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Apr 25, 2016

Coming to terms with a contract’s fixed term

Courts disagree on the liability when a fixed-term contract’s termination provision is deemed too ambiguous

By Jeffrey R. Smith 

Contracts with independent contractors can be great things for businesses — they can secure someone to do a job without worrying about things that come with hiring someone as an employee, such as statutory deductions, workers’ compensation, benefits, and employment standards obligations. Obviously, there has to be some good things in a contract or a contractor won’t choose to sign it and the company may find it difficult to find someone to do a good job. 

It’s a common principle that a contract signed for a fixed term is guaranteed for that term. Neither party can end the contract without being responsible for the balance of the contract. This can be avoided by including termination provisions, which can allow either party to end the contract for specific reasons and get out of the obligations — such as termination of the contractor for just cause or with a specified amount in lieu of notice. But if there is not termination clause, can the company be liable for common law notice of termination instead of the remainder of the contract term? 

Recently, an independent contractor in Ontario filed a claim for breach of contract, asking for compensation for the balance of a five-year contract after the company for whom he was working terminated the contract after less than two years. A judge granted a motion for summary judgment, but ruled that the contractor should be entitled to common law reasonable notice instead of the balance of the contract because the contract’s severance provision was too vague and there was no other indication the parties wanted to contract out of common law notice. 

The provision stated that “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 company had paid the contractor two weeks’ pay after it terminated the contract. 

An appeal court disagreed with the motions judge, finding that the ambiguous severance provision meant that the contract should be treated as not having such a provision. Without such a provision, there was no reason to forego the established contractual notion that a contract with a fixed term held its parties to that term — meaning the company was liable for the full five-year term of the contract. 

The appeal court also noted that the company used the fixed-term contract to limit its severance obligation. It could plan for having the contractor on the books for just the five years of pay and no longer. If it wanted the opportunity to get out of that amount, it would have to have a clearer severance provision so the contractor could make an informed decision on whether to enter into the contract or not. See Howard v. Benson Group Inc., 2016 CarswellOnt 5382 (Ont. C.A.). 

When it comes to a contract with a fixed term, the only way a company can get out of liability for the entire term of the contract is to have a clear termination provision and the circumstances outlined such a provision come to pass. So how did the motions judge come to the conclusion that common law notice was in play once the ambiguous termination provision was deemed unenforceable? Should fixed-term contracts have specific language stating there is no intention by the parties to bring common law notice into it, or does having a specific term of validity always mean common law notice isn’t an option?

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