Disturbing Case on Mitigation of Damages During Contractual Notice Period

8 janvier 2013

( Disponible en anglais seulement )

Facts

When Peter Bowes commenced his employment
with Goss Power Products Ltd. (“Company”), he entered into a written employment
contract which provided that he would receive six months’ notice or pay in lieu
thereof if his employment was terminated without cause.  The contract was silent on the issue of
mitigation.

The Company subsequently terminated Bowes’
employment without cause.  The letter of
termination stated that Bowes would be paid his salary for six months but was
required to seek alternative employment during this period and keep the Company
apprised of his efforts in this regard. 
Bowes obtained employment with another employer at the same salary he
was earning with the Company two weeks after the termination of his
employment.  After paying the statutorily
required three weeks’ salary, the Company ceased making salary payments to
Bowes.  Bowes brought an application to
the court seeking a determination of rights pursuant to his contract.

Application
Judge

Bowes argued that he had no duty to
mitigate, was entitled to the amount stipulated in his contract and that this
amount ought to have been paid in lump sum at the time of his termination from employment.  The application judge held that, where an
employment agreement contains a fixed entitlement, it is subject to a duty to
mitigate unless the agreement, either directly or by implication, relieves the
employee of this obligation.  Since the contract
in this case provided no such exemption from the duty to mitigate, the
application judge found that Bowes was not entitled to the full amount provided
for under the contract as he had mitigated his loss by finding new
employment.  Bowes appealed this decision.

Ontario
Court of Appeal

The Ontario Court of Appeal (“Court”)
allowed the appeal and set aside the decision of the application judge.  The Court found that the application judge
erred by treating a contractually fixed term of notice as effectively
indistinguishable from common law reasonable notice and by finding that
contractual amounts of pay in lieu of notice were subject to the duty to
mitigate.  Instead, the Court found that
when parties contract for a specified period of notice or pay in lieu they are
choosing to opt out of the common law approach (whereby an employer has a duty
to provide an employee with reasonable notice when terminating that employee
without cause and that employee’s corresponding duty to mitigate his or her
damages).

In explaining its reasons, the Court
stated:

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.

What
Employers Need To Know

This decision is troubling in that it fails
to follow the established rule that damages for failure to provide proper
notice of termination – whether express or implied – will be subject to a duty
to mitigate.  There is precedent that a
“severance” clause or lump sum pay in lieu term will not be subject to a duty
to mitigate.

As a consequence of this decision, there is
now some risk that a court would follow the Bowes reasoning.  We recommend that if you now enter into an
employment agreement specifying a fixed amount of notice of termination and
intend for mitigation to apply, express such an intention in clear and specific
language in the contract.  If you fail to
do so, a former employee may be entitled to the entire contractual notice
amount even if that former employee starts a new job at a different company
within days of termination.

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