Canada: Tacit Renewal Of Fixed-Term Employment Contracts: Proceed With Caution!

This past February 1st, a noteworthy decision was rendered by Justice Lukasz Granosik of the Quebec Superior Court1, concerning the automatic renewal of a fixed-term employment contract through the operation of a provision in the Civil Code of Québec (the "Civil Code").

The facts

When Mr. Danny Kennel ("Kennel") was hired by Traffic Tech Inc. ("Traffic Tech") in January 2000, he signed a fixed-term employment contract of three years' duration that included a non-solicitation clause as well as a confidentiality clause. The contract also contained penal provisions and provided for the renewal of the contract upon prior notice by the employer of at least 60 days before the expiration date.

In 2004, a new employment contract containing essentially the same conditions was signed by the parties, again with a fixed-term of three years.

Prior to the expiration of that contract in 2007, Traffic Tech gave no prior notice of its intention to renew it. Kennel nevertheless continued to work at the company following the expiration date, with no objections on the part of his employer.

No additional employment contract was ever signed by the parties.

Kennel had been in the employ of Traffic Tech for 12 years when he voluntarily left the company in 2012, taking three other employees with him, to work for a direct competitor in a similar position.

After leaving, Kennel was sued by Traffic Tech in Superior Court, for nearly $1.3 million.

Traffic Tech alleged that Kennel had breached the confidentiality and non-solicitation clauses in his employment contract. Kenny maintained that the contract was no longer in effect when he left the company.

The Superior Court's reasons

Since the parties had never used the renewal mechanism provided for in the employment contract, Article 2090 of the Civil Code2 applied.

According to the Court, the employment contract was tacitly renewed for an indeterminate term upon its expiration, pursuant to Article 2090 CCQ.

However, based on interpretations of Article 2090 in the case law3, the Court concluded that the renewal applied only to the essential conditions of the employment contract.

According to the Court, the word "essential" signifies the indispensable and fundamental aspects of the employment contract4.

Thus, according to this interpretation, salary, hours of work and vacation entitlements are such indispensable and fundamental aspects. Moreover, the clauses in the contract that are unrelated to those aspects are deemed to be non-essential conditions to which tacit renewal does not apply.

It thus emerges from the Court's reasons that non-solicitation clauses, confidentiality clauses and penal clauses in a fixed-term employment contract will not be considered essential conditions of the contract and accordingly will not be tacitly renewed upon its expiration.

Traffic Tech's action was thus dismissed. The Court concluded that the parties had never renewed the 2004 employment contract and that Kennel had no specific obligations towards his former employer other than those flowing from the essential contractual conditions of his employment and those imposed by law.

Conclusion

In addition to setting an important precedent5, this decision will definitely have a concrete impact on employer's practices with respect to employment contracts prepared by them.

Specifically, to the extent that a manager wishes to include non-competition, non-solicitation or confidentiality clauses in the employment contract, an in-depth analysis will need to be undertaken at the time of hiring in order to determine the advisability of entering into a fixed-term contract or one of indeterminate duration.

Also, to the extent that fixed-term employment contracts are in effect with current employees, caution must be exercised when those contracts approach their expiration date, as the employer must decide whether to renew the contract in writing or enter into a new agreement stipulating the appropriate obligations on the part of the employee, so that those obligations do not become unenforceable upon the expiration of the contract.

Footnotes

1. Traffic Tech Inc. v. Kennell, 2016 QCS 355

2. 2090. A contract of employment is tacitly renewed for an indeterminate term where the employee continues to carry on his work for five days after the expiry of the term, without objection from the employer.

3. Racine et Chamberland Inc. v. Ouellet, J.E. 2001-2160 (S.C.) and Vision Globale A.R. Ltée v. Harel, 2008 QCCA 904

4. Supra, note 1, par. 47

5. At the time of writing, the decision had not been appealed. We will be monitoring this file closely, and how the decision is applied in the case law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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