Independent contractors have a duty to mitigate fixed-term damages

The Ontario Court of Appeal recently clarified how the rules of mitigation apply to fixed-term independent contractor agreements in Monterosso v Metro Freightliner Hamilton Inc., holding that fixed-term independent contractors have a duty to mitigate their damages in the event of their early termination.

Early termination of a fixed-term independent contractor agreement may trigger significant liability for a business. A contractor’s damages in that scenario may amount to the value of the remaining unexpired term, unless the contract provides otherwise. 

For example, if a business engages a contractor to perform defined work for a three-year period and terminates after only a single year, that business may owe the contractor two years of damages, unless the written agreement provides otherwise.

The duty to mitigate

However, in the event of early termination a business might argue the contractor has a duty to mitigate. That is, the contractor must take reasonable steps to reduce its damages by finding replacement work and income. At common law, a party may argue the damages it owes are reduced by the other party’s failure to take reasonable mitigation steps.
Until recently, there has been confusion in Ontario law as to whether the duty to mitigate applies to fixed-term contract damages.

Fixed-term contract damages and mitigation 

In a 2016 Ontario Court of Appeal decision, Howard v Benson Group Inc., the court held that early termination of employees on fixed-term contracts does not give rise to a duty to mitigate damages, unless the parties contract otherwise. 

In 2018, the Ontario Court of Appeal applied Howard v Benson to the early termination of an independent contractor agreement in Mohamed v Information Systems Architects Inc. The court held the independent contractor did not have a duty to mitigate his damages under the circumstances of that case. 

Until now, there has been confusion as to whether the Mohamed decision should be read for the proposition that independent contractors in general do not have a duty to mitigate fixed-term contract damages. The Ontario Court of Appeal has now resolved this confusion.

The Monterosso case

The respondent independent contractor (Monterosso) was engaged by the appellants, a group of corporations (Metro), pursuant to a 72-month fixed-term contract that did not include an early termination clause. After seven months, Metro terminated the contract without cause. Monterosso sought damages equal to the loss of the remaining 65 months of the contract.    

At trial, the judge held Monterosso was not required to mitigate his damages. This decision was appealed to the Ontario Court of Appeal. The court determined that the trial judge had erred, and clarified:

• It remains Ontario law that employees do not have a duty to mitigate damages arising from early termination of a fixed-term contract. 
• The general common law rule applies to independent contractors – they must mitigate their damages upon a contractual breach, including early termination of fixed-term contracts, unless the contract provides otherwise. 

However, the court also observed that there are circumstances that might have taken this contractor relationship outside the normal mitigation rules, including if: 

• Monterosso was in an exclusive employee-like relationship with Metro. 
• Monterosso was “dependent” on Metro. 
• The terms of the contract did not permit Monterosso to perform services for other parties.

In the end, the court held Monterosso remained entitled to the full damages awarded at trial because Metro failed to meet its burden of proving he had failed to mitigate. The burden rests on the party asserting a failure to mitigate to lead evidence that replacement work and income was available had reasonable efforts been made. Failure to lead this evidence is usually fatal to a mitigation defence. 

Takeaways

 The confusion around damages for early termination of fixed-term independent contractor agreements is resolved. Parties to such agreements should expect that the contractor has an obligation to mitigate early termination damages. 

A business that intends to rely on a mitigation defence to a claim for early termination damages should be prepared to lead evidence of failed mitigation efforts, and work opportunities reasonably available to the contractor.

Parties may agree to different termination provisions in the contract or agreement. If parties want to agree that mitigation will not apply or to an alternative calculation of early termination damages they are free to do so. The inclusion of an early termination provision in agreements may prevent disputes like the one that arose here.

The author wishes to thank Juliano Baggieri, law student, for his help in preparing this legal update.