Lessons From the Mistakes of Others: Reliance on an Unenforceable Termination Clause is Costly

August 15, 2014

A recent judgment of the New Brunswick Court of Appeal has once again affirmed the importance of carefully drafting termination clauses in employment contracts. In this case, the Court upheld a trial judgment that a termination clause which purported to limit the employee’s notice entitlement to 20 days was not enforceable.

The Court of Appeal’s decision begins with the following useful overview of the legal principles applicable to a termination without cause:

Every person employed for an indefinite period is entitled to reasonable notice of dismissal, unless the dismissal is for just cause or the parties previously settled upon a notice period, which is authorized by the Employment Standards Act, S.N.B. 1982, c. E-7.2. Where the dismissal is without cause and the employment contract is mute on the length of notice required, or if the employment contract provides for a notice period that is short of the minimum prescribed by the Employment Standards Act, it falls to the court to fill the void and, where appropriate, to order the employer provide compensation in lieu of reasonable notice. Of course, recoverable damages are limited to losses traceable to the failure of the employer to provide reasonable notice, and no damages may be awarded for loss the employee could reasonably have avoided. That said, the onus is on the employer to prove the employee did not make reasonable efforts to mitigate his or her losses. (para 1)

The termination clause at issue stated: “Notice of resignation or of termination must be provided in writing no less than twenty (20) working days in advance.”

The trial judge found that the termination clause was ambiguous because it did not explicitly state that the “20 working days” applied to the notice that the employer was required to provide in a termination without cause. The judge relied on the common law doctrine of contra proferentem, which holds that where a contract is ambiguous, it must be interpreted to the detriment of the drafter. Since the employment contract was drafted by the employer, the judge interpreted the termination clause in favour of the employee. As a result, the trial judge held that the termination clause only applied to circumstances where the employee chose to end the employment relationship, and not to the employer’s decision to terminate her employment.

The Court of Appeal held that regardless of how the termination clause was interpreted, the termination clause was not enforceable because it did not meet the minimum notice requirements of the Employment Standards Act, which required the employer to provide 4 weeks’ notice of termination. The Court held that a “week” under the Employment Standards Act meant 7 consecutive days rather than a “working week.” Since the termination clause only purported to require 20 days’ notice rather 28, the Court held that it fell short of the minimum statutory standards and was therefore null and void.

The Court of Appeal upheld the trial judge’s award of damages based on a common law reasonable notice period of 16 months.

This case underscores the importance of carefully drafting a termination clause that clearly sets out the employee’s entitlement on dismissal by the employer, and that meets the minimum statutory requirements. It also provides a good illustration of the risk of an unenforceable termination clause. The employer, relying on the employment contract, likely terminated her employment in the belief that its only potential liability was 20 days’ notice. However, because the termination clause did not apply to a termination without cause, the employer had to pay 15 months more notice than it anticipated. This liability, and the costly legal proceedings, likely could have been avoided through the use of a termination clause which met the legal requirements, or through the negotiation of a severance package if the employer had known that it would be required to pay reasonable notice of termination.

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