Court of Appeal Extends Goss Doctrine to Fixed Term Contracts

Here's a head-scratcher for you.

Remember Bowes v. Goss Power Products Ltd.?  I posted about it a few times - it was an odd one, because Bowes was making an argument that seemed to me to be unlikely to succeed, even though I felt that, on first principles, it probably should.

Bowes dealt with an issue where a contract provided a fixed amount of notice or pay in lieu thereof: Bowes was fired without notice, got a new job quickly, and then nonetheless pursued his full pay in lieu of notice from the old employer.  The 'old' case law suggested that he had mitigated his losses, and was entitled to essentially nothing.

However, I argued in my blog entries, and the Court of Appeal eventually concluded, that the language entitling him to pay in lieu of notice gave him a monetary entitlement not subject to the duty to mitigate.  So he won.

However, in my commentary on the Court of Appeal's decision, I asked whether or not it went "too far", because the Court's commentary suggested that simply the act of fixing termination entitlements, at all, without an express obligation to mitigate included in the contract, relieves the employee of the obligation to mitigate.

There's a new decision from the Ontario Court of Appeal which clarifies that not only is this the case, but it applies to the termination of fixed term contracts as well.

Howard v. Benson Group Inc.:  Background and Procedural History

Mr. Benson worked as a manager at an automotive service centre in Bowmanville.  He was hired in September 2012 on a five-year fixed term contract, and dismissed 23 months later.

The contract also included an 'early termination clause':  "Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario."

The effect and enforceability of this kind of language is often arguable.  The employer's intention would be to limit the employee's entitlements on termation - in this case to two weeks' pay in lieu of notice - but enforceable language to do so can be challenging.

This is certainly not the best termination language I've seen, but I could probably find good authorities on both sides of this argument.  On motion for summary judgment, this language was found to be ambiguous and therefore unenforceable.  I could go into detail on this, but Sean Bawden posted a good commentary at the time, and ultimately this finding was not appealed, so the Court of Appeal didn't assess whether or not the issue was rightly decided.

That being the case, we are left with a five-year fixed-term contract with no enforceable termination language, and a termination less than two years in.  This is naturally a dangerous situation for an employer - consider, for example, the similar Loyst case, where a fixed term contract led to liability on the basis of 30 months.

However, the motions judge found that damages should be assessed on the basis of common law 'reasonable notice', subject to the duty to mitigate.

The plaintiff appealed on both points, arguing that he should be entitled to the full balance of the outstanding remuneration on the fixed term contract, and that there should be no requirement to mitigate.

The Court of Appeal Decision

Earlier this month, the Court of Appeal released its decision on these issues:  The plaintiff was successful on both.

Common Law Damages versus Wages for the Unexpired Term

A fixed term contract is created only by clear and unambiguous language...and where that is the case, the contract expires at the end of its term without the need for notice by the employer.  Thus, language that expressly creates a fixed term contract actually has the effect of displacing the implied term requiring reasonable notice of termination.

It is possible for parties to a fixed term contract to contemplate early termination, but with the unappealed removal of the early termination clause, there was no basis to do so - and accordingly there was nothing in the contract that expressly or impliedly conferred a right on the employer to terminate the employment contract prior to the expiration of its term.

As a result, the Court of Appeal concluded that damages must be assessed on the basis of the remainder of the five-year term.

Duty to Mitigate

The Court of Appeal spent some time analyzing the Bowes decision, and its rationales, summarizing the policy concerns at issue as being, firstly, a concern about fairness in allowing the employer to "opt for certainty" in terms of its termination liabilities, and then nonetheless reduce that amount by requiring the employee to mitigate its losses where mitigation is not addressed in the employment agreement; and, secondly, "it would be inconsistent for parties to contract for certainty, and yet leave mitigation as a live issue with its uncertainties and risk of future litigation."

The Court acknowledged that the contract in Bowes was different in two respects:  "(1) it was not a fixed term contract; and (2), more significantly, it contained an express clause stipulating a fixed quantum of damages for early termination of the contract".

However, the Court was nonetheless persuaded that the importance of 'certainty' translates well from the Bowes contract to the Howard contract, and therefore that the same legal considerations should be applied.

Accordingly, the Court of Appeal concluded that Mr. Howard is entitled to remuneration for the entire remainder of the term, without deduction for any mitigation earnings.

Impact

In my view, the actual direct practical impact of this decision is small.  I have long been of the view that fixed term contracts, in most circumstances, are a terrible idea for employers, and that most employer objectives are better served by an indefinite term contract with a good termination clause.

