Thursday, June 21, 2012

Bowes v. Goss Power Products Ltd. Reversed by Court of Appeal

I posted about Bowes v. Goss Power Products Ltd. twice before - once shortly after Justice Whitaker's initial decision on the application, and again when I saw it on the Court of Appeal's docket.


Put very simply, Mr. Bowes was fired without cause, and had a contract which entitled him to six months' notice or pay in lieu on termination.  He started a new job, with equivalent pay, two weeks after being fired.  This case asks the question of whether or not Bowes is entitled to that six months' pay anyways.

The conventional wisdom is that he is not, that he has suffered no loss and has no basis to look to his employer for compensation.  He 'mitigated his loss', as they say.  Justice Whitaker held to this conventional wisdom, and dismissed Bowes' claim.  Bowes was clearly fighting an uphill battle.

I argued in my earlier entries that there are major flaws in the conventional wisdom - namely, that where an employer has the right to terminate without notice but with pay in lieu, there is no breach of contract that would give rise to the operation of the mitigation principle.  In order to get to Justice Whitaker's conclusion, I argued that one would have to "read in" a duty to mitigate into the contractual language itself.  And this is not good policy - as I wrote before, "In a contract drafted by the employer, and put to relatively unsophisticated employees for their signature, it is extremely undesirable to start reading in obligations based on arcane legal principles such as the duty to mitigate."  Essentially, my argument is that, if an employer wants the employee bound to an obligation to mitigate pay in lieu, the employer ought to be required to put express language to that effect into the contract.

The Decision


The Court of Appeal released its decision this morning.  It is a fairly lengthy decision, with a unanimous five-judge panel, authored by Chief Justice of Ontario Warren Winkler.  The Court allowed the appeal, finding that payment in lieu of a fixed term of notice is not subject to a duty to mitigate.

In explaining how it got there, I should first note that I skipped a step in my earlier posts when arguing 'No breach, therefore no duty to mitigate.'  Because if there's no breach, then why are they in Court at all?

Let's still try to keep this reasonably simple:  The terms of the employment contract gave the employer the contractual right to terminate without notice, on payment in lieu of notice.  (As distinct from the common law, which requires actual notice, and leads to an intervening 'damages' analysis to determine pay in lieu of notice.)  So the employer terminates the employee without notice, and this does not breach the contract.  The employee therefore has no obligation to mitigate, under ordinary common law principles, nor to account for mitigation earnings.  The employer then refuses to provide the agreed-upon pay in lieu of notice, and the employee argues that this does breach the contract.

What I didn't go into is why this breach doesn't give rise to a mitigation obligation.  I would ordinarily frame this argument with reference to the first principles of damages, in that mitigation relates to income earned through opportunities available because of the breach of contract.  The failure to give working notice, at common law, frees up an employee to work at a new job, so when the employee finds a new job, that's mitigation.  By contrast to an employee who wrote a book in his off hours while employed, and earns royalties which continue to come in after he loses his job; these earnings are in no way a result of his employment contract being breached.

With this contractual language, Goss Power Products had the right to send Mr. Bowes home without notice without breaching the contract, and that act frees up Mr. Bowes to look for new work.  Or sit at home and watch soap operas for six months.  His call, on the plain language of the contract.  So when he finds new work, and starts earning replacement income, the employer still hasn't breached the contract.  So, when the old employer later refuses to pay up, it is that refusal which breaches the contract, which is in no way causative of the employee's opportunity to earn new income.

The Court of Appeal took a slightly different tack, referring to other jurisprudence which resulted from those first principles.  In essence, their decision turns on a characterization of contractual pay in lieu of notice as "liquidated damages" or a "contractual amount".

Contractual Amounts vs. Common Law Notice

Bowes argued that, as the Court put it, "when an employment agreement specifies a period of notice the parties are merely inserting a term akin to a pre-estimate of damages that would flow from non-performance of the agreement."  Such pre-estimates of damages, are generally enforceable, provided that they are not in the nature of a penalty and are reasonable in the circumstances, and - outside the employment arena - are not subject to a duty to mitigate.

The employer's argument is fundamentally based on a passage from a decision by Justice Nordheimer in 2000, Graham v. Marleau, Lemire Securities Inc., stating that a contractual term fixing the notice period "is nothing more than an agreement between the parties as to the length of the reasonable notice to terminate the contract", without being intended to impact other matters such as the duty to mitigate.

The Court of Appeal rejected this argument, finding that "a fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice".  When agreeing to contractual language with fixed entitlements on termination, the parties are agreeing to something entirely different from the common law.  The maximum length of the notice is half of the maximum damages which might be recoverable under common law principles and the calculation of pay in lieu was limited only to base salary, with no accounting for his bonus, car allowance, or other benefits (which, again, would be included pursuant to common law principles).  Thus, the Court found that it is an error to simply equate a contractual fixed term of notice or pay in lieu with common law wrongful dismissal damages.

