Northern Exposure

Unfixing a fixed-term contract

by Eowynne Noble

In a recent good-news decision, the Ontario Superior Court of Justice shed new light on how damages should be awarded if a fixed-term contract is terminated early and the termination provision is unenforceable.

Employees may no longer be entitled to be paid out the balance of the contract. Instead, their damages may be limited to reasonable notice. What’s more, they may have an obligation to mitigate those damages. As employers prepare to hire students or short-term employees for the summer, they should take note of this recent decision in Howard v. Benson.

Facts

The employee was hired by the employer for a period of five years commencing September 4, 2012. Less than two years in—in July 2014—the relationship began to sour. On July 28, 2014, the employer terminated the employee’s employment—three years prior to the conclusion of his fixed-term employment contract.

The employer provided the employee two weeks’ pay in lieu of notice in accordance with the termination provision in the employment contract. But the employee took issue with that limited notice and commenced an action. He claimed he was owed $194,284.93, being the balance of the five-year employment contract.

The case turned on one clause in the contract:

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.

Decision

The employer argued that the clause was enforceable. But the employee successfully countered the employer’s argument. He claimed that the phrase “any amounts paid” in clause 8.1 was ambiguous; it was not clear whether it included benefits or bonuses. The court agreed that it was unenforceable because it was not clear that all forms of compensation would be continued for the notice period, as required by Ontario’s employment standards legislation.

But that didn’t mean the employee was entitled to the balance of the five-year contract. Instead, the employer was successful in its alternative argument. It argued that in the event the termination provision was invalid, the appropriate remedy was reasonable notice at common law, not the balance of the fixed-term contract (which would have been three years in this case).

In making this argument the employer relied on Mississauga Motors Mart Inc. v. Sovereign General Insurance Company, an insurance case, for the proposition that when interpreting a contract, the court should avoid an interpretation that would not have been contemplated by the parties at the time the contract was concluded. The court agreed that because early termination of the employment contract was contemplated, and terms qualifying the five-year term were included in the employment contract, awarding the balance of the contract would be contrary to the intention of the parties at time of formation.

The parties are scheduled to appear before the court later this year to determine what the appropriate amount of reasonable notice will be in this case. The court also will consider whether the employee took adequate steps to mitigate his damages.

Takeaways for employers

Prior to this good-news case, courts across Canada routinely decided that absent an enforceable termination provision in a fixed-term employment contract, the employee would be entitled to the balance of the contract as liquidated damages. Furthermore, the employee would not be required to mitigate those damages.

This case suggests that Canadian courts are headed in a more sensible direction and will now use reasonable notice to determine damages for the termination of a fixed-term contract. That would mean employees would have to mitigate their damages accordingly.

Notwithstanding this, Canadian employers who want to use fixed-term contracts should heed the warning in this case. Be sure to include express termination provisions—ones that provide at least employment standards minimums—in fixed-term contracts.