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One cannot both breach and benefit – employer precluded from relying on termination clause it breached

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Employers are often advised to act cautiously when dismissing employees, particularly when those employees are subject to enforceable termination provisions.  Hasty decisions to terminate based on unfounded allegations of “just cause”, or careless applications of “without cause” termination provisions, may result in unintended consequences.  Specifically, employers may find themselves:

  1. exposed to liability for bad faith, aggravated and punitive damages (i.e. on top of traditional damages for wrongful dismissal); and
  2. at risk of having fundamentally breached and/or repudiated the employment agreement, thereby precluding reliance on contractual terms that would have otherwise limited termination entitlements.

The second concern was recently highlighted by the Ontario Superior Court of Justice in Holmes v Hatch Ltd., 2017 ONSC 379 (“Holmes”). In that case, Paul Holmes was employed by Hatch Ltd. (“Hatch”) for approximately 17 years before he was dismissed without cause.  Mr. Holmes was subject to a contractual termination clause that provided the following:

In the event that we must terminate your employment for reasons other than cause, you will receive a termination package which takes into account your years of service, position and age.  As a minimum the amount of combined notice and severance you will receive will equal 4 weeks plus one week for each completed year of service, or such greater amount as may be required by statute at the time of termination. [Emphasis Added]

In reliance on the termination clause, Hatch provided Mr. Holmes with his statutory entitlements. The evidence before the Court was that Hatch did not consider the factors of age, service and position when deciding the content of Mr. Holmes’ package. On the basis of its failure to consider those factors, Mr. Holmes argued that Hatch fundamentally breached and/or repudiated the employment agreement, and was thereby liable for wrongful dismissal damages at common law.

The Court agreed with Mr. Holmes’ submission, and held that Hatch was precluded from relying on the termination clause it breached:

… Hatch cannot breach the contract “and then rely on the termination clause which it breached, to limit its liability.”  I agree with these submissions.  Mr. Holmes is therefore entitled to damages for failure to provide reasonable notice in accordance with the common law.

The notion that an employer cannot both breach and benefit is not entirely new – for example, this principle was canvassed in the older case of Ebert v. Atoma International Inc., (1997) 70 A.C.W.S. (3d) 1016 (Ont. Gen. Div.) (“Ebert”).  However, Ebert involved a constructive dismissal, which by definition involves an employer’s repudiation of the employment agreement.  Holmes appears to have expanded that principle to include not just constructive dismissals and unfounded allegations of “just cause”, but also the failure to comply with the terms of “without cause” termination provisions.

Interestingly, a narrower approach was adopted more recently in Simpson v. Global Warranty Management Corp., 2014 ONSC 6916 (“Simpson”).  In that case, the Ontario Divisional Court considered the magnitude of an employer’s contractual breaches, and held that neither a constructive dismissal caused by a layoff, nor the employer’s failure to comply with the terms of the contract on a timely basis, precluded the employer’s reliance on a “without cause” termination provision:

…There is no issue that the layoff constituted a constructive dismissal… even if the purported layoff could be seen as a breach of the employment agreement, because the employment agreement did not allow for layoffs, that breach would not necessarily disentitle the respondent to the benefit of the negotiated termination provision.  In the same vein, while the employer was technically in breach of the employment agreement by not immediately paying the appellant what he was owed upon his termination, that breach is not of an order of magnitude, in the circumstances of this case, as to disentitle the respondent from the benefit of the termination provision.

It remains to be seen how courts will reconcile the seemingly conflicting approaches in Holmes and Simpson, and whether the broader approach will become the accepted precedent. Until further clarity is provided on the issue, employers are encouraged to be mindful of the following:

  1. Terminate Cautiously: Where employees are subject to enforceable termination provisions, “without cause” terminations may end up being less costly than litigating uncertain “just cause” disputes and losing the benefit of contractual limitations.
  2. Comply with Contractual Terms: Employers must diligently follow the language of the termination provisions that they intend to rely on.  Material omissions may preclude an employer’s reliance on termination provisions that are otherwise enforceable.
  3. Avoid Unsolicited Contractual Commentary: Termination provisions should be limited in language to those terms that are necessary to unambiguously set out an employee’s termination entitlements.  Unnecessary commentary may have the unintended effect of binding employers to additional considerations beyond the prescribed formulas.

Titus Totan

About the Author: Toronto employment lawyer Titus Totan supports both employee and employer clients in all areas of employment law, including employment standards, contractual and implied obligations, terminations, workplace investigations and workplace human rights.