The Fixed-Term Contract: Employers Beware

The Ontario Court of Appeal has given employers yet another good reason to be wary about hiring employees on fixed-term contracts.  In Howard v. Benson Group Inc. (2016) ONCA 256, a unanimous Court awarded a terminated employee 37 months’ pay, equivalent to $194,284.93, upon termination of his employment agreement after just 23 months of work.  The employer had not alleged that he was terminated for just cause, and instead opted to exercise its (purported) termination rights under a clause in the employment agreement.

When the plaintiff brought a motion for summary judgment for an alleged breach of the employment contract, Justice Mackenzie of the Ontario Superior Court found the termination clause to be void as a result of its ambiguity, and excised it from the agreement.  Instead, Justice Mackenzie ordered a mini-trial on the appropriate period of notice based on the common law Bardal factors, and on the issue of whether the plaintiff mitigated his losses sufficiently by trying to find other work.  The Plaintiff appealed.

Background

John Howard was 57 years old when he began his employment with Benson Group Inc. in September of 2012 in the role of Truck Shop Manager on a five year fixed-term contract.  In May of 2013, Mr. Howard was promoted to the position of Sales Development Manager, with a base salary of $60,000.00 as well as participation in a bonus incentive program.  The initial contract from September 2012 remained in force, with the exception of additional salary and benefits commensurate with the promotion.

The employment relationship continued until July 28, 2014 when Benson Group exercised its contractual right to terminate the employment agreement, and pay its notice and severance obligations in accordance with the Employment Standards Act.  Subsequently, Mr. Howard sued on the basis that the clause, as follows, was too ambiguous to be enforced:

“8.1.      Employment may be terminated at any time by the Employer [the defendant] and any amounts paid to the Employee [the plaintiff] shall be in accordance with the Employment Standards Act of Ontario. [sic]”

When the trial judge found that this clause was unenforceable, and directed a mini-trial on the amount of common-law damages payable to the plaintiff, the plaintiff appealed this decision.  The plaintiff maintained the position that this was purely a breach of contract issue, and that he was entitled to the full value of the contract as it would be at the expiry of its five year term.

The Issue

Where an employee is employed on a fixed-term contract, and there is no clause (or an invalid clause) dealing with early termination of employment, is that employee entitled to the value of the balance of the employment agreement?

The Result

When drafting early termination clauses, an employer is required to achieve a high level of certainty; a principle stated in Ceccol v. Ontario Gymnastic Corporation, 2001 CanLII 8589 (ON CA).  Where the employer does not achieve such certainty, the ambiguity will be resolved against the employer and in favour of the employee.  This follows the long-standing principle of contra proferentum, in which ambiguities in a contract are construed against the person who drafted it, which is usually the employer.

In this case, the phrase “any amounts paid” was particularly troubling for the trial Judge, as questions arose regarding the specific “amounts” being referred to, and when exactly they were or would be “paid”.  Primarily because of the inability to discern the meaning of this phrase, this part of the agreement was found to be unenforceable, and the Court exercised its jurisdiction to remove that clause from the agreement.  Instead, the trial judge would have applied the Bardal factors to determine an appropriate notice period.  The Bardal factors are a consideration of the employee’s age, length of service, expertise, and availability of alternate similar employment to determine an appropriate notice period.  On these facts, 6 months’ pay would likely be considered a generous notice period under this common law principle; not 37 months.

Interestingly, and noted in the written judgment of Justice Miller, counsel for the appellant did not appeal the finding that the clause dealing with termination without cause was invalid.  Accordingly, no analysis of the validity of that clause was undertaken by the Court of Appeal.

The Court clearly states that there is a rebuttable presumption that a common-law notice period will apply in the absence of a notice period specified in the employment contract.  This presumption can only be rebutted where the employment agreement clearly specifies some other period of notice, whether expressly or impliedly.  Where no such right to termination exists, an employee is entitled, on early termination without cause, to the balance of the amount of the employment agreement.  In this case, the Court of Appeal made an outright award of the remaining amount payable to the plaintiff under the contract, and further stated there was no requirement for the plaintiff to mitigate his damages.

Finding Fairness

This result appears grossly inequitable, given the employer likely intended to pay approximately $2000.00 on early termination and ended up facing a judgment of over $200,000.00, after factoring in costs on appeal.  Aside from this point, the Court may have erred in finding that there was no specified period of notice.  There was indeed a specified period of notice, agreed to by both parties, that simply could not have been ascertained and was accordingly excised from the agreement.  While it may be correct to disregard this provision, it is still useful in attempting to determine the intention of the parties.  The error, if any, may be concluding the presumptive application of a reasonable period of notice under the common law had been rebutted.

Based on these reasons, the result would likely be the same if there was a 10, 20 or 30 year contract.  However, if the employer hired the employee for an indefinite term than the employer could exercise its right to terminate without cause on reasonable notice, which would be significantly less expensive.  The other lesson for employers is that clear and concise drafting in employment agreements can have huge cost-saving consequences, and can often avoid litigation all together.