We all know that:
1. Damages for a contractual loss should be set to put the innocent party in the same position as if the contract had been performed.
2. An innocent party should not be compensated for avoidable losses (i.e. the innocent party must mitigate the damages).
3. An employment contract is just that, a contract.
Must an employee mitigate his damages when he is terminated without cause, pursuant to a written contract, if the employment contract makes no mention of a duty to mitigate? This question is answered in Bowes v. Goss Power Produce Ltd., 2012 ONCA 425 (C.A.).
The employer entered into a written employment agreement with the employee in 2007. The agreement set the base salary at $130,000 per year. There was a provision for a substantial bonus and other benefits. The contract contained termination provisions according to an increasing scale dependent on the years of service. The termination provisions were relatively generous for the first 12 years of service, but capped at one year’s base salary after 12 years.
The employer terminated the employee’s employment without cause at law and was liable under the agreement to pay 6 months’ base salary in lieu of notice. The employee obtained new employment, at the same salary, within two weeks of the termination. The employer paid the statutory minimum of 3 weeks and nothing more, claiming that the employee had done a marvellous job in completely mitigating his damages. The employee wanted the remainder of his severance payment and sued.
The decision is interesting, not just for the law it sets, but for the law it already accepts.
When parties set a fixed notice period or payment in lieu, they are treating the matter as if the contract were fixing liquidated damages. There is no obligation in general to mitigate liquidated damages – because liquidated damages are to be paid regardless of the actual damages suffered.
Further, when a contract sets a contractually due sum, mitigation does not apply.
The motions judge held that the entitlement to a particular notice period was akin to the common law concept of reasonable notice. Accordingly, just as reasonable notice is subject to mitigation, contractual notice is also subject to mitigation.
The Court of Appeal disagreed. It held that whether the contractual period was determined to be liquidated damages or a fixed contractual sum, mitigation did not apply. It gave the following further reasons:
1. By contracting for a fixed sum, the parties contracted out of the reasonable notice regime. In doing so, the parties wanted closure. To interpret the agreement to allow mitigation would be contrary to that objective and counter-intuitive because it would result in uncertainty, risk, and litigation.
2. Mitigation is a live issue at law only if the damages are at large (i.e. damages in lieu of notice).
3. It would be unfair to permit an employer to opt for certainty by specifying a fixed amount of damages and then allow the employer to later seek to obtain a lower amount by raising mitigation that the agreement did not specify.
4. There is no double payment in this concept. The employee gave up rights in fixing the notice payment. He would have been limited to 1 year’s notice, which is about half of what he could get, for long term employment and limited in compensation to his base salary without bonus or benefits. In short, he paid for the fixed sum.
5. The courts have recognised that there is a broad disparity in the bargaining power between employer and employee. The employer drafted the employment agreement. It could have referenced mitigation and did not.
6. The employment agreement contained a broad release, which implied an intention to avoid resort to the courts and confirmed a desire for finality.
The employee was successful and received not only his fixed severance, but also his salary for the contested period.
The moral to this case is simple. If you draft an employment agreement on behalf of an employer, ensure that the fixed sum is made expressly subject to a duty to mitigate.