Termination Clauses and Fixed Term Contracts: Significant Court Decisions

Two recent decisions of the Ontario Courts (in Dufault and Kopyl)^[1] serve as stark reminders that:

1. Our courts continue to be ready and willing to find new ways to strike down termination clauses in employment contracts; and
2. The use of “fixed term” employment agreements is very risky.

In each case, the employee was employed pursuant to the terms of a written contract with a “fixed term”, or end date. And in both cases, the contract contained a termination clause, permitting the employer to terminate employment prior to expiry of the contract, with only a specified, limited amount of notice or termination pay.

The employer, in each case, terminated employment and paid the employee the amounts required by the early termination clause. In each case, the employee then sued for wrongful dismissal, asserting that the termination clause in their contract was not binding.

Although for different reasons, the Judge in each case found that the “early termination” provision was not enforceable, resulting in the employee being awarded the full value of their lost earnings until the end of the fixed term, without any reduction on account of the employee’s earnings from alternative employment.

In the Dufault case, this meant that the employer had to pay damages representing 100% of Dufault’s lost earnings for the remaining two years of her fixed term. In the Kopyl case, the employer had to pay the full remaining six months of a one-year term.

Significantly, the Judge in the Dufault case found that the termination provision was invalid for several reasons, including the fact that it permitted the employer to terminate employment in its “sole discretion” at any time. The Judge found that this language offended the Employment Standards Act, 2000, which prohibits termination in certain circumstances.  

Dufault is the first Canadian court decision invalidating a termination clause on the basis of the words “sole discretion”.

Important “take-aways” for employers:

1. Fixed term employment contracts are inherently risky … We continue to strongly discourage their use; and
2. If your form of employment offer currently says that you can terminate at any time at your “sole discretion” (or contains other language suggesting an “absolute” right to terminate employment), we strongly recommend that your contract be reviewed, and possibly revised for future use.

As always, we encourage all our employer clients to periodically have their forms of employment contract reviewed, for currency and compliance with recent developments in the law.

For more information, please contact Peter Straszynski or another member of our Labour & Employment Group.