The cost of ambiguity: termination clause in fixed-term employment contract ruled unenforceable

Canadian Employment News Series

Employment Update


On April 8, 2016, the Ontario Court of Appeal released its decision in Howard v Benson Group[1], in which the court provides important guidance to employers in relation to the use of fixed-term contracts for employees and the early termination of those contracts.

Case background:  employee sought payment for full term of contract

The appellant in Benson, Mr. John Howard, was employed as a Truck Shop Manager and then a Sales Development Manager with the defendant employer, an automotive repair centre. Mr. Howard’s employment contract was for a five-year term. The employer terminated Mr. Howard’s employment, without alleging cause, just twenty-three months into the five-year term.

Mr. Howard brought an action for breach of contract and sought compensation for the remainder of his contract – three years’ salary. Mr. Howard subsequently brought a motion for summary judgment.

The employer responded to Mr. Howard’s motion, relying upon a termination provision (clause 8.1) contained in Mr. Howard’s employment contract in support of its position that it could terminate Mr. Howard’s employment during the term of the employment relationship by providing Mr. Howard with notice. The relevant termination provision stated the following:

“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.”[2]

In reaching his decision[3], the motion judge determined that the termination provision in Mr. Howard’s employment contract was:

“sufficiently ambiguous as to the true extent of the plaintiff’s entitlement under the E.S.A. and in the result, that ambiguity must be construed against the defendant again having regard to the power imbalance that exists between an employer and employee as a matter of course.”[4]

Mr. Howard was seeking payment for the remainder of the contract. As a remedy, Mr. Howard was awarded common law damages for wrongful dismissal. The quantum of those wrongful dismissal damages was left to be assessed at a trial.

Ontario Court of Appeal: employee entitled to payment for remainder of contract term

Mr. Howard appealed the motion judge’s decision. Given that the issue of whether clause 8.1 was “sufficiently ambiguous” was not a subject of the appeal, the Ontario Court of Appeal highlighted the following question as the main issue to be decided:

Is an employee who is employed under a fixed term employment contract that does not provide for early termination without cause, entitled to payment of the unexpired portion of the contract on early termination of the contract?

The court answered this question in the positive, reversing the motion judge’s decision. Specifically, the court concluded that if a pre-determined notice period is not specified in a fixed-term employment contract, the employee is entitled to all the wages he or she would have received to the end of the fixed term if the employer terminates the contract early.

The court noted that from a policy perspective this makes sense. An employer that uses a fixed-term contract is often attempting to eliminate its severance obligation entirely or, in the case of Benson, to limit the obligation to those minimum entitlements prescribed by the Ontario Employment Standards Act, 2000. Although the court recognized that an employer is free to do this, the court cautioned 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.”[5]

Next, the court turned to the issue of whether Mr. Howard had a duty to mitigate (i.e. diligently search for and secure new employment). Put more generally, the question before the court was whether the duty to mitigate attaches in a fixed-term employment contract situation (where the contract is silent as to mitigation), in the same way that the duty to mitigate attaches to common law reasonable notice.

The court relied on one of its previous decisions, Bowes v Goss Power Products[6], as support for the proposition that:

“An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.”[7]

The employer pointed out that in this case, the parties had not bargained for a particular term of notice or payment in lieu thereof. There was no evidence as to what the parties agreed should happen if clause 8.1 was found to be ambiguous and unenforceable. However, the court determined that parties do bargain for this kind of certainty when they enter into a fixed-term contract. In the court’s view, there was no difference between (a) specifically expressing a fixed penalty; and (b) a fixed-term contract, which incorporates an implied, default penalty.

Ultimately, the court awarded Mr. Howard damages equivalent to three years’ salary – approximately $180,000.

Takeaways for employers

While employers should always carefully consider whether a fixed-term contract is appropriate in the circumstances, it remains open for employers to structure employment relationships in this way. The Benson decision highlights how precise and carefully drafted the terms of a fixed-term contract need to be. To that end, employers should be mindful of the following:

  1. If a termination provision in a fixed-term employment contract is found to be ambiguous, it will not be enforced and the employee will be entitled to the wages he or she would have received had they continued working through to the end of the fixed term.
  2. A fixed-term employment contract should clearly state what the notice period or payment in lieu of notice will be in the event of early termination.
  3. If an employer expects that the employee will have a duty to mitigate these damages, the fixed-term employment contract should clearly state this as well.

It is strongly recommended that employers seek the advice of legal counsel when drafting new fixed-term employment contracts or if the employer wishes to revise existing fixed-term employment contracts.

[1] Howard v Benson Group Inc., 2016 ONCA 256 [Benson].

[2] Ibid. at para 6.

[3] Howard v Benson Group, 2015 ONSC 2638.

[4] Ibid. at para 58.

[5] Supra note 1, at para 29.

[6] Bowes v Goss Power Products Ltd., 2012 ONCA 425.

[7] Ibid at para 41.