The Ontario Superior Court of Justice recently released a decision, Rahman v. Cannon Design Architecture Inc., 2021 ONSC 5961 (“Rahman”), in which a contractual termination provision was upheld on summary judgment, on the basis that the provision was entered into following negotiation between parties of equal bargaining power, both of whom had obtained independent legal advice. The decision, penned by Justice Dunphy, stands in contrast to other recent cases from the Ontario courts in which termination provisions have been viewed through a strict lens, with many being found to be unenforceable upon challenge.
Recent Case Law
As we’ve discussed previously in this blog (see here, here and here, for example), the Ontario courts released a series of decisions in the last few years relating to termination provisions in employment agreements. In these decisions, termination provisions have been found to violate the Ontario Employment Standards Act, 2000 (the “ESA”), including by failing to provide for minimum ESA entitlements, and as such, have consistently been found to be unenforceable.
Notably, in 2020, the Ontario Court of Appeal found in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale”) that contractual language that permits termination for cause in circumstances outside those permitted by the ESA is in violation of the ESA, and may therefore impact the enforceability of both termination “for cause” and “without cause” provisions.
By way of further background, under the ESA, only “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” will relieve the employer from providing the ESA termination entitlements. However, it is fairly common to see employment contracts (particularly contracts from before 2020), in which termination for cause provisions are more broadly drafted and/or include numerous enumerated grounds that the parties agreed at the time of drafting would constitute just cause. This type of drafting has been scrutinized by the Ontario courts, for the reasons noted above.
Facts in Rahman
The Plaintiff in Rahman was employed as a Principal for Cannon Design Architecture Inc. (“Cannon”). After a series of interviews and prior to starting, Cannon provided Ms. Rahman with a written offer letter (the “Letter”) and an attached “Officer’s Agreement” with more general terms. The Letter was stated to govern in the event of any conflict with the Officer’s Agreement.
Cannon advised Ms. Rahman to seek independent legal advice with respect to the offer, which she did. The evidence before Justice Dunphy showed that Ms. Rahman’s lawyer drew her attention to the termination provisions in the Letter but raised no concerns in respect of the termination for cause language. The parties’ negotiations ultimately resulted in material improvements to the terms of Ms. Rahman’s employment, including with respect to her entitlements upon termination without cause.
The final terms in the Letter included as follows:
Termination Without Cause:
“[Payments in the event of termination without cause to be not less than the] advance notice and/or applicable payments, benefits continuation, and severance pay if applicable, equivalent to the minimum applicable entitlements contained within the [ESA]” . . . . “[f]or greater certainty, [Cannon’s] maximum liability to you 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 your Officer's Agreement or the minimum amounts specified in the ESA”.
Termination for Cause:
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. [Emphasis added.]
Ms. Rahman commenced work in early February, 2016. Just over four years later, her employment was terminated on a without cause basis.
Relying in part on Waksdale, Ms. Rahman argued that she was entitled to reasonable notice of termination at common law, because the termination provisions in the Letter violated the minimum standards of the ESA and were therefore unenforceable. She pointed to several purported deficiencies in the termination provisions, including that (i) the just cause provision permitted termination without notice in circumstances outside those permitted by the ESA, (ii) the notice provisions purported to pay only base salary during the notice period, (iii) severance pay was not included in the Officer’s Agreement, (iv) there were insufficient notice provisions in the future, and (v) there was no bonus entitlement on termination, even if fully earned.
Without Cause Provision
Justice Dunphy upheld the without cause termination provision, rejecting objections (ii) through (v) from above based on the plain language of the agreement, including “the clearly expressed priority of the [Letter] relative to the Officer’s Agreement” and the “twice repeated express affirmation of the mandatory requirement to pay the ESA minimum amounts on termination at all events.”
For Cause Provision
Justice Dunphy also upheld the “for cause” termination provision, finding that there was no basis in this case to apply a “strict or even adverse construction approach”, for the following reasons:
- 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;”
- These negotiations resulted in material improvements for the benefit of Ms. Rahman in excess her minimum ESA entitlements; and
- The Letter contained an explicit “for greater certainty clause” recognizing that Cannon’s maximum liability would be the greater of Ms. Rahman’s contractual termination entitlements or her minimum ESA entitlements.
Justice Dunphy found that it was clear that the parties had a mutual intent to comply with the minimum ESA standards, based on the express affirmations in the Letter and an examination of the surrounding circumstances. He also found that Ms. Rahman’s contractual termination entitlements exceeded her minimum entitlements under the ESA such that her contractual entitlements should govern (in accordance with Section 5(2) of the ESA, a contractual provision that provides in excess of an ESA standard on the same subject matter will apply in lieu of the ESA standard).
In light of the above, Justice Dunphy found that there was no genuine issue for trial and that the termination provisions in the Letter were valid and enforceable so as to govern the termination of Ms. Rahman’s employment.
The decision in Rahman strongly emphasizes the sophistication of the employee, the receipt of independent legal advice, and the negotiation of the terms of the employment agreement to the employee’s benefit. For employers faced with disputes over termination provisions from similarly situated employees, this decision will be helpful. Rahman also underlines the importance of encouraging employees to obtain independent legal advice and providing them with adequate time to do so.
Employers should be mindful that because Rahman departs from the Ontario Court of Appeal’s decision in Waksdale, it is susceptible to appeal. As recent case law more generally favours a strict approach to the interpretation of termination provisions, we continue to urge employers to exercise caution when drafting these clauses and to consult with legal counsel when doing so.