Termination provision didn't remove requirement to pay out contract term
An employer that terminated a worker less than one month after his fixed-term contract automatically renewed must pay damages for the remainder of the new fixed term, the Ontario Superior Court of Justice has ruled.
The worker was a real estate agent for Sotheby’s International Realty Canada, hired in June 2021. His employment was governed by a written agreement that stated it was in effect for a period of one year ending on June 10, 2022. The agreement also allowed for it to be renewed “for one additional year by mutual written agreement.”
In addition, the agreement stipulated that if the one-year period lapsed and the worker continued to provide services to Sotheby’s, the agreement “will be deemed to be extended for a period of one year” with the same terms, provision, and conditions.
The agreement had a termination clause that allowed Sotheby’s to terminate it immediately without notice if the worker violated the agreement, and either party could terminate it without cause “at any time with written notice to the other party.”
The parties did not execute a renewal agreement in June 2022 but the worker continued to work for Sotheby’s, so the contract was deemed to be extended until June 10, 2023.
However, Sotheby’s terminated the contract on July 5, 2022, without notice.
Wrongful termination action
The worker found a position with another real estate brokerage six days later. He then sued Sotheby’s for damages for wrongful termination of the contract and moved for summary judgment.
Sotheby’s maintained that the termination clause allowed it to terminate the contract with written notice, arguing that the plain reading of the provision indicated that the phrase “at any time” meant that the right to terminate without cause could be exercised so long as the party terminating the contract advised the other in writing. There was no express or implied contractual right to any advance notice for termination without cause, the company said.
The court noted that “the law is clear” that when an employer terminates a fixed-term contract, the worker is entitled to what they would have earned for the duration of the contract’s term, regardless of whether they are an independent contractor or not – unless there is an enforceable termination clause.
“When you have a fixed-term contract, if the terminating party terminates it, then what is owed to the opposing party is damages equivalent to the balance of that contract,” says Paulette Haynes, principal of Haynes Law Firm in Toronto.
The court also noted that the Ontario Court of Appeal recently found that independent contractors under fixed-term contracts have a duty to mitigate their losses, subject to an agreement stating otherwise.
Advance warning of termination
The court found that the use of “immediately” in the with-cause termination provision referred to actually terminating with no notice, but one would have to advise the other about the end of the agreement. As a result, the expression “without notice” could only refer to a period of advance warning required by common law. For termination for cause, there would be no advance warning, said the court.
Based on the for-cause termination provision, the without-cause provision’s reference to termination with written notice had to also refer to advance warning, the court said, adding that if it was otherwise, the concept of a one-year renewable term would be meaningless if either party could terminate the contract at will.
“Sotheby’s thinking was, ‘Okay, we can terminate any time and we don't have to give notice,’ but the court was saying that really nullifies the meaning of a renewal term,” says Haynes.
“The court said that either party can terminate without cause at any time and we have been told a method of notice, which is written notice to the other party,” she adds. “That language should be interpreted as written advance notice of termination if you want to terminate somebody without cause.”
The court also found that the actual amount of notice was not referenced in the without-cause termination provision because it wasn’t necessary – it’s well-established in jurisprudence that the amount of notice required would be the time remaining in the renewed one-year term of the contract.
Interpretation of ambiguity
Although the court determined that there was no ambiguity in the contract, it noted that if there was between the two termination provisions, the doctrine of contra proferentem would apply – it would be interpreted in favour of the worker and against Sotheby’s as the maker of the contract.
“When the courts apply the principle of contra proferentem, they’re implicitly saying the employer makes up the contract and has the onus of producing a contract with clarity,” says Haynes. “And we know that they make those contracts in their interest and arguably have the resources to do so - but if there's any ambiguity, then it will be interpreted against the maker of the contract.”
The court determined that the worker was entitled to damages for the 11 months remaining on the contract. Although Sotheby’s argued that the worker had no entitlement to damages because he found a new job six days after the termination, the court found that it took time to transition to the new brokerage and build up his business, and his status there was not the same. In fact, the worker provided evidence that his earnings at his new job were significantly less for a period of time.
Both breach-of-contract-law and common law place a duty to mitigate damages on the non-breaching party, but that duty is in relation to comparable employment, says Haynes.
“It was not surprising that Sotheby’s would say there were no damages because the worker got a job six days after his termination,” she says. “But the worker’s argument was that it takes a long time build oneself up to the level that he was at Sotheby’s - a worker does not have to obtain just any work, it has to be comparable in terms of status, hours, remuneration, that kind of thing.”
Damages for balance of contract
Sotheby’s was ordered to pay the worker the equivalent of 11 months’ worth of his average monthly income over his last year at Sotheby’s, with a 45-per-cent discount accounting for a decline in the real estate market in 2022 and minus his actual earnings at his new employment. The final total was just over $21,000 plus costs.
Employers should be clear about what they want to achieve with fixed-term contracts, according to Haynes.
“Ideally, you treat the worker as employed only for the term and have the termination provisions be consistent with that,” she says. “We've seen with this case that once you have provisions of renewal, if the contractor continues services then you basically trigger another term and that obligation of paying the [worker] for the remainder of the existing contractual.”
The employer should think about whether they characterize these relationships as fixed-term or as an indefinite nature, as this case reiterates the obligations with fixed-term contracts, adds Haynes.
“I don't know this for a fact, but I think some employers may want to do fixed terms thinking they can get around some of the obligations that would come with a contract of an indefinite nature.”
