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Littler LLP: Monty Verlint

Termination clause enforced: Oudin and the Supreme Court of Canada

In Canada, termination clauses in employment agreements are critical tools that allow an employer to avoid providing reasonable notice of termination under the common law.  Each year there are numerous court decisions on this topic; it is one of the country's most litigated employment issues.

On February 2, 2017, the Supreme Court of Canada dismissed an application for leave to appeal the decision in Oudin v. Centre Francophone de Toronto, 2016 ONCA 514.  Oudin was a wrongful dismissal case resolved by way of a summary judgment motion based on the interpretation of a termination clause in the employee’s contract that was drafted in French.  The lower-level motions court translated the clause as follows:

The [company] may also terminate this agreement for any other reason by giving the employee 15 days notice or the minimum prescribed by the Employment Standards Act or by paying an amount of salary equal to the salary the employee would have had the right to receive during the notice period (after deduction and/or withholding at source), in the entire discretion of [the company].

The motions court upheld the provision and stated that it was reasonably interpreted to provide the employee with the greater of 15 days or the minimum required by the Ontario Employment Standards Act, 2000  (the “ESA”).  In doing so, the motions court stated:

Contracts are to be interpreted in their true context and I can find no basis to interpret this employment agreement in a way that neither party reasonably expected it would be interpreted when they entered into it.  There was no intent to contract out of the ESA in fact; to the contrary, the intent to apply the ESA is manifest.

In other words, the court moved away from a purely technical interpretation of the clause and focused more on the intentions of the parties.  As a result, the employee was not entitled to reasonable notice of termination pursuant to the common law, contrary to the claims made by the employee in the action.

On appeal, the Court of Appeal noted an error in the translation of the clause but ultimately dismissed the appeal and upheld the termination clause. 

The case of Oudin has largely been considered a positive development for employers since prior case law had invalidated termination clauses for not specifically providing for a particular requirement of the ESA such as, for example, the ESA's mandatory continuation of benefit premiums during the statutory notice period, or the ESA requirement to provide minimum severance pay in addition to termination pay. 

Notwithstanding the Supreme Court's positive decision in Oudin, employers should still take care in drafting their termination clauses to guarantee that they are enforceable.  Such clauses need to be carefully tailored to ensure, among other things, that:

  1. they do not violate applicable employment standards legislation in Canada;
  2. they clearly and unambiguously rebut the presumption of common law reasonable notice;
  3. the agreement containing the termination clause has valid consideration; and
  4. the employee has voluntarily agreed to the provision after having an opportunity to obtain independent legal advice. 

Where termination clauses do not contain the requisite requirements, employers may be at risk of having their termination clause struck down, thus facing potential exposure to greater liability under Canada's common law notice of termination requirement.

For more information on this and other important employment law topics, please join us for a complimentary breakfast seminar in Toronto on February 28, 2017.  Click here for more information. 

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