Mitigation and Fixed Term Contracts
There's a recent decision out of the British Columbia Court of Appeal, Quach v. Mitrux Services, which is a bit of a game-changer on the issue of mitigation in fixed-term employment contracts.
But before I get into Quach, a bit of background.
Mitigation in Employment Contexts
The concept of 'mitigation' is a foundational doctrine of damages. As a general proposition, when somebody breaches a contract, the non-breaching party is entitled to recover for losses flowing from that breach; however, that entitlement comes with a duty to mitigate by taking reasonable steps to manage or reduce your own loss.
The principles were applied in the employment law context in 1976 in the Supreme Court decision of Red Deer College v. Michaels - one of the few seminal employment law cases to come out of Alberta. At the risk of oversimplifying...when an employee entitled to reasonable notice of termination is dismissed without that reasonable notice, that employee needs to take reasonable steps to get a new job. If the employee fails to take such steps, that failure can reduce damages. If the employee gets a new job, the earnings count against the old employer's liabilities.
For a while, there was a debate as to how this applied in contexts where an employee has a written employment contract entitling a person to a particular amount of notice or pay in lieu of notice. In 1986, in Mills v. Alberta, the Alberta Court of Appeal found that there is no duty to mitigate with such a clause.
The rest of the country took a while to catch up. In 2000, Justice Nordheimer of the Ontario Superior Court of Justice rejected Mills in his decision in Graham v. Marleau, Lemire Securities, and in Ontario, at least, Graham held the day for a long time. Contractual termination language did not modify the obligation of a dismissed employee to mitigate his or her loss.
Then, in Bowes v. Goss Power Products, in 2012, things changed. I had blogged about this case at earlier stages, and I regarded Mr. Bowes' position as being broadly consistent with first principles, if not with the case law. (I got an email from his counsel afterward, letting me know that his client had appreciated my commentary, because I seemed to be the only one on the internet on his side.) Chief Justice Winkler, writing for a unanimous 5-judge panel, wrote an excellent decision that would effectively put the issue to bed across the country.
Except, in my view, there was a bit of ambiguity that made me wonder (and openly question at the time) if it might leave the door open to the pendulum swinging even further against mitigation.
Fixed Term Contracts
In 2016, my concerns were confirmed: The Ontario Court of Appeal released a surprising decision in Howard v. Benson Group, expanding upon Bowes and concluding that an early termination of a lengthy fixed term contract, without an effective early termination clause, did not engage a duty to mitigate.
This meant that Howard was entitled to a lump sum payment for three years' wages - and that this entitlement would remain intact even if he got a new equivalent job the next day.
The Court of Appeal's logic was that the parties had contracted for certainty, as in Bowes. The trouble is that, in that sense of the phrase, all contracts are for certainty. The difference between Bowes and Howard is that Bowes' contract entitled him to a cheque; Howard's contract entitled him to an opportunity to earn a cheque. And from a mitigation perspective, that's a huge difference.
I argued, and continue to argue, that Howard was wrongly decided, inconsistent with the principles in Red Deer College. However, it was - and is - the law in Ontario.
I transferred to Alberta some time after Howard, and the consensus among employment lawyers I've talked to here appears to be that Howard is a weird decision, but a relatively recent decision of the Ontario Court of Appeal is a persuasive authority that creates risk for employers dealing with fixed term contracts. (It doesn't really change how I advise employers when drafting contracts. Even before Howard, I generally avoided fixed-term contracts: In most circumstances, there are better ways of protecting an employer's interests.)
Ultimately, though, I have serious doubts as to whether the Alberta Court of Appeal will follow Howard, and I've been watching for a good case to test it. BC beat us to it, though. Sort of.
The Quach Decision
Quach has an unusual and interesting fact-pattern: Mitrux offered Quach a job, and Quach hired his own lawyer to draft an employment contract to reflect the terms, which included a one-year fixed term contract, starting October 1, 2015, with an annual salary of $138,000. Both parties signed the contract on August 25, 2015.
The contract (having been prepared by the employee's lawyer, remember) actually provided that the employer, if terminating the contract early, would have to pay the entire outstanding value of the term of the contract. (A Howard clause, if you will.)
With the signed contract in hand, Quach resigned his old job, and prepared to start the new one. In the mean time, Mitrux got legal advice on the contract it had already signed. (NB: When you're getting legal advice on whether or not you should have signed an agreement that you have, in fact, signed, things are usually about to get interesting.)
On September 28, 2015, Mitrux put a month-to-month contract to Quach instead, insisting that the new contract had to be signed or else Quach would not be able to start work. Quach signed the contract. Two days later - i.e. the day before the employment relationship was supposed to start - Mitrux terminated the contract.
So there are a number of really interesting characteristics of this case:
The trial judge - having rejected the employer's claim to rely on the second contract, for reasons that are sound - followed Howard, and awarded Quach the full one year's compensation. He also awarded aggravated damages on the basis that he experienced "devastation", with "stress and anxiety", particularly in light of rising financial obligations including a baby on the way and in-laws moving in with him.
