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Bowes v. Goss Power Products: No Duty for Employee to Mitigate When Contract Includes a Written Notice Term

It’s summer now, when I usually slow down on blogging, but every day lately, something new and exciting happens in labour and employment law!  Here’s the newest jewell, brought to us by Chief Justice Winkler and the Ontario Court of Appeal today in a case called Bowes v. Goss Power Products.

For employers who like the idea of including an expressed notice term in their employment contracts, to avoid the implied duty to provide “reasonable” notice, pay attention.

Facts

Employee B. and Employer GP entered into an employment contract, drafted by the employer, which included a term saying that GP could terminate the contract without cause by providing notice, or pay in lieu of notice.  At the time he is dismissed in 2011, the contract required 6 months notice, or pay in lieu thereof.  The contract said nothing about a duty to mitigate.  However, the termination later advised B that he would receive 6 month’s continuation of his salary, but also included a sentence saying that B is required to seek out alternative employment and advise GP if he gets a job.  B obtained another job two weeks after being fired by GP.

GP declined to pay the continued salary beyond the 3 week period required by the ESA, taking the position that B had successfully mitigated.

Issue: Does an employee have a duty to mitigate when the contract specifies in writing the amount of notice required, and also the specific amount of pay in lieu of notice required, to terminate the contract?

Court of Appeal: Nope.  There is no duty on an employee to mitigate when the amount the employer must pay the employee to terminate the contract is written into the contract,  unless of course the contract expressly requires mitigation.

The lower court judge had followed a line of cases (including Graham v. Marleau Lemire Securities) finding that there was no legal difference, in terms of the duty  to mitigation, between a written notice term and an implied ‘reasonable notice’ term.  Recall that the requirement to provide ‘reasonable notice’ is an implied term, inserted into employment contracts by judges when the written contract is silent on how much notice is required to terminate the contract.  The duty to mitigate is a requirement that follows a breach of contract. When an employer terminates a contract without giving ‘reasonable notice’, it is breaching the contract.  The normal rules of damages specify that the employee by put into the position they would have been had reasonable notice be given, but that is subject to an obligation to make efforts to try and limit (or mitigate) those damages by looking for alternative work.

However, when a contract entitles an employee to a specific amount of notice (or money in lieu of notice), the employee is entitled to the contractual amount.  The issue of mitigation does not arise, because the court is not assessing damages for a breach of contract.  It is simply enforcing the clear language of the contract.  The parties had agreed that, as a condition of the employer terminating the contract, the employee would be entitled to X amount of money.  We can think of this a contractual requirement or as the fixing of ‘liquidated damages’, the purpose of which is to fix a sum to be paid the employee irrespective of the actual damage suffered by the employee, according to Winkler.  The purpose of such a clause is to introduce certainty into the contract, which would be inconsistent with implying a duty to mitigate.

Thus, Winkler wrote:

An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount.  It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.

There’s some great comments by Winkler in response to the employer’s claim that it would be ‘unfair’ to allow the employee to keep both the severance payment the contract required, and his new salary at the new employer.  Winkler writes:

It is worthy of emphasis that, in most cases, employment agreements are drafted primarily, if not exclusively, by the employer. In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages.  In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from the fixed amount.  Notably, the concern expressed in Graham seems to disregard the oft-observed disparity in bargaining power between employee and employer.

We saw the same Court note recently (in Braiden v. La-Z-Boy)  that “in the employment context, there is inequality of bargaining power between employees and employers”, that employees are ‘vulnerable”, and that “recognition of this vulnerability is now so firmly embedded in the jurisprudence that it need hardly be recited.” Along the same lines is this little jewel about the desirability of the law treating the rich and famous the same as the ‘less privileged’ [though I note that B was a highly paid Vice-President]:

It is noteworthy that in the sports, entertainment and senior management fields it is commonplace for such contractual provisions to not be subject to mitigation.  Where the rich, famous, and powerful are involved, there is no suggestion that such payments are unfair to the other contracting party, even where there is, in effect, total mitigation of the loss.  A contract is a contract, and it is expected that it will be honoured.  Nothing short of this can be countenanced where the terminated employee is less privileged.

Bowes v. Goss Power is yet another exhibit in the ongoing evolution of employment law that is treating the employment contract as a special species of contract characterized by the inequality of bargaining power and the vulnerability of one party.

Implications?

The most likely impact of this decision will be that, in the future, employers will be careful to include an expressed requirement to mitigate if they elect to include a fixed amount of notice that exceeds the minimum statutory notice in employment standards legislation (there is no duty to mitigate associated with statutory notice requirements).

What do you think of this decision?  Do you think it is ‘fair’ that the employee gets to keep both his 6 month’s pay from his previous employer and his pay from his new employer?

