The latest on termination clauses: Good news for employers?

Recent Ontario decision likely to be overturned on appeal

The latest on termination clauses: Good news for employers?
Stuart Rudner

For years, we have watched the evolving saga of judicial treatment of termination clauses. While there have been “wins” on both sides, the pendulum has definitely swung more in favour of employees, with many termination clauses being struck out.

The most recent decision of the Superior Court of Ontario is Rahman v. Cannon Design Architecture Inc., which was a somewhat surprising win for the employer. While this would seem to be good news for those on that side of the fence, I suspect that if the decision is appealed, it will be overturned. Hence the reason for the question mark at the end of the title of this piece.

Why do I think that the case won’t stand? The key term is this:

“CannonDesign maintains the right to terminate your employment at any time, and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.”

Since last fall, we have been in the “Waksdale era,” in which any termination for cause section that uses a “just cause” standard invalidates the entire termination clause, including the termination without cause section. Right or wrong, that was the state of the law. And on that basis, the clause in Rahman would be unenforceable.

So why was this case decided differently? The pithy answer is that it was decided by a different judge. To expand on that, in Rahman, Justice Sean Dunphy’s reasons included the following:

“[25] I cannot agree that Ojo represents a conclusive and binding determination that the general phrase ‘conduct that constitutes just cause for summary dismissal’ must in every contract and in every context be construed as authorizing dismissal in circumstances that would contravene the ESA [Employment Standards Act] and the regulations thereunder.

“[26] There is no basis to apply a strict or even adverse construction approach to the termination provisions of this employment contract in the context of this case where:

“a. the termination provisions were the object of specific negotiation with the benefit of time and independent legal advice between reasonably sophisticated parties with neither compulsion nor marked disparity in bargaining power;

“b. the negotiations resulted in material improvements for the benefit of the prospective employee in excess of ESA minima; and

“c. the offer letter contains an explicit ‘for greater certainty clause’ recognizing that the employer’s ‘maximum liability… for common law notice, termination pay, benefits continuation, severance pay, or payment in lieu of notice’ shall be limited to the greater of the notice required in the Officer’s Agreement or the minimum amounts specified in the ESA.

“[27] The mutual intent to comply with the minimum standards of the ESA is clear in this case. As Iacobucci J. observed in Machtinger v. HOJ Industries Ltd., [1992] 1 SCR 986 (at para. 35):

“[a]bsent considerations of unconscionability, an employer can readily make contracts with his or her employees which referentially incorporate the minimum notice periods set out in the Act or otherwise take into account later changes to the Act or to the employees' notice entitlement under the Act. Such contractual notice provisions would be sufficient to displace the presumption that the contract is terminable without cause only on reasonable notice.


“[29] There is no basis in this case to imply into the general phrase ‘just cause for summary dismissal’ a standard below the ESA standard of wilful misconduct absent any evidence that such represents a reasonable construction of the intention of the parties in the context of the employment agreement in question. There is no evidence of any policy or practice of Cannon Design authorizing summary dismissal of employees for cause in circumstances beyond the limited circumstances enumerated in the ESA and its regulations. The Oosterbosch v. FAG Aerospace Inc., 2011 ONSC 1538 (CanLII) case relied upon in Ojo made no generalized findings regarding ‘just cause for summary dismissal.’ Oosterbosch considered a specific set of written employment policies that clearly did authorize dismissal in circumstances beyond the ‘wilful’ standard required by the ESA.”

The problem is that Justice Dunphy relied extensively on the fact that Farah Rahman was a sophisticated party, received legal advice about the termination provision, engaged in meaningful negotiation about it, and was  well informed on the issue of termination and severance entitlements and the potential impact of the contractual terms.

Justice Dunphy contrasted the situation with that in Wood v. Fred Deeley Imports Ltd.:

“Her situation on reviewing and signing the employment agreement was poles apart from the situation that more commonly obtains in circumstances described by the Court of Appeal in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 at para. 28.”

Lastly, the fact that there was a “saving provision” in the contract was a factor:

“[13] The offer letter thus provides in clear and unambiguous terms that payments the employee shall receive on termination will be no less than the minimum amounts required under the ESA even if the Officer’s Agreement might purport in some circumstances to provide for a lower payment.”

The problem with Justice Dunphy’s decision, welcomed by the Defence Bar as it may be, is that it relies on many factors that should be irrelevant when assessing whether a termination clause is enforceable. In Wood v. Fred Deeley Imports Ltd., which the court referenced, the Court of Appeal explicitly confirmed that the enforceability of a termination clause is to be assessed solely on its wording: “The wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.”

That the employee was sophisticated, or received legal advice, or negotiated the contract, including the termination clause, is not relevant to the analysis. Neither is the parties’ mutual intention to be bound by the legislation. None of those factors change whether or not the clause is unlawful as a breach of employment standards legislation, which is the test.

So, while this new case may give employers hope, and will allow counsel to take a stronger position when defending dismissal for cause provisions that refer to “just cause”, I suspect that it will be overturned, and we will be back to where we were a week ago.

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