Early Termination of Fixed Term Contract Results in Employee Windfall (Or the Dangers of Dubious Drafting)
The Ontario Court of Appeal recently awarded an employee, whose fixed-term contract was terminated on a without cause basis twenty-three months into a five-year term, damages reflecting the balance of his remuneration under the Agreement.
The employee, John Howard, was employed in a management position pursuant to a five-year fixed-term Agreement, which provided for early termination in the event of his resignation, by the employer for cause, or by the employer without cause. If his employment was terminated without cause, the Agreement stated that “… any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario”.
Mr. Howard’s employment was terminated and he brought an action for breach of contract, seeking damages reflecting his remuneration for the balance of the contract, which equated to over three years’ of salary and benefits. In defence, his employer argued that any damages should be limited to the two weeks’ he was entitled to under the legislation.
Mr. Howard sought a motion for summary judgment which the motions judge granted, finding that the clause which provided for early without cause termination was unenforceable due to ambiguity. However, the motions judge did not award Mr. Howard the balance owing to him under his agreement, but rather, awarded him reasonable notice of termination at common law, subject to the duty to mitigate, all of which was to be determined at a mini trial. Mr. Howard appealed. Notably, there was no appeal of the motion judge’s determination that the termination clause in question was unenforceable.
Setting aside the decision of the motions judge on the issue of damages, the Court of Appeal confirmed the common law presumption that every employment contract includes an implied term that an employer must provide reasonable notice to an employee prior to termination of employment, but held that by virtue of choosing a fixed-term arrangement, the parties had “unambiguously ousted” this implied term in favour of a contractual obligation of a five year term.
According to the Court of Appeal, after the parties contracted out of the implied obligation for reasonable notice in this case, Mr. Howard was entitled to receive the balance of his remuneration under the agreement in the event of early termination because the contract did not otherwise specify a pre-determined notice period in the event of the same.
In other words, because the without cause termination clause was unenforceable, it could not operate to reduce Mr. Howard’s damages where reasonable notice was otherwise ousted. The Court rejected the employer’s arguments that this created an unfair windfall for Mr. Howard, as the employer was sophisticated, had drafted the agreement, had elected for a fixed term, and had attempted to limit its liability in the case of early without cause termination to legislative minimums. That this latter clause failed to meet the standards imposed by the courts was inconsequential: “If an employer does not use unequivocal, clear language and instead drafts an ambiguous or vague termination clause that is later found to be unenforceable, it cannot complain when it is held to the remaining terms of the contract”.
The Court then held, consistent with previous decisions regarding liquidated damages, that without a contractual requirement to mitigate his loss, Mr. Howard was under no obligation to do so. Where a contract stipulates the penalty for early termination there is no implied duty to mitigate–it matters not whether the penalty is stated expressly, or is by default the balance of the wages and benefits under the agreement. As a result, Mr. Howard was entitled to 3 years of compensation, with no obligation to mitigate.
This case is yet another example of the dangers of using fixed term contracts, and the importance of drafting clear, unambiguous termination provisions.
The Court’s decision can be found at Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 http://www.ontariocourts.ca/decisions/2016/2016ONCA0256.htm