The Court of Appeal disagreed with the Howard analysis. Citing Neilson, a 1988 decision by the BC Court of Appeal, it concluded that Howard is not the law in British Columbia...however, on the specific language of this contract, the result was the same.
So, even though the Court of Appeal's commentary on Howard becomes obiter, it was made with the express purpose of making sure that nobody interprets their reasons as an endorsement of Howard.
Further, the discussion of Neilson is worth parsing:
What's Next?
This case will pretty firmly set the question to bed in British Columbia, for the time being, as being the opposite from Ontario. In other Provinces, such as Alberta, it balances the scales a little: No longer are we simply looking at a questionable decision from Ontario; now, we're looking at a contentious issue on which appellate courts have disagreed, and where Howard no longer threatens to be particularly persuasive.
Practically, it means that mitigation of fixed term interests is now a very live issue in Alberta and elsewhere. In a case where it creates a significant 'value' difference - say, a scenario where a dismissed employee with a lengthy period left in the contract finds a new job quickly - it will almost certainly be worth litigating.
And while this case definitely tees up the issue as one that may eventually have to be resolved by the Supreme Court of Canada, that is unlikely to happen on this case.
Further Discussion
What if there had been consideration for the second contract?
This is a scenario that the employment law canon is poorly equipped to address: In a case where an employee has substantial termination entitlements, and the employer puts a contract in front of the employee that removes those entitlements (successfully dotting the i's and crossing the t's in terms of fresh consideration and statutory compliance issues) can the employer turn around before the ink's dry and terminate that employment relationship? (This is compounded by the fact that an employer can effectively compel an employee to sign such a contract. Coupled with a termination of the existing employment agreement, an offer to continue the existing employment relationship, but with a new termination clause, with a five cent signing bonus...if the employee declined to sign it, there is plenty of case law to suggest that this could be regarded as a failure to mitigate his or her wrongful dismissal damages.)
Intuitively, there seems to be something wrong with that scenario - there's every reason for judges to bend over backwards finding some way to not hold the employee to the oppressive contractual terms. But, historically, these issues have tended to be resolved on the basis of technical issues, such as lack of consideration, that are not necessarily inherent to the scenario itself.
Similar theoretical issues arise in restrictive covenants. When upholding the General Billposting principle, that wrongfully dismissed employees cannot be held to a non-competition promise, the majority of the Court of Appeal in Globex saw General Billposting as limiting the potential for employers to hire an employee, have them sign such a covenant, and then immediately dismiss them, as a way of reducing competition in the marketplace. The problem with the analysis is this: It is limited to situations of wrongful dismissal, whereas it is quite possible, with a good contractual termination clause, for an employer to dismiss a new employee with negligible notice or pay in lieu, without it being wrongful.
If a court ended up facing such a scenario, in a case where the employer actually had properly implemented ostensibly enforceable language (results-driven analyses aside), it is not clear how a court would address this.
I don't think I'm saying anything particularly controversial that we should not want to allow employers to be able to trick, cajole, or coerce employees into giving up existing termination rights (be it to notice, pay in lieu of notice, or post-employment competitive freedom), and then immediately terminate the contract. But how we get to that result is an important question. Is there something improper about a contract that allows the employer to do so? (Unconscionability; inadequacy of consideration; public policy issues, etc.) Or is it okay for the employer to secure such contractual rights, but not to immediately engage them? (Implied misrepresentations; implied contractual terms; duty of good faith; etc.)
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
But before I get into Quach, a bit of background.
Mitigation in Employment Contexts
The concept of 'mitigation' is a foundational doctrine of damages. As a general proposition, when somebody breaches a contract, the non-breaching party is entitled to recover for losses flowing from that breach; however, that entitlement comes with a duty to mitigate by taking reasonable steps to manage or reduce your own loss.
The principles were applied in the employment law context in 1976 in the Supreme Court decision of Red Deer College v. Michaels - one of the few seminal employment law cases to come out of Alberta. At the risk of oversimplifying...when an employee entitled to reasonable notice of termination is dismissed without that reasonable notice, that employee needs to take reasonable steps to get a new job. If the employee fails to take such steps, that failure can reduce damages. If the employee gets a new job, the earnings count against the old employer's liabilities.
For a while, there was a debate as to how this applied in contexts where an employee has a written employment contract entitling a person to a particular amount of notice or pay in lieu of notice. In 1986, in Mills v. Alberta, the Alberta Court of Appeal found that there is no duty to mitigate with such a clause.
The rest of the country took a while to catch up. In 2000, Justice Nordheimer of the Ontario Superior Court of Justice rejected Mills in his decision in Graham v. Marleau, Lemire Securities, and in Ontario, at least, Graham held the day for a long time. Contractual termination language did not modify the obligation of a dismissed employee to mitigate his or her loss.
