In Wood v Fred Deeley Imports Ltd. (which we wrote about here), the Ontario Court of Appeal seemed to make a definitive statement about the interpretation of termination provisions in employment agreements: a court will invalidate them when they contain actual or technical deficiencies. However, the same Court’s decision last year in Oudin v Centre Francophone de Toronto (which we wrote about here) seemed to reach a different conclusion: the court will apply contractual certainty to give effect to the parties’ intentions. Can the two be reconciled? Closer inspection reveals that each decision is specific to the employment agreements in each.
Wording of the contract
The termination provision in Oudin required the employer to provide “…15 days’ notice or the minimum prescribed by the Employment Standards Act…”. The employee challenged this as it provided for notice under the Employment Standards Act (ESA) but not severance, which may be required in some circumstances.
The Court of Appeal upheld the Motion Judge’s finding that there was no attempt to contract out of the ESA. The Motion Judge noted the presence of a saving clause (labeled in the contract as a “Waiver and Severability” clause) in the employment contract, finding that according to this clause, any provision in the contract that became invalid by virtue of law would be nullified or modified to become compliant. This indicated that the parties had considered what would happen in the event any part of the contract became unenforceable and agreed on a remedy, which prevented the contract from coming into conflict with the ESA.
Neither the initial judgment nor the appeal mentions the non–restrictive language of the termination clause, but this is significant as well. The language in the termination clause does not “draw a circle” around the employer’s obligations to the employee by limiting it to those set out in the clause, as some (including the one in Wood) do. The significance of this does not become apparent until this decision is reviewed in relation to Wood.
The termination provision in Wood required the employer to provide “two weeks’ notice of termination pay or pay in lieu thereof for each completed or partial year of employment…”, and that “the Company shall not be obliged to make any other payments to you other than those provided in this paragraph” (emphasis added). In striking it, the court found that “pay” referred only to the employee’s salary, and not benefit or Registered Retirement Savings Plan (RRSP) contributions. As a result, the Court found that this language restricted the employer’s compensation obligations to pay only and therefore did not provide for all compensation required by the Act. The Court of Appeal additionally found that the clause created three scenarios for paying severance, two of which violated the ESA. The employment agreement in Wood does not appear to have included a saving clause; as a result, this violation of the ESA was sufficient to invalidate the termination clause.
The court in Oudin allowed the termination clause to stand through a holistic review of the contract to determine the parties’ intention. Conversely, the holding in Wood was based solely only on the wording of the termination clause. So, neither clause met the requirements of the ESA, but one was deemed unenforceable while the other was enforced. The Court of Appeal in Wood did not address this contradiction. Can it be explained?
In our view, yes, these decisions are reconcilable. The absence of a saving clause and the presence of inclusive language were fatal to the clause in Wood. The reverse was true in Oudin, allowing the employer to rely on the termination clause.
The restrictive wording of the termination clause in Wood was rendered invalid due to the perceived restrictions it placed on the employer’s obligations at the time of dismissal, which were less than the minimum standards established by statute. The absence of a saving clause meant that the termination provision could not be “fixed”, and was therefore unenforceable. The termination clause in Oudin, while suffering from similar deficiencies , was salvaged on the basis of the saving clause and the lack of a clause “drawing the circle” around the entitlements set out therein (although this was not explicitly referenced). The lesson for any organization that seeks to draft a termination clause that will be upheld by the court is one we have stated often: always include a “saving clause” in your termination provision and avoid overly restrictive language that would prevent the clause from being “saved” if it is now, or in the future, in breach of applicable legislation.
By: Stuart Rudner and Geoffrey Lowe