of benefits during the ESA statutory notice period. Ultimately, the motions judge found the termination clause to be unenforceable due to ambiguity and, significantly, that finding was not appealed.
On appeal therefore the Court had two issues before it:
1. was the employer liable for common law damages for wrongful dismissal, or for damages for breach of a fixed term contract; and
2. is an award of damages for early termination of a fixed term contract subject to a duty to mitigate.
Where an employment contract states unambiguously that it is for a fixed term, the employment relationship automatically terminates at the end of the term without any obligation on the part of the employer to provide notice or payment in lieu thereof to the employee. The Court of Appeal noted that such a provision ousts the common law implied term in every employment agreement that reasonable notice must be given for termination without cause.
Obviously, the parties to the employment contract can include a provision that contemplates early termination and provides for a pre-determined notice period in those circumstances. Where, however, no such provision is contained in the fixed term contract or, as in this case, the provision is found to be unenforceable, the employee is entitled, on early termination, to the wages he would have received to the end of the term of the contract. The Court commented that the employer, who was not an unsophisticated party, had drafted the employment contract. Although the employer is, of course, entitled to use a fixed term contract to limit its obligations on early termination, where it fails to draft a properly worded and unambiguous early termination clause, it will bear the consequences. Where the Court finds the early termination clause to be unenforceable, the employer cannot complain that it is held to the remaining terms of the contract.
No Duty to Mitigate
The Howard case is also of significance for employers based on the Court’s conclusion regarding the employee’s duty to mitigate his damages. In dealing with the mitigation issue, the Court relied on its 2012 decision in Bowes v. Goss Power Products Ltd. In that case, the Court held that, where an employment contract specifies a fixed term of notice or payment in lieu, there is no obligation on the part of the employee to mitigate his damages. The Court in Howard acknowledged that the employment contract in Bowes differed in two respects: i. it was not a fixed term contract; and ii. it contained an express clause stipulating a fixed quantum of damages for early termination.
Notwithstanding those distinctions, the Court extended the principle set out in Bowes, to fixed term contracts. In doing so, it commented that the parties had bargained for certainty when they entered into a fixed term contract. Where a fixed term contract contains no enforceable contractual provision stipulating a fixed term of notice, the employer is obligated to pay the employee to the end of the term and that obligation will not be subject to a duty to mitigate. In the Court’s view it did not matter whether the penalty for early termination was expressly set forth, as in Bowes, or by default, is the wages and benefits payable to the end of the term, as in the case of fixed term contracts generally.
The practical result of the Howard decision was that the employer, rather than paying its employee two weeks’ pay in lieu of notice, was obligated to pay the employee damages equivalent to 37 months’ pay.
Sloppy drafting of an early termination clause in a fixed term contract, can prove very costly. Similarly, if the employer seeks to impose a duty to mitigate on the employee, it must expressly set forth this obligation in the fixed term contract.
Image c/o LiaLeslie.
Written by Susanne Balpataky Susanne Balpataky is an experienced commercial litigator who has practiced at Speigel Nichols Fox LLP since joining the firm in 1991.