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2017-11-07T15:28:34+00:00 November 13, 2017|Employment Contracts, Employment Law|

Enforceability of Employment Contracts – Still No Consistency

I recently had occasion to review a post that I wrote on my former blog dealing with the case of  Cook v. Hatch Ltd., 2017 ONSC 47.  It really is a well reasoned and thoughtful decision that injects some common sense into the enforceability of contractual termination clause discussion.

The employment relationship is contractual and the task of the court is to determine the intentions of the parties and to put these into effect.  Yet courts have, in many cases, taken a technical approach to employment contract interpretation that seems at odds with what appear to be the expressed intentions of the parties. Cook and some other recent cases pull the pendulum back from where it has swung.

The court was called upon, on a motion for summary judgment, to interpret the following contractual termination provision:

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

The question was whether this clause was enforceable and served to displace the common law presumption of reasonable notice (Machtinger v. HOJ Industries Ltd., [1992] 1 SCR 986). 

Mr. Cook was terminated without just cause and he received eight (8) weeks’ salary as termination pay, 10.58 weeks of severance pay and his health benefits were continued for eight (8) weeks.  

The Court made a number of comments:

  • Any attempt to contract out of the minimum employment standards imposed by the legislation, by providing for lesser benefits, was “null and void” (Machtinger).
  • Where an employment contract did not meet with the minimum requirements of the applicable legislation, it will be null and void for all purposes. It could not be used as a demonstration of the intention of the parties (Machtinger).
  • Any effort to understand the meaning of the contract (the intention of the parties) begins with the words used, not from the subsequent actions of the parties.
  • The employment contract must be considered at the time it is executed. If the termination provision fails to comply with the Employment Standards Act, 2000 at the outset of the employment relationship, then it will be void and unenforceable. Potential violation in the future is sufficient for this purpose.  (Garreton v. Complete Innovations Inc., 2016 ONSC 1178).
  • The intention of the parties should be clear from the words (Wright v. Rubicam Group of Companies, 2011 ONSC 4720).
  • The effort to understand a termination clause may begin with the words but it does not necessarily end there.  If the intentions of the parties can be clearly discerned from the language used (albeit not perfect) the court should enforce it. (MacDonald v. ADGA Systems International Ltd. 1999 CanLII 3044 and Roden v. Toronto Humane Society 2005 CanLII 33578 (ON CA)).
  • The rationale behind Machtinger is that an employer who drafts a clause that attempts to avoid the minimum statutory notice requirements cannot rely on such a clause to show that the intent of the parties was to provide the minimum statutory notice (Clarke v. Insight Components (Canada) Inc. 2008 ONCA 837)
  • The first task in contractual interpretation is to interpret the contract with the view to ascertaining the objective intention of the parties by considering the intentions of the parties.  The goal is always and everywhere to determine what was intended on a true and fair construction of the contract.  If, and only if, a fair construction of the contract leads to the conclusion that such was their intention (i.e. to contract out of the Act), then that attempt to contract out is rendered void by s. 5 (1) of the ESA. (Oudin v. Centre Francophone de Toronto, Inc. 2015 ONSC 6494  appeal dismissed 2016 ONCA 514 (CanLII))
  • The Court is to “look for the true intention of the parties, not to disaggregate the words looking for any ambiguity that can be used to set aside the agreement and, on that basis, apply notice as provided for by the common law”.  You don’t search out “what is said to be an ambiguity and, on that basis, seek to set aside the common intention of the parties.”

Further “contracts are to be interpreted in their context and I can find no basis to interpret this employment agreement in a way that neither party reasonably expected it would be interpreted when they entered into it. There was no intent to contract out of the ESA in fact; to the contrary, the intent to apply the ESA is manifest.”  (Oudin v. Centre Francophone de Toronto, Inc.)

  • In MacDonald v. ADGA Systems International Ltd. the termination clause did not refer or allude to any legislation. The contract provided that termination could be effected by “…giving not less than one (1) month’s prior written notice” The  Court of Appeal held that the clause was enforceable and dis not violate the Act.  Although it would have been preferable had the parties specifically referenced the legislation, the fact that they did not was not fatal.  Their intentions were clear. 
  • Including a “this is your complete entitlement clause” or a “limitation clause”, and where the termination clause does not specify “everything” the employee will receive in a manner that complies with the Act, then the clause may be unenforceable.  The Court put it this way “it is not necessary for a termination clause to explicitly address the employer’s obligation under the Employment Standards Act to provide the employee with benefits during the statutory period. Provided termination clause does not attempt to contract out of the employer’s obligation to provide benefits, the termination clause will be upheld….. Following Roden v. Toronto Humane Society, courts in Ontario have continued to uphold termination clauses that do not refer to the issue of benefits.”
  • In King v. Cannon Design Architecture Inc. 2015 CarswellOnt 20496 123 the court held that where a “termination clause is silent on benefits and/or severance pay, is not automatically repugnant to, or purport to waive or contract out of any right or obligation under the Employment Standards Act.”
  • Termination clauses that limit “what is paid” on termination in a manner that contravenes the Employment Standards Act, 2000 will be found to be unenforceable.  For example, in Miller v. A.B.M. Canada Inc. 2015 ONSC 1566 the clause limited “what” was paid on termination to salary which was found to contravene the Act and the court found this to be unenforceable.  See also Carpenter v Brains II, Canada Inc., 2015 ONSC 6224 aff’d at 2016 ONSC 3614 (CanLII).

