Canada: Court Of Appeal Weighs In On Termination Clause Failsafe Provisions

Last Updated: October 1 2019
Article by Irfan Kara and Melody Burke

On August 30, the Ontario Court of Appeal affirmed a lower court’s decision on the extent an employer can rely on a failsafe provision in a termination clause, emphasizing the importance of structuring these provisions properly to avoid ambiguity or an interpretation that the provision does not extend to the entirety of the clause. 1

What you need to know

  • A failsafe provision is a portion of a termination clause which provides that, regardless of any other terms or conditions of a termination clause, an employee who is terminated without cause will always receive at least what he or she is entitled to under applicable employment standards legislation.
  • These provisions must be carefully drafted to avoid the interpretation that the failsafe does not apply to the termination clause as a whole.
  • This decision suggests that the inclusion of a failsafe provision at the end of a termination clause will more likely be interpreted to extend to the entire clause than if the provision was contained amid other subclauses.

Background

The plaintiff Demetri Andros was dismissed without cause by the defendant Colliers Macaulay Nicolls Inc., a large Canadian commercial real estate services company. Mr. Andros was terminated without cause on January 19, 2017 and brought an action for wrongful dismissal, arguing he was owed: damages for reasonable notice under common law; benefits he would have been entitled to during the reasonable notice period; and the bonus he would have earned.

The language of the termination provision in Mr. Andros’ employment agreement was as follows:

4. Term of Employment

The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:

a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period. 

b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. [Emphasis added.]

The plaintiff argued that the termination provision was unenforceable because it attempted to contract out of the Ontario Employment Standards Act 2000, S.O. 2000, c. 41 (ESA), and therefore, he was entitled to a period of notice in accordance with what was reasonable under common law.

The motion judge agreed with the plaintiff and awarded damages on the basis that the termination provision was unenforceable, finding that the failsafe clause did not extend to clauses 4(a) and 4(b), and thus the termination clause did not provide for the minimum standards under the ESA as they pertained to benefits and severance.

The Court of Appeal’s decision

The Court of Appeal affirmed the motion judge’s approach to determining whether the termination clause was unenforceable. On appeal, the defendant argued that the termination clause provided at least the statutory minimums under the ESA and argued that the inclusion of “greater of” at the outset of the termination clause was a failsafe clause⁠—meaning that even if clauses 4(a) or 4(b) applied, the minimum statutory entitlements related to benefits and severance would still be provided under those clauses. The defendant also argued that the motion judge erred by failing to consider the termination clause as a whole, pursuant to the Court of Appeal’s 2018 decision in Amberber v. IBM Canada Ltd (read our full analysis of Amberber here).

The Court of Appeal disagreed, finding that the motion judge correctly interpreted the contract. The Court held that the motion judge did not interpret the subsections in isolation but rather looked at the clause as a whole, as indicated by the motion judge’s reasons, and further, the Court found that the motion judge did not err in interpreting the word “or” as indicative of the disjunctive nature of the contents of the termination clause. Thus, the Court found the motion judge was right to conclude that the termination clause had two distinct parts. In light of the disjunctive nature of the clause, the Court found it was open to the motion judge to find that the first clause did not cast the ESA statutory entitlements upon clauses 4(a) and 4(b).

In differentiating the facts of this case from those in Amberber, the Court emphasized that the failsafe provision in Amberber fell at the end of the termination clause and was fundamentally different from the operative clause in this case. Here, the reference to ESA entitlements in the first clause did not cloak the entire termination clause. Rather, the Court described that reference as “stranded within the first clause” and therefore it did not extend to the latter part of the termination clause.

Footnote

1Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679.

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