 

 

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4 Responses to Bowes v. Goss Power Products: No Duty for Employee to Mitigate When Contract Includes a Written Notice Term

  1. Dennis Buchanan Reply

    June 28, 2012 at 4:17 pm

    Food for thought: “when a contract entitles an employee to a specific amount of notice (or money in lieu of notice)”

    What is the function of the “or”? The parentheses imply a certain reading, which may not be an unfair interpretation of the decision.

    But there seems to be some ambiguity:

    When a contract says “a” or “b”…
    When a contract says “a or b”…

    Is the contractual proviso for “pay in lieu” an essential prerequisite for displacing the duty to mitigate? If the contract simply fixed the period of notice, without providing for pay in lieu, would that have changed the result?

  2. Doorey Reply

    June 28, 2012 at 5:28 pm

    Hi Dennis. I doubt very much the court would make the distinction you are talking about. Are you talking about a contract that says an employer can only terminate the contract by giving working notice, so that paying out the notice period instead is not an option?
    Wouldn’t the court just imply, or assume, the parties intended the ‘or in lieu’ part to be there, even if it is not expressed? It would be odd to say that the employer must keep an employee around and working for the entire notice period, even if there is no work or the employee is incompetent? It would take pretty clear language for the court to assume that is what the parties intended, since it runs so counter to how employment works. Or am I misunderstanding your point?

  3. Dennis Buchanan Reply

    June 29, 2012 at 12:49 am

    Not so odd to have a contract that says the employer can only terminate the contract by giving working notice.

    That’s exactly the implied term at common law. See, for example, para 15 of Taylor v. Brown (http://canlii.ca/t/1j4qm), which the Court in Bowes distinguished. And it would be strange indeed if a written contract could not be written to resemble – with certain modifications – terms which would otherwise be implied at common law.

    Yes, the employer *must* keep the employee around and working through the notice period, even if there is no work or the employee is incompetent…or else be in breach of its contractual obligations and liable to compensate the employee for his/her resulting losses.

    Pay in lieu of notice is traditionally based on principles of damages, and the entitlement arises upon breach of the contractual duty to give notice, which is why it is traditionally subject to the duty to mitigate. But on the facts of Bowes, where pay in lieu of notice is a term of the contract itself, it is absolutely consistent with first principles of contract law that the mitigation principle should not apply. I see this decision, to that extent at least, as streamlining the employment contract with contract law. (The temptation to read the contract against the employer isn’t necessary here, but there’s a nod to contra proferentum in the decision as well.)

    The Court is right that, despite Justice Nordheimer’s finding in Graham, the contractual language in Bowes is for something quite different from the common law framework: A period of notice that does not refer to the Bardal factors, and compensation on the basis only of base salary. The Court is simply giving effect to the clear language of the contract.

    But some contracts use language which, to varying degrees of clarity, expressly do only what Justice Nordheimer suggested – that is, agree in advance as to the period of reasonable notice.

    I don’t think there would be basis for finding an implied term of ‘or pay in lieu’. It clearly doesn’t arise by operation of law, and it would be awkward to apply either of the ‘presumed intention’ tests to it. And tricky, too, since there’s really no basis for opting for any one method of calculation of pay in lieu over any other, in cases with variable or non-monetary compensation.

    The common law’s way of dealing with that problem is to look at what the person would have received had the contractual term been complied with. But if the point of the contractual provision is to displace that common law approach…then what?

    The distinction of whether or not “pay in lieu” flows from the contract itself or from breach of the contract is important to a number of questions. Mitigation is one which cuts both ways – no duty to mitigate; no obligation to compensate for mitigation expenses. Aggravated damages could be another, since Fidler v. Sun Life.

    So if you had a contractual term that just said “We can terminate this contract for any reason on six months’ notice”, then the term looks very much like the implied term of reasonable notice at common law, and should therefore fall into a similar framework – if the employer doesn’t give notice and thus breaches the contract, the employee is entitled to sue for damages, subject to a duty to mitigate.

    So here’s the crux:

    It isn’t clear to me that you *can* apply the Court’s reasoning from Bowes about ‘contractual amounts’, because the contract simply doesn’t set out an amount, nor a formula for calculating it. Without “pay in lieu” language, the contractual language is different in many material ways. But on the other hand, Justice Winkler seems to be concerned about the fairness aspects from Abrahams, about creating a cap on damages which may be lower than actual damages, while still permitting the defendant credit for factually lower damages.

    • Doorey Reply

      September 23, 2014 at 4:57 pm

      Thanks Dennis, interesting analysis. I follow your reasoning, but I’m still not persuaded that it is what the court decided. Doesn’t this passage put to rest the suggestion that it all turns on whether the contract says “or pay in lieu”?:

      “Mitigation is a live issue at law only where damages are at large, i.e. damages in lieu of reasonable notice. Mitigation is not applicable if the damages are either liquidated or a contractual sum.”

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