Cause for Concern: Ontario Court of Appeal Rules Illegal “For Cause” Provision Invalidates Entire Employment Contract
Mr. Benjamin Waksdale (“Mr. Waksdale”) worked for his former employer, Swegan North America Inc. (“Swegon”), for a period of eight months before he was terminated without cause.
Like many employees, Mr. Waksdale signed an employment contract with Swegan before commencing work. The contract contained the following clause that applied in the event his employment was terminated without cause:
Termination of Employment with Notice
You agree that in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act 2000 as amended. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.
The contract also contained a “for cause” termination provision, which Swegon conceded violated the Ontario Employment Standards Act, 2000, as amended (the “ESA”).
The contract also contained a severability clause, stating the following:
You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms conditions and provisions shall be considered severable and shall remain in full force and effect.
Mr. Waksdale subsequently sued Swegon for damages for wrongful dismissal, claiming that he was owed damages pursuant to the common law.
In doing so, he argued that the unenforceability of the “for cause” provision impacted on the contract beyond that one clause. He further argued that the defective clause rendered the entire contract, or, at the very least, the termination provisions, void and unenforceable.
As many employers would do, Swegon argued that since Mr. Waksdale was terminated without cause, the clause in the contract governing termination “for cause” is irrelevant to the current dispute and therefore should play no part in defining the parties’ respective rights and obligations.
In siding with Swegon, Justice Morgan had the following to say:
There is no need to sever anything here as by its own terms the Termination for Cause provision does not apply to the present case. It is only the Termination of Employment with Notice clause which applies here, and there are no grounds on which to challenge the enforceability of that clause. It does not contravene the ESA, and is therefore valid and enforceable as written and agreed to (para. 17).
Mr. Waksdale’s motion was dismissed.
Ontario Court of Appeal Decision
Not satisfied with the result of the summary judgment motion, Mr. Waksdale appealed Justice Morgan’s decision.
In doing so, Mr. Waksdale maintained his view that the entire contract was void from the outset given the illegality of the contract’s “for cause” provision. As a result, he reiterated that he was owed damages pursuant to the common law.
In a ground-breaking and precedent-setting decision, the Ontario Court of Appeal reversed Justice Morgan’s decision and held that the common law was applicable.
In coming to its decision, Ontario’s highest Court held that:
- A contract must be interpreted as a whole and not on a piecemeal basis;
- It is irrelevant whether the termination provisions are found in one place in the contract or separated, or whether the provisions are by their terms otherwise linked; and
- It does not matter if Swegon did not rely on the “for cause” provision. The court is obliged to determine the enforceability of the termination provisions as at the time the contract was executed (paras. 10-12).
On the issue of the severability clause, the Court stated the following:
We decline to apply this clause to termination provisions that purport to contract out of the provisions of the ESA. A severability clause cannot have any effect on clauses of a contract that have been made void by statute: North v. Metaswitch Networks Corporation, 2017 ONCA 790, 417 D.L.R. (4th) 429, at para. 44. Having concluded that the Termination for Cause provision and the Termination of Employment with Notice provision are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions (para. 14).
The key takeaway from this case is simple: if you are an employer, you need to re-examine your employment contracts. Specifically, you need to ensure that your termination provisions (including the “for cause” provision) do not violate, or have the potential to violate, the ESA.
There has been much legal debate over what constitutes the perfect “without cause” provision, which makes sense given that most employees, when terminated, are terminated without cause. Historically, and in these cases, the “for cause” provision has therefore been deemed less relevant. Not any more. In light of Waksdale, employers now need to be more vigilant than ever when it comes to their termination clauses. Otherwise, there will be cause for concern.