Appeal court decision says contract 'clearly' included 72-month term without termination provision
A recent Ontario appeal court ruling that upheld a damage award for an independent contractor underlies the need to exercise caution when using fixed-term contracts.
In Monterosso v. Metro Freightliner Hamilton Inc., the Court of Appeal found that the agreement between the parties “clearly and unambiguously” provided a 72-month fixed term that did not include any termination clause. Without such a provision, the appeal court said, the defendant did not have the right to end the agreement only seven months into the contract.
As a result, the court awarded the contractor damages equal to the compensation he would have earned for the balance of the contract, upholding the trial court's damage award of $552,500.00 plus HST.
“So, my cheeky answer [on the value of fixed-term contracts] is don’t use them,” says labour and employment lawyer Brittany Taylor of Rudner Law. “But in all seriousness, fixed term contracts rarely provide a benefit worth the risk to the company or employer, as this case shows.”
Brittany Taylor, Rudner Law
In this case, she added that the employer could have avoided the significant damage award by including a provision for early termination in the fixed-term agreement or “simply using an indefinite term agreement with the contractor which contained a termination clause allowing them to terminate the relationship.”
Taylor said that A fixed-term contract is potentially helpful in using an independent contractor for short-term work, with a precise end date, but even that should have a termination clause. “However, it should only be done with careful consideration and legal advice to ensure that you’ve got those kinds of early termination provisions in there.”
As independent contractors do not have the same entitlements to notice as employees, the cost to Metro Freightliner to part ways with the contractor could have been minimal. “Instead, the improper use of a fixed term contract cost them significantly.”
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Employer argued the termination was enforceable
Metro Freightliner argued the trial judge failed to consider email correspondence, pointing to a provision added to the contract to ensure that the plaintiff “would be paid up until the last day of active service.”
This provision, the company said, would be “superfluous” if the 72-month term of the contract were guaranteed. The appellants also said the respondent saw the email message and “that in these circumstances, it would be inequitable to allow him to rely on the 72-month term.”
However, the appeal court rejected this argument, saying that the email correspondence was “ambiguous” in contrast to the trial judge’s finding that “the language of the contract is clear and unambiguous.
“The contract contains an ‘entire agreement clause,’ a clause plainly designed to avoid the sort of argument raised here,” the appeal court decision says. “Moreover, the trial judge found no evidence of fraud, misrepresentation, undue influence, mistake, or waiver, and found that this was not a case for rectification.”
The appeal court concluded: “We see no error in these findings, still less a palpable and overriding error that would permit this court to intervene.”
Duty to mitigate
Metro Freightliner had also argued the contractor should have mitigated his damages by securing other work. However, the appeal court determined the company needed to satisfy its burden to establish that the contractor had failed in his duty to mitigate.
However, the contractor had filed extensive evidence documenting his mitigation efforts, whereas the company had no evidence to establish there were jobs the contractor could have taken.
However, the appeal court panel agreed with Metro Freightliner that the trial judge had not properly considered this mitigation issue. It said the trial judge had adopted the reasoning in Howard v Benson Group Inc., which found that if a fixed-term agreement is terminated early, an employee is entitled to damages equal to the loss of remuneration for the balance of the fixed term without a duty to mitigate.
However, that decision did not consider if such a duty would apply to an independent contractor in the same situation. The appeal court also noted the contractor was not in an “exclusive, employee-like relationship” with Metro Freightliner and was not dependent on them for his income.
The appeal court said there was no basis for the trial judge to conclude that the respondent was not subject to the ordinary duty to mitigate but still dismissed the appeal.
“The trial judge erred by conflating the situation of independent contractors with that of employees working under fixed-term contracts,” the decision said. “Although this court held in Howard v. Benson Group . . . that employees under fixed-term contracts are entitled to damages equal to the loss of remuneration for the balance of the fixed term, without a duty to mitigate, this court has never held that independent contractors do not have a duty to mitigate following breach of a fixed-term contract.”
A cautionary tale for employers
Taylor says that this case is a “great cautionary tale” for employers to know about, given the potential liability and the relative ease of using other options that don’t have the same risk. A properly drafted [fixed-term] contract could have saved them a lot of money.”
She adds that the decision demonstrates the importance of having an employment lawyer advise on contracts employers might want to use in such situations. “A lot of the time, companies might think, ‘I can’t afford to go have a lawyer review this contract.’ But honestly, this is a great example of what happens when the cost of not doing that. It’s always better to spend the money upfront rather than deal with the fallout of an improperly drafted contract.”
Taylor also says that an employer might not want or need to have a contract reviewed with every person hired, it is important that the contract used is properly drafted and enforceable, and checked periodically.
“We usually recommend reviewing the contract language at least every year to make sure it can be adapted to any changes in law,” she says. "Chances are, if you’re using a contract you had drawn up in 2016, even if a lawyer reviewed it then, chances are it is out of date.”
In some instances, employment lawyers may even reach out to employer clients to inform them of the implications of a court decision. Such a case was Waksdale v Swegon North America Inc, in which the Court of Appeal for Ontario confirmed that a hypothetical flaw in a “termination for cause” clause, which would only be relevant in unusual circumstances, can render a “termination without cause” clause in the same contract unenforceable.
The case confirmed that a termination clause must be looked at in its entirety. Although the termination in Waksdale was without cause (and the without cause provision was fine), the “for cause” provision invalidated the entire termination clause. It breached the Employment Standards Act, giving the plaintiff the right to common law reasonable notice and significantly more compensation.