Fixed-term contract had a vague termination provision
This instalment of You Make the Call features a dispute over an employee’s entitlement when his fixed-term contract was terminated.
John Howard, 59, was hired by The Benson Group (TBG) in September 2012 to be a truck shop manager and sales development manager at an automotive service centre in Bowmanville, Ont. He signed a five-year, fixed-term contract prior to starting in the position.
The employment contract contained an article providing for early termination. TBG had the right to early termination without cause through a clause that stated “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.”
On July 28, 2014, TBG terminated Howard’s employment, just 23 months into the five-year contract term. The company took the position that the termination clause entitled Howard to two weeks’ salary in lieu of notice — the minimum allowed by the act.
Howard commenced an action for breach of contract, seeking payment for the balance of the contract’s term — more than three years’ salary. He was granted summary judgment for the action, but the motion judge determined his compensation should be common law damages for wrongful dismissal instead of his salary for the remaining three years on the contract. The amount of these damages and any obligation by Howard to mitigate his damages was to be determined in a mini-trial.
The motion judge found that the clause in the contract allowing for early termination by the employer was unenforceable due to ambiguity. Once that clause was eliminated, the motions judge found the other provisions didn’t demonstrate an intention by Howard and TBG to displace the common law presumption of reasonable notice, leaving “an implied term under the common law requiring ‘reasonable notice’ for the termination of the employment of (Howard).”
Howard appealed the decision, arguing he should be entitled to compensation for the balance of the contract instead of common law damages for reasonable notice.
You make the call
Was TBG liable for reasonable notice damages for wrongful dismissal?
OR
Was Howard entitled to compensation for the balance of the five-year contract that was terminated early?
If you said Howard was entitled to be paid for the balance of the five-year contract, you’re right. The Ontario Court of Appeal found that the motion judge was correct in that “every employment contract includes an implied term that an employer must provide reasonable notice to an employee prior to the termination of employment” if there was no agreement to the contrary. However, the appeal court found the motion judge erred in finding there was no agreement to the contrary.
The appeal court found the removal of the ambiguous clause didn’t change the fixed-term nature of the contract, which by having an end date automatically terminated the employment relationship without any common law notice obligation. The ambiguous clause only provided for early termination, so without it there was no allowance for early termination of the contract and no stated notice obligation. The fact the contract was a fixed-term contract was sufficient to displace the common law presumption of reasonable notice on termination, said the appeal court.
The court also found TBG sought to use the fixed-term contract to limit or eliminate its severance obligation. But to do this, it had to communicate clearly its intention so Howard could properly choose whether he wanted to enter the contract or not. TBG drafted an ambiguous early termination clause that was found to be unenforceable, so it couldn’t complain when it was held to the remaining terms of the contract, said the court.
The court also found there was no duty to mitigate on the part of Howard since it wouldn’t be fair to permit an employer “to opt for certainty by specifying a fixed amount of damages for termination, and then permit it to reduce that amount by compelling the employee to mitigate his or her damages when mitigation was not addressed in the employment agreement.”
The court allowed Howard’s appeal and found Howard was entitled to compensation for the balance of the contract.
“In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed-term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation,” said the appeal court.
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