Ontario Court of Appeal Weighs in on Terminating Fixed Term Contracts

In May of last year we gave our readers an update on a recent Ontario decision regarding early termination of a five year fixed contract, Howard v. Benson Group Inc.  Mr. Howard’s employment was terminated without cause after only 23 months of service.  He brought a claim for payment of the remaining 37 months of the term.  Justice MacKenzie of the Ontario Superior Court of Justice was asked to determine on a motion for summary judgment whether an early termination clause in a five year term agreement was enforceable and if not, what damages were owed to the plaintiff?  Was he entitled to payment for the remaining term of the agreement or would it suffice for the employer to give him reasonable notice of termination?  At a motion for summary judgment, MacKenzie J. found that the without cause termination clause was ambiguous and thus not sufficient to limit Mr. Howard to his Employment Standards Act, 2000 ( “ESA”) minimums.  He then went on to determine that the fixed term agreement did not have any other language that would displace the common law presumption of reasonable notice.  Thus, Mr. Howard was entitled to reasonable notice of termination and not to payment for the remaining term of the contract.  MacKenzie J. also held that Mr. Howard had a duty to mitigate his damages by seeking new employment.

 

Mr. Howard appealed the motions judge’s decision, asking that the Court of Appeal overturn the ruling and find that he was entitled to payment of the remaining 37 months of the five year term.  He also sought a declaration that he had no obligation to mitigate his damages.  Mr. Howard was successful on both points. 

 

The Court of Appeal held that the common law presumption that an employer must provide reasonable notice of termination can only be rebutted if the employment contract “clearly specifies some other period of notice, whether expressly or impliedly”.  Since the fixed term agreement between Mr. Howard and Benson Group Inc. stated clearly that it automatically terminated at the end of the term, it displaced the common law presumption of reasonable notice.  Because the ambiguous ESA-only termination clause was deemed unenforceable by the motions judge (a ruling that was not appealed by the employer), it was to be treated as being deleted from the agreement.  This meant that the only rights of early termination were in the event of Mr. Howard’s resignation or termination for just cause.  Otherwise, the contract must continue for the full term or Mr. Howard must be paid as if it had so continued.

 

Turning to the issue of whether or not Mr. Howard must mitigate his damages, the Court of Appeal applied its 2012 decision, Bowes v. Goss Power Products Ltd, 2010 ONCA 425.  In Bowes, the Court of Appeal found that there is no duty to mitigate where the contract specifies the penalty for early termination.  Applying Bowes to the facts of this case, the Court of Appeal found that the agreement between Benson Group and Mr. Howard contained an implied penalty in that the lack of termination clause meant that Mr. Howard was entitled to payment until the end of the five year term.  The Court of Appeal held that it did not matter if the penalty for early termination was specified expressly or was by default.  The parties had bargained for certainty by choosing a fixed term agreement and it would not be fair to Mr. Howard to allow the employer to reduce its obligations to him nor would it be consistent with the principle of certainty to leave mitigation as a live issue at the time of termination.  In the end, Mr. Howard was entitled to his 37 months of pay without reduction for mitigation.

 

This case clearly illustrates the potential pitfalls of long fixed term agreements for employers.  Any such agreement must be carefully drafted to address the true expectations of the parties regarding early termination.  We strongly recommend involving legal counsel at the early stages to protect your company from unnecessary risk.