Termination clause in Ontario agreement struck out due to unfortunate use of 'or'
By Stuart Rudner
As regular readers will know, the last few years have seen a plethora of legal challenges to termination clauses and, unfortunately, a judicial approach that has been largely unpredictable.
We have written about the issue countless times, including here and here, the latter of which was a discussion of the Ontario Court of Appeal decision in Nemeth v. Hatch Ltd., which we indicated was one of a series of cases that suggested a more common-sense approach that would be welcomed by employers.
Drafting is critical, and even a seemingly innocuous misuse of a word can have a devastating impact. The recent Ontario Superior Court of Justice decision in Alarashi v. Big Brothers Big Sisters of Toronto (BBBST) is a perfect example of what can happen when an employer does not choose their words carefully.
Remember that, by default, all employees are entitled to “reasonable” notice of a dismissal without cause. That presumption can be displaced by contract, but our courts have repeatedly confirmed that in order to do so, a termination clause must be clear and unambiguous.
Furthermore, the termination clause cannot breach the applicable employment standards legislation, or even have the potential of doing so.
In Alarashi, the termination clause in question read as follows:
“Following the probationary period, in the event that it becomes necessary to terminate your employment without cause, BBBST will provide you with such notice (or payment in lieu of notice) or severance pay that may be required to meet the requirements of the Employment Standards Act, 2000 [ESA]. Notice is based on the length of service as follows: … four years or more but fewer than five years — four weeks… You understand and agree that BBBST has no obligation to make any additional payments to you or to provide you with additional notice upon termination. You also understand and agree that BBBST would not have entered into this agreement if it were required to provide notice in excess of the Employment Standards Act, 2000.
“If your employment is terminated without cause, BBBST will continue your group insurance benefit coverage for such period as the Employment Standards Act, 2000 shall require, provided such coverage is available from the insurer.
“Your employment may be terminated for cause and without pay in lieu of notice at any time for serious breaches of the terms of this agreement and/or BBBST’s policies set out in the Human Resources Manual, and/or for any cause recognized at law.”
Two out of three ain’t bad?
The clause actually withstood two challenges brought by the plaintiff. However, the court, on a summary judgment motion, found that it could not withstand a third. Specifically, the employee argued that
- First, the termination clause indicates insurance benefits will continue makes coverage contingent on the insurer, contrary to the ESA.
- Second, the termination for cause provision allows for termination for conduct which falls short of willful misconduct, contrary to the ESA.
- Third, the termination clause sets out an entitlement on termination to payment in lieu of notice (termination pay) or severance pay, whereas these are both available where an employee is eligible.
The court rejected the first two arguments. Notably, the court affirmed the notion approved of in Amberber v. IBM Canada Ltd. that when assessing the validity of termination clauses, ambiguity will invalidate the clause but courts should not strain to find ambiguity where there is none. That is good news for employers.
The second argument is one that we see more often lately: that the termination for cause clause is invalid because it allows for dismissal without any notice or compensation where there is just cause. The argument is that some forms of just cause at common law or pursuant to the contract will not necessarily disentitle an employee to notice or compensation pursuant to employment standards legislation. In this case, the clause stated:
“Your employment may be terminated for cause and without pay in lieu of notice at any time for serious breaches of the terms of this agreement and/or BBBST’s policies set out in the Human Resources Manual.”
That is not the same as what the employment standards legislation, so the argument is that even if the contract disentitles an employee to notice or termination pay in certain circumstances, the legislation may not, so the contract is inconsistent with the legislation and therefore unenforceable.
This argument inevitably frustrates employers, since it is made in the context of a dismissal without cause so, in their view, an issue regarding the termination with cause provision should be irrelevant. The court agreed and did not reject the termination clause on that basis.
If the clause could be interpreted in a way that breaches the act, it will be void
However, the good news for employers came to an end when the court considered the third argument. The reference to “severance or termination pay” was fatal. The court found that the clause could be interpreted in two different ways, only one of which complied with the Employment Standards Act, 2000.
Our courts have always said that to displace the common law presumption that reasonable notice of dismissal is required, there must be clear and unambiguous language.
In recent years, many challenges to termination clauses have alleged that clauses were ambiguous or that they breached the employment standards legislation. In some cases, it is both: an argument that the clause could be interpreted in more than one way, with one of those ways being contrary to the legislation.
That was the argument in Alarashi which succeeded in knocking out the termination clause.
The wording in question: “BBBST will provide you with such notice (or payment in lieu of notice) or severance pay.” The act in question requires notice or termination pay and, in some circumstances, severance pay as well.
By using the word “or,” the clause suggests that they will not all be provided. So, one possible interpretation is a breach of the act.
The court noted the principle of contract interpretation known as contra preferentum, which requires that any ambiguity in a contract be interpreted in favour of the party that did not draft it. As a result, the clause was found to be unenforceable.
Always include a saving clause
One way to avoid results like this — where you have to pay extensive termination pay despite what you thought was a binding termination clause — is the use of a saving provision. Such a clause provides, essentially, that in the event that the entitlements pursuant to the clause fall below those required by the applicable legislation at any time, the requirements of the legislation will prevail.
This will protect the employer from inadvertently breaching the legislation, even if the legislation changes in the future.
Needless to say, a saving provision could have dramatically changed the result of this case. And, as we know, the difference between an enforceable termination clause and one that is unenforceable can be as much as two years of pay.