The recent decision of the Ontario Court of Appeal, Howard v Benson Group Inc (The Benson Group Inc), 2016 ONCA 256 (CanLII), is a reminder for all employers of the risks associated with fixed-term employment contracts.
John Howard was employed by Benson Group Inc. (“Benson”) at Benson’s automotive service centre in Bowmanville, Ontario. He was first employed by Benson as a Truck Stop Manager and then as Sales Development Manager. Mr. Howard’s written employment contract with Benson was for a five-year term. However, Benson terminated Mr. Howard’s employment only 23 months after his employment began. Benson did not allege just cause for Mr. Howard’s dismissal. Benson provided Mr. Howard with two weeks’ pay in lieu of notice of his employment termination.
Following the termination of his employment, Mr. Howard brought an action for breach of his employment contract against Benson. Mr. Howard sought damages equal to the amount he would have been paid if he had worked for the full duration of the five-year contract, which was equivalent to more than three years of salary and benefits.
SUMMARY JUDGMENT MOTION – COMMON LAW NOTICE
Mr. Howard’s action was disposed of by way of a summary judgment motion. The motion was granted by the motion judge; however, Mr. Howard was not awarded the remedy he sought. Instead of payment of his salary to the end of his five-year fixed-term contract, Mr. Howard was awarded common law damages for wrongful dismissal. The quantum of the damages, subject to mitigation, was to be assessed at a mini trial.
Notably, Mr. Howard’s fixed-term employment contract expressly provided for early termination of his employment by Benson. In particular, the contract included the following provision which set out the general framework for early termination of the contract:
The Employee and the Employer may terminate the Employee’s employment at any time in accordance with the terms and conditions of this Agreement.
Various early termination scenarios were governed by a separate provision in the employment contract, including early termination of the contract by Mr. Howard and by Benson for just cause. With respect to Benson’s right to terminate the contract early without cause, the contract 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.
The motion judge made two critical findings: (1) that the clause addressing early termination of the contract without cause was sufficiently ambiguous as to be unenforceable; and (2) that in the absence of an enforceable “without cause” early termination clause, Benson’s obligations were governed by “an implied term under the common law requiring ‘reasonable notice’ for the termination of the employment of [Mr. Howard].” Only the latter finding was appealed by Mr. Howard.
THE COURT OF APPEAL DECISION – DAMAGES FOR THE UNEXPIRED PORTION OF THE CONTRACT
The primary question raised on appeal was whether Mr. Howard was entitled to payment of the unexpired portion of his fixed-term contract because the contract was terminated prior to its expiry and the contract did not provide for early termination without cause. The Court of Appeal allowed Mr. Howard’s appeal, finding that Mr. Howard was entitled to an amount equal to his salary and benefits for the unexpired term of his fixed-term employment contract.
The Court of Appeal confirmed that where an employment agreement states unambiguously that the employment is for a fixed term, the employment relationship automatically terminates at the end of the term without any obligation on the employer to provide notice or payment in lieu of notice. Such a provision, if stated unambiguously, will rebut the common law presumption that reasonable notice must be given when an employee’s employment is terminated without cause. The Court of Appeal also confirmed that parties to a fixed-term employment contract can specifically provide for early termination and specify a fixed-term of notice or payment in lieu thereof. However, if the parties to a fixed-term employment contract do not specify a pre-determined notice period, an employee is entitled on early termination to the wages the employee would have received to the end of the term (at para. 22).
As the clause addressing early termination of the contract without cause in Mr. Howard’s contract was found to be unenforceable, Mr. Howard was entitled to the compensation that he would have earned to the end of the five-year term.
The Court of Appeal expressly rejected Benson’s argument that such an outcome produced a windfall for Mr. Howard and was unfair. In this regard, the Court of Appeal stated that Benson was not an unsophisticated party. Further, the Court of Appeal stated that Benson sought to use a fixed-term contract either to eliminate its severance obligation entirely or to limit it to two weeks’ notice upon early termination of employment. While the Court of Appeal acknowledged that Benson was free to do this, it also found that the consequences to an employee of such a bargain are so significant that the employer must communicate clearly in the contract that this is what it is intending to do. If an employer does not use unequivocal, clear language and instead drafts an ambiguous or vague termination clause that is later found to be unenforceable, it cannot complain when it is held to the remaining terms of the contract.
Finally, the Court of Appeal also concluded that Mr. Howard was not required to mitigate his losses under the fixed-term contract.
This case highlights the particular pitfalls of ambiguously drafted fixed-term employment contracts. Employers should be cautious when drafting fixed-term contracts to ensure that such contracts may be terminated early without significant liability. This is especially so in light of the Court of Appeal’s finding that a fixed-term employee whose employment is terminated early has no duty to mitigate his or her damages where the contract does not contain a provision allowing for early termination of the contract.