This case drives in the point, but from the perspective of employer risk is not really new:  I pointed to Loyst as authority for the proposition that a five-year fixed-term contract could leave an employer on the hook for years of lost wages.  The difference in Howard is that some of the partial defences that the employer might have faintly hoped to rely upon are totally extinguished.

It will be interesting to see if the courts apply the same reasoning to constructive dismissal cases dealing with fixed term contracts:  That's an area where mitigation proves to be a much more difficult concept for plaintiffs.

Concerns with the Decision

Make no mistake:  At present, the decision in Howard is law in Ontario, binding on lower courts.  It's possible that it could be appealed, or that the Court of Appeal could rethink it in the future, but until or unless this happens, expect Howard to be followed in similar cases.

And as a lawyer who does a significant amount of plaintiff-side work, I'll acknowledge that the 'certainty' argument resonates.  Of course, all the contracts we've been seeing since Bowes, trying to build in mitigation clauses...well, they're tricky, and complicated, and weird, and difficult for an employee to understand, and that's going to develop into a whole new area of contract interpretation in employment law, with new dimensions of uncertainty.

But if I boil this down to a "first principles" perspective - the same one that I used when analyzing Bowes before the Court of Appeal decided it - I find the decision troubling, a case of the pendulum swinging way too far in one direction.

Indeed, I would argue that it's impossible to reconcile Howard with the first principles of contract damages.

Contracts 101:  The Compensation and Mitigation Principles

In Canada, "breach of contract" is not a swear term.  It's not considered to be morally outrageous, that somebody might not do what they've promised.  The law will generally permit people to breach contracts, but then expect and require them to pay 'damages' to the other parties to the contract.

And the quantum of those damages is governed by two of the oldest principles in the common law - compensation and mitigation.

The compensation principle states that the non-breaching party is entitled to be put into the position he would have occupied had the contract been honoured, to the extent that this can be done by the payment of money.  The mitigation principle states, however, that avoidable loss or avoided loss is not compensable.

But the mitigation principle gets applied only to income that you were able to earn as a result of the breach.  In wrongful dismissal contexts, this is usually straightforward:  I fire you without notice, in breach of an implied term of your contract, and you now have time during the notice period to use to earn more money...so when you get a new job, that's mitigation.

Where Mr. Bowes' case differed was that he wasn't contractually entitled to notice of termination.  He was contractually entitled to notice or pay in lieu, which means that the termination without notice, in and of itself, didn't actually breach his contract.  Rather, Goss Power breached Bowes' contract only when they - having terminated him without notice - failed to provide the pay in lieu.  His ability to take another job, therefore, can't be said to flow from the breach.

That can't be said of Mr. Howard.  Mr. Howard was entitled to work the full five years, for his full remuneration package.  Benson Group breached his contract by terminating his employment during the term, which directly freed him up to seek new employment.

Unlike Bowes' contract, with actual contractual language that entitled him to a contractual sum on termination without notice, there is absolutely nothing comparable in Howard's contract.  His entitlement to a payout arises only as a function of the compensation principle - which, with very few exceptions (see, for example, Waterman v. IBM), must be subject to the mitigation principle.

Within the employment context, there's no cogent way around this analytical problem, and especially not in a 'fixed term contract' case:  It requires one to regard the compensation and mitigation principles as being, themselves, implied terms of the contract - which is a difficult proposition to justify, because then you could never really talk about 'breach of contract' coherently (because by providing compensation, you'd actually be complying with your full contractual obligations).  The further difficulty is that the compensation and mitigation principles actually transcend contract law, and exist in an essentially identical way in tort law.

Furthermore, the rationale for setting aside the obligation to mitigate, in fixed term contract cases, is based on propositions which is ubiquitous within contract law:  The mitigation principle, by definition, results in uncertainty, because its very function is to modify liabilities flowing from breach, based on events after the breach which are not necessarily within the control of the parties.  Likewise, the very act of entering into a contract is an attempt to achieve certainty.  Nobody ever deliberately contracts for uncertainty.  To say that parties who "contract for certainty" should never apply the mitigation principle...would basically eliminate the mitigation principle as a proposition of law altogether.

For illustration purposes, consider a fixed term tenancy:  If I enter into a one year tenancy, and then terminate the tenancy after two months, it is trite law that the landlord has an obligation to take reasonable steps to re-rent the place, and then account for new rental income.  If he re-rents it for the same amount two months after I leave, my liability is two months.  Yet you would say that we "contracted for certainty" in exactly the same way that Howard and Benson Group did, so why should I benefit from the mitigation principle?

As I said, Howard is now the law in Ontario.  And frankly I'm not all that worried about how that plays out, in practice.  But on a theoretical level, I believe that it take the Bowes proposition further than it can rationally bear.

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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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.