Ontario Court upholds just cause termination provision

24 septembre 2021 | Inna Koldorf

( Disponible en anglais seulement )

Last year, we reported on the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc. (the “Waksdale decision”), in which the Court found that although drafted properly, a termination without cause provision in an employment contract was unenforceable because the termination with cause provision in the same contract provided for termination without notice in circumstances broader than those contemplated by the Employment Standards Act, 2000 (the “ESA”). Following the Court of Appeal’s decision, employers across the province scrambled to amend their termination provisions to ensure their enforceability as plaintiffs began to raise the “Waksdale argument” in wrongful dismissal claims.

Last week, Justice Dunphy of the Ontario Superior Court of Justice issued a decision which appears to specifically address the absurdity of the effect of the Waksdale decision. In Rahman v. Cannon Design Architecture Inc. (2021 ONSC 5961), the Plaintiff’s employment was terminated without cause after four years of employment. The Plaintiff argued that the termination without cause provision in her employment contract was unenforceable, because the termination with cause provision permitted termination without notice in circumstances broader than those contemplated by the ESA. The termination with cause provision in Ms. Rahman’s contract provided as follows:

CannonDesign maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.

 Justice Dunphy disagreed with the Plaintiff. At paragraph 26, he found that there was no basis to apply a strict or even adverse construction approach to the termination provisions in Ms. Rahman’s employment contract for the following three reasons:

  1. The termination provisions were the subject of specific negotiations between the parties in 2016. The parties were both sophisticated, there was no disparity in bargaining power, and the Plaintiff received independent legal advice prior to signing the employment contract;
  2. The negotiations resulted in material improvements to the Plaintiff’s entitlements which were in excess of the ESA minimums; and
  3. The offer letter contained a clause recognizing that the employer’s maximum liability for common law notice, termination pay, benefits continuation, severance pay or pay in lieu of notice was limited to the greater of the notice required in the employment contract, or the amounts specified in the ESA.

Justice Dunphy found that the contract displaced the Plaintiff’s right to reasonable notice. He noted that referentially incorporating the ESA minimums into an employment contract was sufficient; it was not necessary to explicitly set out the ESA minimum standards in the contract. Rather, the contract should be interpreted by giving effect to the parties’ mutual intent at the time that the contract was signed by looking at the surrounding circumstances during negotiations between the parties. Conclusions reached in another case, Justice Dunphy noted, particularly a case which post-dated the signing of the contract between Ms. Rahman and her employer, were of limited assistance in construing the intention of the parties and were therefore of limited assistance in reaching a conclusion with respect to the enforceability of the termination provisions.

Addressing the specific issue employers have struggled with since the Waksdale decision, Justice Dunphy noted that there was no basis to find that the phrase “just cause for summary dismissal” spoke of a standard below the ESA standard of wilful misconduct without evidence that the parties intended the phrase to have that meaning, or evidence of an employer policy or practice authorizing summary dismissal in circumstances that are different from the circumstances enumerated in the ESA for dismissal without notice. Justice Dunphy noted at paragraph 30:

If none of the parties to the contract at its inception – having turned their minds to the very subject of the ESA minimum standards applicable on termination and their priority – took objection to the general “just cause for summary dismissal” language used it would be entirely illogical to infer nevertheless an intent to contract out of well-known and long-standing minimum standards in the jurisdiction in which they were operating [our emphasis].

Additionally, Justice Dunphy found that the termination provisions must be upheld for the sake of certainty, an argument made by countless employers since the release of the Waksdale decision. He noted at paragraph 37:

Uncertainty in the application of the law to fairly negotiated employment agreements will only have the unintended consequences of causing employers to forego efforts to offer severance benefits beyond the ESA minima for fear that any steps beyond the limited bound of the ESA will carry an unacceptable level of risk of being found invalid with the resulting potential for common law liability far in excess of what either side expected at the time the contract was agreed to. Doubtless this is already occurring to some degree. Over time, there are no winners in such a world.

Justice Dunphy upheld the termination provisions and found that they governed the termination of Ms. Rahman’s employment.

The Rahman decision provides employers and their lawyers with a slight sense of relief. The Waksdale decision has had a significant impact on employers, and has caused a substantial increase in allegations of unenforceable termination provisions and claims for wrongful dismissal. Justice Dunphy’s approach to the interpretation of termination provisions is more consistent with basic principles of contract law, arguably the most important of which is that contracts must offer certainty, and must therefore be interpreted consistently, having regard to the intention of the parties when the contract was signed. While employment contracts are specialized contracts, the fundamental principles of contract law still apply, a fact which sometimes gets lost when termination provisions are considered by courts. While it is unknown at this time whether the Rahman decision will be appealed, until it is, there is no doubt that employers will heavily rely on it when the enforceability of termination provisions is challenged.

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