Applying these principles, the Court in Cook held that the termination clause in issue was more akin to the one in Roden and was enforceable according to its terms. 

The case provides an excellent review of the principles to be applied in these termination clause interpretation cases and discusses the court’s overriding objectives when interpreting the contract.  Where the intentions are not apparent or where the clause is otherwise unenforceable (for example, as contravening the Act) then the court will apply the common law.  Otherwise, the clause should be applied in accordance with its clear terms.

Similar conclusions were more recently reached by the Ontario Superior Court of Justice in Farah v EODC Inc., 2017 ONSC 3948 (CanLII). The employee signed a series of employment contracts each containing a termination clause that sought to displace the common law presumption of reasonable notice of termination. In the Spring of 2015, EODC asked each of its employees, including Mr. Farah, to sign an updated employment contract in return for a “cost-of-living increase of 2 percent”. According to the Court:

[the employment contract] was dated June 1, 2015, but was made effective as of September 2, 2013. Both parties signed the agreement. The signature of Philip Lynch, Managing Director of EODC, is dated June 30, 2015. The Applicant’s signature is dated July 8, 2015. The contract contained the following clause: At any time, following the conclusion of the Probationary Period, the Employer may terminate the Employee without just cause simply upon providing him/her with the entitlements prescribed in the Employment Standards Act, 2000 (“the Act”) or any amendments thereto. The Employee hereby acknowledges that he/she has had the opportunity to review the relevant portions of the Act and/or to consult with legal counsel about their impact on his/her current entitlements upon termination of his/her employment.

The employee sued and argued that the words “with the entitlements prescribed in the Employment Standards Act, 2000” were ambiguous and void.  It also argued that the employer failed to define Probationary Period and, thus, was evidence of a further ambiguity.

Following a review of the case law, the court considered whether “entitlements prescribed in the Employment Standards Act, 2000” was ambiguous. The Court found that it was not, and stated:

…. the Court finds that the interpretation of the Termination Clause and its intention to provide the Applicant “with the entitlements prescribed in the Employment Standards Act, 2000” to be clear and unambiguous. Accordingly, the contractual term rebuts the common law presumption and prevails.

With respect to the “consideration” argument, the Court found that the 2% wage increase provided to the applicant was sufficient consideration in the circumstances. Specifically, the company’s evidence was that the cost-of-living increase was provided in exchange for signing the contract (including the termination clause) and that, had the applicant not signed the agreement, he would not have received any increase. The company gave evidence to the effect that one other employee who refused to sign was not paid the increase. The court agreed that this 2% wage increase was sufficient consideration for the contract.

However, an even more recent case went the other way and the Court in Nogueira v Second Cup, 2017 ONSC 6315 (CanLII) found that the following termination clause was not enforceable to displace the common law presumption of reasonable notice:

If the Second Cup terminates your employment, it will comply with its obligations under the employment standards legislation in the province in which you work (the ‘Employment Standards Act’). In finding that this clause was unenforceable, the court referred to Farrah discussed above and distinguished that case and others.

The Court stated:

…. in Farah v. EODC Inc., 2017 ONSC 3948 (CanLII), the contract provided that, “Upon termination, the Applicant would only be entitled to the statutory entitlements prescribed under the Employment Standards Act”

No such explanation or warning sign appears in clause 13 of the Employment Agreement here. Using the barest possible language, it says nothing more than that the employer will obey the statute. The new employee being asked to sign this contract could be forgiven for assuming that the clause is there to reassure her that none of her rights are being curtailed, when in fact the very opposite is true.

The fact that the employer was responsible for drafting the employment agreement and, as such, any ambiguity in the language was to be interpreted against the employer (contra proferentem).

So, when it comes to termination clauses, you win some and you lose some, but the grounds of attack continue to develop and the lack of consistency in the reasoning remains troubling.