Faulty just cause clause in fixed-term contract results in large damages award

A recent Ontario Superior Court of Justice decision¹ highlights the importance of reviewing termination clauses for enforceability, and the potential liability employers face when even one section is invalid.

Background

The plaintiff was a professional engineer and former owner of the defendant company. The plaintiff, along with the other former owners, sold his interest in the company in December 2019. During the sale, he negotiated an employment agreement with the new owner of the company to take on the role of vice-president. The employment agreement was for a fixed term of three years, ending on December 2, 2022, and provided the plaintiff with a base salary of $250,000 per year. 

In November 2020, the company terminated the plaintiff without cause. He brought an action against the company for wrongful dismissal. On a motion for summary judgment the court granted judgment in his favour.

Faulty “just cause” provision invalidates “without cause” provision

The court’s decision turned on the wording of the termination clause in the plaintiff’s employment agreement. That multi-part clause contained the following “just cause” provision [emphasis added]:

11(a)   Termination for Cause. TMIG may terminate Employee’s employment hereunder for “Cause” immediately upon delivery of a written termination notice to Employee. “Cause” means the repeated and demonstrated failure on Employee’s part to perform the material duties of his/her position in a competent manner, which Employee fails to substantially remedy within  a reasonable period of time after receiving written warnings and counseling from TMIG; Employee engaging in theft, dishonesty or falsification of records; Employee willful refusal to take reasonable directions after which Employee fails to substantially remedy after receiving written warnings from TMIG; or any act(s) or omission(s) that would amount to Cause at common law. In the event that Employee’s employment hereunder is terminated pursuant to the provisions of section 11 (a), Employee shall not receive payment of any kind, including notice of termination or payment in lieu thereof, or severance pay, if applicable, save and except accrued and outstanding salary and vacation pay.² 

This “just cause” provision was followed by a “without cause” provision that limited the plaintiff’s termination entitlements to the minimum amounts required by the Employment Standards Act, 2000 (ESA).³ 

The court concluded the termination clause was unenforceable because section 11(a) allowed the company to potentially deprive the plaintiff of his ESA entitlements.

Specifically, the examples of “cause” set out in section 11(a) of the agreement were examples of “just cause” at common law, but did not contemplate the standard of behaviour required to deprive an employee of termination entitlements under the ESA. In other words, section 11(a) could result in a termination for misconduct meeting the common law just cause standard but not the ESA standard, while depriving the employee of ESA entitlements. In accordance with prior guidance from the Ontario Court of Appeal, this potential “contracting out” of the ESA rendered not only section 11(a) unenforceable, but also the entire multi-part termination clause.⁴  

The court also held that the plaintiff’s receipt of legal advice and his role in negotiating the clause did not affect its enforceability. While those considerations might “carry the day” in most contract disputes, when interpreting employment contracts they cannot override plain wording that contracts out of the ESA.

In the absence of an enforceable termination clause defining the plaintiff’s termination entitlements, the court awarded him damages for the remainder of his fixed-term contract. This amounted to 23 months of damages, totalling $479,166.67. In addition, the plaintiff was awarded damages for the loss of his employment benefits, vacation pay and incentive compensation.  

Takeaways

This case highlights the importance of reviewing each section of a termination clause in an employment contract for enforceability and compliance with the ESA. A small investment in contract review can help prevent significant termination liabilities later. It is also a reminder that employers should not rely on an employee’s sophistication, receipt of legal advice or participation in negotiating an employment contract to forego reviewing a termination clause for ESA compliance.