This entry relates to material covered in The Law of Work book in Chapter 11 (looking at fixed term employment contracts, Chapter 16 (damages and mitigation in wrongful dismissal lawsuits).
April 8 2016
A decision released today by the Ontario Court of Appeal clarifies that the duty to mitigate does not apply when an employer terminates a fixed term employment contract before its end date. The case is called Howard v. Benson Group. This case clarifies the application of the reasoning applied by the same court in Bowes v. Goss Power Products decided in 2012.
Howard was employed under a 5 year fixed term contract, but the employer terminated the contract after only 23 months. The contract said this about early termination without cause:
8.1 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.
The employer argued that this clause entitled it to terminate the contract at any time simply by giving ESA minimum notice, which was 2 weeks’ notice in this case. Howard argued that he is entitled to damages based on the remainder of the 5 year term of the contract, or 3 years plus one month.
The lower court ruled that the article cited above was ambiguous and therefore unenforceable. The court wrote:
I regard the language used in clause (8.1) to be sufficiently ambiguous as to the true extent of the plaintiff’s entitlement under the E.S.A. and in the result, that ambiguity must be construed against the defendant again having regard to the power imbalance that exists between an employer and employee as a matter of course.
The clause was ambiguous because it is unclear whether “any amounts” included just termination pay, or also benefits owing to the employee during the notice period. Note the now common reference to the need to respect the fact that the employee lacks power and also, as the court later notes, since the employer usually drafts the contract, any uncertainty should be interpreted in the employee’s interest.
Having found that the notice clause was ambiguous and therefore unenforceable, the court implied a requirement to provide “reasonable notice” rather than find that the damages should be assessed based on the remainder of the 5 year period of the contract. The employee appealed that ruling.
Court of Appeal
At the Court of Appeal, the issue of whether the notice term in the contract was ambiguous and therefore void was not challenged. Therefore the issue was whether the judge erred in implying reasonable notice rather than order damages based on the remainder of the 5 year fixed period.
Applying a standard of correctness, the Court of Appeal overturned the lower court. Work through the argument. Firstly, employment contracts include an implied term requiring “reasonable notice” of termination, unless the parties have agreed otherwise. A fixed term contract is an example of a exception to the general rule, since the parties have expressly agreed to the circumstances under which the contract will come to an end and have included an end date. Here, that end date was 5 years from the start date.
It is possible for a fixed term contract to include a clause permitting early termination either for cause or without cause but with notice in some amount. However if the contract does not indicate how much notice is required to terminate early, then in a fixed term contract (as opposed to an indefinite term contract), the period of notice is that remainder of the fixed term originally contemplated. In this case, the clause that purported to explain how much notice was required to terminate early (clause 8.1) was ruled void. That means we read the contract as if it wasn’t there. Since there was no notice of termination clause in the contract, it follows that the notice period required to terminate the contract is the remainder of the fixed term. The court notes too that it was the employer’s fault for not drafting a clearer termination clause if the intent was to avoid this result.
Duty to Mitigate
Since the contract was for a fixed term, the question arises whether the employee was under a duty to mitigate. A similar issue was raised by the Bowes v. Goss Power decision (which I summarized here). However, in Bowes the contract was not for a fixed term (it included a defined notice period). Nevertheless, in Howard v. the Court of Appeal ruled that “the rule in Bowes” applies to a contract that is for a fixed term, since the fixed term is essentially the equivalent of defined notice period.
 There is no reason to depart from the rule in Bowes that there is no duty to mitigate where the contract specifies the penalty for early termination. It does not matter whether the penalty is specified expressly, as in Bowes, or is by default the wages and benefits for the unexpired term of the contract, as in the case of fixed term contracts generally.
Therefore, Howard was not required to mitigate his damages and he is entitled to the full amount of wages and benefits he would have been paid had he worked the remainder of his 5 year contractual term.
1. This decision, like that in Bowes, will no doubt cause employer lawyers to revisit how employers draft notice of termination clauses. They will fix the language to ensure that the duty to mitigate remains. Draft a notice of termination clause for a fixed term contract that would have that affect.