Workplace Wire

On June 21, 2012, the Ontario Court of Appeal released its decision in Bowes v. Goss Power Products Ltd. Put simply, the ruling changes the rules when it comes to the application of mitigation  where there is a termination clause in an employment contract.

Normally, where there is a breach of contract, the common law imposes an obligation on the “wronged” party to take all reasonable steps to reduce the damage caused by the breaching party. In the employment context, this means that, when employees are dismissed without cause and with insufficient notice, they must make reasonable efforts to find, and accept, reasonably comparable employment elsewhere during the applicable notice period.

For many years, this principle applied equally to employees with and without contracts that defined their entitlements upon termination. However, in 2000, Justice Nordheimer of the Ontario Superior Court of Justice ruled that mitigation should not apply in cases where the parties had contractually agreed upon a fixed severance payment in the event of termination (rather than “pay in lieu of notice” as provided by the common law). Specifically, in Graham v. Marleau, Lemire Securities Inc., he held as follows:

I confess that I do not find it easy to reconcile all of these cases. However, I believe that the following general conclusions can be drawn from them:

(a) whether a contract is a fixed term contract or a contract of indefinite duration, the principle of mitigation applies to a claim arising from any breach of that contract, and;

(b) in cases where there is an agreed upon severance provision, the principle of mitigation also applies to that provision, but;

(c) there is an exception to that second conclusion in cases where the contract of employment can be interpreted as having exempted, either expressly or by implication, the employee from the duty to mitigate. Examples of such exemptions are:

(i) an express waiver of the duty to mitigate as in Neilson;

(ii) an express obligation to continue to make the payments under the employment contract as in Paquin; or,

(iii) where the contractual provision provides that the severance amount is payable immediately at, or very shortly after, the time of the termination as in Borkovich and Rossi. In such cases, the fact that the payment is to be made prior to the time when either the employer or the employee could know whether mitigation could occur implicitly suggests a waiver of that obligation.

In Bowes, however, the Court of Appeal went further, and held that there is in fact no duty to mitigate where an employment agreement contains a specific termination entitlement, regardless of the timing of the payment. Relying primarily upon the principle of contra proferentum, (which says that a contract will be read against the interest of the party offering its terms), the Court of Appeal held that the only way to make mitigation apply to a contractual termination entitlement is to do so explicitly.

Chief Justice Winkler, in a ruling adopted by all five of the appellate Justices, held:

In summary, the application judge erred in deciding that an agreement specifying a fixed notice period, in the event of dismissal without cause, was akin to damages in lieu of reasonable notice at common law. This mischaracterization led him to wrongly conclude that there was a presumption that the appellant had a duty to mitigate and that, since the agreement was silent in respect of mitigation, the presumption had not been rebutted. On this basis, he determined – wrongly in my view – that the parties intended, at the point of contracting, that mitigation would be applicable to the calculation of damages upon termination.

Although decisions of trial courts appear to go both ways on the issue in this appeal, the preponderance of appellate jurisprudence supports the view that, where an employment agreement contains a stipulated entitlement on termination without cause, the amount in question is either liquidated damages or a contractual sum. Either way, mitigation is irrelevant. This conclusion is based on the following reasoning:

• By contracting for a fixed sum the parties have contracted out of the Bardal “reasonable notice” approach or damages in lieu thereof. There is no material difference whether the quantum contracted for is fixed or readily calculable from the terms of the agreement.
• By specifying an amount, the stipulated quantum is characterized as either liquidated damages or a contractual sum.
• Mitigation is a live issue at law only where damages are at large, i.e. damages in lieu of reasonable notice. Mitigation is not applicable if the damages are either liquidated or a contractual sum.
• It would be unfair to permit an employer to opt for certainty by specifying a fixed amount of damages and then allow the employer to later seek to obtain a lower amount at the expense of the employee by raising an issue of mitigation that was not mentioned in the employment agreement.
• It is counter-intuitive and inconsistent for the parties to contract for certainty and finality, and yet leave mitigation as a live issue with the uncertainty, lack of finality, risk and litigation that would ensue as a consequence.
• Thus, where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.
• Moreover, a broad release in an employment agreement, as here, demonstrates an intention to avoid resort to the courts, confirms a desire for finality, and bolsters a finding that the parties intended that mitigation would not be required unless the agreement expressly stipulates to the contrary.

I find the decisions of the appellate courts referred to in these reasons to be persuasive and I adopt their reasoning. From a practical standpoint, it is worth repeating that if parties who enter into an employment agreement specifying a fixed amount of damages intend for mitigation to apply upon termination without cause, they must express such an intention in clear and specific language in the contract.

While the Chief Justice is, of course, correct that it is open to employers to be explicit in this manner, the practical result of the ruling is that, relying on the caselaw that existed for decades, a large number of employers will not have done so. Prudent employers that made the effort to contractually establish their employees’ entitlements on the basis that the employees would be required to search out alternate employment, will now find themselves with contracts that no longer mean what they thought they meant when they were signed.

Those same employers may also find themselves unable to alter those contracts without providing additional consideration to the employees that agreed to the terms as originally presented, given the Court of Appeal’s ruling in Wronko v. Western Inventory Services Ltd.

In the end, Bowes means that employers should revisit their contracts and, at a minimum, decide whether to include the explicit application of mitigation, or opt not to do so, this time on the understanding that failing to do so will mean that what they are doing is providing fixed commitments to dismissed employees, regardless of how quickly the employees are re-employed elsewhere.