Vague Termination Clause Leaves Employer On The Hook

Written on behalf of Arbesman Hamilton LLP

Employment contracts can be tricky to write, and termination clauses can sometimes lead parties into litigation. A recent decision from the Ontario Superior Court of Justice highlights just how important it is to have clear contractual language around termination.

The employee started working with the employer, a company producing lamb meat, in June 28, 2003. He worked as Vice-President of Operations at the company’s United States processing facility in Los Angeles. He continued to work there until he was terminated without cause, at age 63, on June 28, 2015. Upon his termination he sought damages for wrongful dismissal equivalent to 24 months’ reasonable notice. He employer’s Canadian and US subsidiaries were named as defendants in the trial, both serving as the employer.

A vague employment contract

The employee sought 24 months’ notice. However, the employer countered that the employment contract limited notice of termination to 12 months. The relevant part of the contract were as follows:

3(d)      This Agreement and the employment of the Employee hereunder may be terminated by the Employer giving notice of termination (or at the Employer’s option, pay in lieu of notice) as follows:

(i) during the first three years of employment 12 months’ notice;

3(e)    Pay in lieu of notice will be calculated on the basis of the Employee’s annual base salary as of the date he receives notice of termination.  Bonuses and other forms of additional compensation will not be considered part of the Employee’s annual base salary.  The Employee’s rights and entitlement under any performance bonus shall terminate effective as of the date of his or her termination of employment, or as at the date he or she receives notice of termination, if pay in lieu of notice is provided.

Pay in lieu of notice will be provided in regular monthly instalments and shall be subject to all deductions and withholdings required by law.

The contract was drafted by the employer’s lawyers. It quickly became clear at trial that the contract was vague, limiting the section about notice to employees in their first three years of employment. The court noted that it seemed that clause 3(d) was intended to be a list; but it was never completed. Simply put, the contract was silent about what notice was to be provided to employees with over three years of employment.

Ontario law governs the employment relationship

Despite the employer being a US-based company, with the employee working in Los Angeles, The contract stated it was to be governed by the laws of Ontario. With this understanding, the court was able to address the vagueness found in the contract. The court wrote,

“Both parties agree that under Ontario law, (the employer) could not terminate the plaintiff’s employment without providing him with reasonable notice or pay in lieu thereof. To the extent that (the employer) maintains that the Agreement should be construed to limit the (employee’s) reasonable notice to 12 months regardless of when he was terminated, I disagree.

[24] As held by the Court of Appeal for Ontario in Wood v. Fred Deeley Imports Ltd. 2017 ONCA 158, any termination clause can only rebut the presumption of reasonable notice if the clause’s wording is clear. Here, the contents of clause 3(d) are anything but clear. The inclusion of clause 3(d)(i) seems to, on its face, distinguish between the (employee’s) reasonable notice before and after he completes three years of employment, although the clause appears incomplete. Under Ontario law and the principles of contractual interpretation, after three years of employment, the plaintiff is thus entitled to his common law reasonable notice.”

The court determined the employee’s entitlement to his common law reasonable notice to be 22 months.

The experienced employment law team at Arbesman Hamilton LLP help employers draft contract language that is clear, concise, and designed to keep parties out of the courts. We also help both employers and employees understand their rights and obligations under employment contracts. Please reach out to us online or at 416.481.5604 if you are an employer looking to draft clear contracts, or an employee or employer involved in an employment law issue.