Canada: Premature Ending Not A Happy One For Employer: Early Termination Of A Fixed-Term Contract Leads To Significant Damage Award

We have written before on the perils of (mis)using defined-term contracts. The issue we encounter in our practice most frequently is the repeated use of defined-term contracts: usually manifested in successive one-year contracts that simply get renewed for the next year upon expiry. In those instances, the employer must be aware that although the Employment Standards Act, 2000 ("ESA") allows for defined-term contracts to be used without need for the employer to otherwise provide notice of termination, the use of successive defined-term contracts that are renewed almost by rote is viewed by the Court as creating an indefinite employment agreement, creating common-law notice obligations.

However, there is also case law that suggests that, in at least some circumstances, early termination of a defined-term contract can attract damages equivalent to the remainder of the contract. It is this line of cases that has now been bolstered significantly, with the decision of the Supreme Court of Canada not to grant leave to appeal in Howard v. Benson Group Inc., a Court of Appeal decision on which Brian Silva blogged on April 4, 2016. However, the significance of the damages awarded, now confirmed as "good law", means that this case bears another review.

Mr. Howard was hired for a 5-year term pursuant to a written employment agreement. When his employment was terminated after only 23 months and he was provided with only two weeks' pay, Mr. Howard sued for wrongful dismissal and obtained a summary judgment ruling that he was wrongfully dismissed. However, the summary judgment only granted damages in accordance with common-law notice, while Mr. Howard felt he was entitled to payment equal to the remainder of the term of the contract; accordingly, he appealed to the Ontario Court of Appeal.

Unfortunately for employers, the Court of Appeal agreed with Mr. Howard and ruled that he was entitled to "...a contractual sum for the termination of his employment in an amount equal to his salary and benefits for the unexpired term of the Employment Contract." Interestingly, although at trial the employer had tried to rely on its termination clause in the Employment Contract – determined by the trial judge to be void for ambiguity – the employer did not appeal that finding.

In his reasons for the decision Justice Miller stated:

Justice Miller went on to say that, while the parties could have specified the consequences of early termination with a properly-drafted clause, "...in the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term."

The lesson for employers is twofold: first, for anything longer than a certain one-year term (most parental leaves, for example), it is preferable to have a properly-drafted "indefinite-term" employment agreement in place; second, if for some reason it must be some fixed-term agreement, it is imperative that the agreement contain a properly-drafted termination clause that addresses specifically how the relationship can end early, ensuring of course that the language meets all legal requirements for enforceability.

The lawyers at CCPartners have extensive experience in drafting and dealing with employment agreements of all kinds: fixed-term, indefinite-term or any other type of agreement that exists between an employer and employee; we can help reduce exposure through proper drafting and advice. Click here for a list of lawyers at CCPartners who can assist.

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