The Court went on to cite language from a 1995 decision by the English Court of Appeal:  "The concept of a duty to mitigate is entirely foreign to a liquidated damage claim....How could it be right to hold the plaintiff, who can show that his actual damage is greater, to the stipulated sum, but permit an employer who can show that it is less to take advantage of that fact?"  (The English Court made the further criticism, quite astutely, that such an interpretation of such contractual language undermines a core objective of the term itself - to provide certainty and avoid the need for litigation.)

The Golden Parachute Concern

The employer argued that, from a public policy perspective, it was unfair to the employer to give the employee such a windfall, in the form of, effectively, double-recovery.

The Court had a number of responses to this, some of which appear to be little more than fact-based retorts, but others which are more substantial.  In particular, the Court notes that it is common in sports, entertainment, and senior management fields for mitigation to be excluded from such contractual provisions.  If it isn't unfair for "the rich, famous, and powerful" - gleeful side note:  Chief Justice Winkler uses the Oxford comma! - it isn't unfair for the "less privileged".  On a more sober side note, many 'less privileged' lacked the bargaining power to insist on an exclusion of mitigation, and yet now will benefit from the lack of language on the point because of the changing law; however, in some ways that's a problem of the employer's own making.
[55]  It is worthy of noting that, in most cases, employment agreements are drafted primarily, if not exclusively, by the employer.  In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages.  In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from that amount.
[56]  Notably, the concern expressed in Graham seems to disregard the oft-observed disparity in bargaining power between employee and employer.  On this point, Iacobucci J. endorsed the following excerpt from K. Swinton, "Contract Law and the Employment Relationship:  The Proper Forum for Reform" both his decisions in Wallace v. United Grain Growers Ltd....and Machtinger...[citations omitted]:
[T]he terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does.  Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.
As I said before, I consider this to be the most important policy concern.  The legal question, framed at its simplest, is:  When a contract sets out a fixed notice period or pay in lieu, who benefits from silence on the question of mitigation?  The answer consistent with the entire body of law interpreting employment contracts is simple:  If the employer wants to require the employee to account for mitigation, the employer can build in language.

(Of course, the fact that the parties can contract into a mitigation obligation is emphasized several times, and was never in doubt.  So now employers will start building that language into their termination clauses as a matter of course.  No problem, that's their right.  But I wonder how many such clauses, moving forward, will end up failing altogether because of an accidental extension of the mitigation principle to the statutory minimum notice?  Remember:  statutory minimum notice isn't subject to mitigation, and a clause that purports to make it subject to mitigation will be void.  Reasonably easy to account for, if you're aware of the problem, but easy enough to miss, too.)


A lot of employment contracts in Ontario have language akin to Bowes'.  While many such contracts limit the employee to the statutory minimums (which means you can't exclude mitigation), and it's relatively unusual that a dismissed employee finds employment quite as quickly as Mr. Bowes did, there are still going to be a lot of dismissals into the future where this case is very significant to the employer's liabilities.

That is, of course, unless the Supreme Court overturns it.  The employer will likely seek leave to appeal, and it's anybody's guess whether or not the Court will hear it.

Did the Court of Appeal Go Too Far?

I'm a little bit concerned about some parts of the decision that are a bit overbroad.  In particular, I've been operating on the premise that a contract contemplating pay in lieu of notice is fundamentally different from the common law, whereas a contract which simply fixes the notice period (without a 'pay in lieu' option) will otherwise operate within the common law framework.

The Court, however, suggests (maybe?) that a contractually fixed notice period is still a different creature in kind from the common law notice period, and therefore might also be treated differently, perhaps also being excluded by default from an obligation to mitigate.  It isn't certain; the Court doesn't really parse the effect of a contractually fixed notice period without pay in lieu, but some of the language used by the Court suggests that it may go that way.

Again, I would feel uncomfortable with that, because it doesn't accord with the first principles of contract law.  If we contract for actual notice, and you fire me without notice, my obligation to mitigate should apply in full force.  Even on the analysis used by the Court, it doesn't seem to me that there's any way of expanding "contractual amounts" to cover language that doesn't include "or pay in lieu".


I'd like to express congratulations to Mr. Bowes, and to his lawyer, Alex Van Kralingen, who contacted me this afternoon to bring the decision to my attention, noting that I "seemed to be the only one in cyberspace on [Bowes'] side".  They were the underdogs in this fight, and - assuming again that it holds up - it will have a significant impact on the law.  The best wins are always the ones that everyone thought you would lose.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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