Beware the Fixed Term Contract

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In Howard v Benson Group Inc., the Ontario Court of Appeal concluded that employees employed under a fixed term contract that does not provide for early termination without cause, are entitled to payment of the unexpired portion of the contract upon early termination of the contract. The Court of Appeal also stated that the duty to mitigate does not apply to fixed term contracts that do not contain an express provision for early termination without cause.

In this case, the employee, John Howard, was employed by the Benson Group Inc., an automotive service centre in Bowmanville, as a Truck Shop Manager and then as a Sales Development Manager. His employment contract was for a five-year term beginning in September 2012. The employer terminated his contract, without alleging cause, 23 months after hiring him.

The employer’s right to termination without cause was governed by a clause in the employment contract. The motion judge found this clause to be unenforceable due to ambiguity:

“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.”

On Appeal, the Court of Appeal found that the motion judge erred both in awarding common law damages for wrongful termination rather than damages for termination of a fixed term contract and for finding that an award of damages for early termination of the employment contract is subject to a duty to mitigate.

  • In the absence of an early termination clause, fixed term contracts rebut the common law presumption of reasonable notice on termination by providing the employee with a clear end date. In this case, the employer was not an “unsophisticated party” and if it wished to limit its liability at termination to common law notice they should have included a clear provision to do so. Without such a clause, the Court of Appeal found that Mr. Howard was entitled to the remainder of his fixed-term contract as damages.
  • The duty to mitigate does not apply to fixed term contracts that do not contain mitigation clauses. The Court held that there is no duty to mitigate where the contract specifies the penalty for early termination, whether that penalty is expressly defined or is, by default, the wages and benefits of the unexpired term of the contract. If the employer wished for Mr. Howard’s duty to mitigate to apply, it should have been clearly stated in the employment agreement.

Whenever an employer seeks to limit its liability to the statutory minimum upon termination, a well drafted termination provision is essential and this decision demonstrates that this is the case even in fixed term contracts. It is also noteworthy that the duty to mitigate may not apply to the termination of fixed term employees without a clause to that effect.