Canada: Mud in the Water: Divisional Court holds limiting language required to displace presumption of reasonable notice

By Stringer LLP

December 18, 2018

It is becoming increasingly difficult for employers to understand what language is required in order for a termination clause to be enforceable.  Such clauses have been repeatedly struck down for increasingly technical reasons.

A recent Divisional Court decision continues that trend and suggests that more termination clauses could be invalid than previously thought.

In order to be enforceable, a termination clause must meet two criteria.  First, it must unambiguously contract out of the presumption that an employee is entitled to reasonable notice of termination under the common law.  Second, it must provide the employee with at least the entitlements required by the Employment Standards Act, 2000 (the “ESA”).

If it does not meet both of these requirements, it is invalid and on termination the employee will be entitled to reasonable notice at common law, rather than any amount set out in the contract.

In Movati Athletic (Group) Inc v Bergeron, the principal question before the Court was whether the following termination clause was valid:

Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.

The employee did not argue that the clause failed to provide the necessary entitlements under the ESA.  As a result, the only challenge to its validity was whether the clause clearly and unambiguously contracted out of the requirements of the ESA.

Traditionally, the view of Ontario Courts was that a termination clause displaced the presumption of common law notice if it provided an alternative notice period than “reasonable notice” at common law (see, for example, MacDonald v ADGA Systems Intl, which was a decision of Ontario’s Court of Appeal).

In practice, contracts could either set out a precise notice requirement or a formula for determining notice based on years of service.  Many contracts created a notice period by reference to the minimums in the ESA.

No matter how the clause was worded, so long as the Court could determine the alternative notice period agreed upon by the parties, Courts held that the clause displaced the presumption of reasonable notice.

Both the Ontario Superior Court of Justice and the Divisional Court came to a different conclusion in Movati Athletic (Group) Inc v Bergeron, holding instead that the clause did not displace the presumption of reasonable notice.  They noted that the clause did not explicitly state that the entitlements under the ESA would be the employee’s only entitlements on termination.  As a result, the Court held it could not be said that the language unambiguously rebutted the presumption of reasonable notice as the contract did not explicitly exclude such an entitlement.

By doing so, they found that wording explicitly limiting the entitlements on termination was required in order to rebut the presumption of reasonable notice.  This stands in stark contrast to the past appellate caselaw noted above.

Interestingly, the Divisional Court did not cite or distinguish the Court of Appeal’s decision in MacDonald or any similar caselaw.  (And it is not clear at this time whether the employer will seek leave to appeal to the Ontario Court of Appeal.)

In our respectful view, this decision is difficult to reconcile with the principles of contractual interpretation, which require that every provision in a contract be given meaning wherever possible.  The parties took the time to stipulate the entitlements on termination, referring to the ESA.  The finding that the clause is ambiguous robs the termination clause of any meaning.  Indeed, the outcome of this case would have been the same if there were no termination clause at all.  Query then – what could the parties have intended by the inclusion of the termination clause, if not to oust the common law presumption?

Unfortunately, neither the summary judgment nor Divisional Court decisions directly address this concern.  Perhaps, if the Court of Appeal were to hear an appeal we may receive clarity on this apparent discrepancy in the caselaw.

In any event, the result in this case suggests that, at least for now, contracts bearing clauses that do not explicitly state that employees are not entitled to any entitlements on termination beyond what is provided therein may be vulnerable to attack.  Of course, employers must be careful when adding such words of limitation to avoid breaching the ESA and so invalidating the contract on that basis.

Given the flux in this area of the law, employers would be well-advised to seek legal advice when crafting employment agreements, and particularly termination clauses, to ensure legal compliance and enforceability.