Then, in Bowes v. Goss Power Products, in 2012, things changed. I had blogged about this case at earlier stages, and I regarded Mr. Bowes' position as being broadly consistent with first principles, if not with the case law. (I got an email from his counsel afterward, letting me know that his client had appreciated my commentary, because I seemed to be the only one on the internet on his side.) Chief Justice Winkler, writing for a unanimous 5-judge panel, wrote an excellent decision that would effectively put the issue to bed across the country.
Except, in my view, there was a bit of ambiguity that made me wonder (and openly question at the time) if it might leave the door open to the pendulum swinging even further against mitigation.
Fixed Term Contracts
In 2016, my concerns were confirmed: The Ontario Court of Appeal released a surprising decision in Howard v. Benson Group, expanding upon Bowes and concluding that an early termination of a lengthy fixed term contract, without an effective early termination clause, did not engage a duty to mitigate.
This meant that Howard was entitled to a lump sum payment for three years' wages - and that this entitlement would remain intact even if he got a new equivalent job the next day.
The Court of Appeal's logic was that the parties had contracted for certainty, as in Bowes. The trouble is that, in that sense of the phrase, all contracts are for certainty. The difference between Bowes and Howard is that Bowes' contract entitled him to a cheque; Howard's contract entitled him to an opportunity to earn a cheque. And from a mitigation perspective, that's a huge difference.
I argued, and continue to argue, that Howard was wrongly decided, inconsistent with the principles in Red Deer College. However, it was - and is - the law in Ontario.
I transferred to Alberta some time after Howard, and the consensus among employment lawyers I've talked to here appears to be that Howard is a weird decision, but a relatively recent decision of the Ontario Court of Appeal is a persuasive authority that creates risk for employers dealing with fixed term contracts. (It doesn't really change how I advise employers when drafting contracts. Even before Howard, I generally avoided fixed-term contracts: In most circumstances, there are better ways of protecting an employer's interests.)
Ultimately, though, I have serious doubts as to whether the Alberta Court of Appeal will follow Howard, and I've been watching for a good case to test it. BC beat us to it, though. Sort of.
The Quach Decision
Quach has an unusual and interesting fact-pattern: Mitrux offered Quach a job, and Quach hired his own lawyer to draft an employment contract to reflect the terms, which included a one-year fixed term contract, starting October 1, 2015, with an annual salary of $138,000. Both parties signed the contract on August 25, 2015.
The contract (having been prepared by the employee's lawyer, remember) actually provided that the employer, if terminating the contract early, would have to pay the entire outstanding value of the term of the contract. (A Howard clause, if you will.)
With the signed contract in hand, Quach resigned his old job, and prepared to start the new one. In the mean time, Mitrux got legal advice on the contract it had already signed. (NB: When you're getting legal advice on whether or not you should have signed an agreement that you have, in fact, signed, things are usually about to get interesting.)
On September 28, 2015, Mitrux put a month-to-month contract to Quach instead, insisting that the new contract had to be signed or else Quach would not be able to start work. Quach signed the contract. Two days later - i.e. the day before the employment relationship was supposed to start - Mitrux terminated the contract.
So there are a number of really interesting characteristics of this case:
- a wrongful dismissal matter where the employment relationship never started (which is really rare);
- a 'fresh consideration' issue where the 'second' contract was signed before the start of employment (which happens from time time to time);
- a parsing of the function of employment standards legislation (for which the bar needs a refresher from time to time);
- a credible aggravated damages claim;
- a termination of employment immediately after the employer required the employee to sign a new contract that significantly compromised his termination entitlements (which, up until now, I've theorized about but never seen happen);
- and a post-Howard fixed term contract.
The trial judge - having rejected the employer's claim to rely on the second contract, for reasons that are sound - followed Howard, and awarded Quach the full one year's compensation. He also awarded aggravated damages on the basis that he experienced "devastation", with "stress and anxiety", particularly in light of rising financial obligations including a baby on the way and in-laws moving in with him.
The Court of Appeal disagreed with the Howard analysis. Citing Neilson, a 1988 decision by the BC Court of Appeal, it concluded that Howard is not the law in British Columbia...however, on the specific language of this contract, the result was the same.
So, even though the Court of Appeal's commentary on Howard becomes obiter, it was made with the express purpose of making sure that nobody interprets their reasons as an endorsement of Howard.
Further, the discussion of Neilson is worth parsing:
Observing that employment law is governed by the law of contract, Mr. Justice Seaton in Neilson closely analyzed the status of the contract once the employee is refused continuing employment. He observed that the employee’s action then is for damages, not remuneration, and that the employee is not entitled to treat the contract as subsisting. Justice Seaton then turned to the issue of mitigation. Without resolving whether there is a duty to mitigate, an issue on which there are conflicting authorities based on competing theories, Justice Seaton concluded that unless the contract provides otherwise, the employer derives the benefit of mitigation, even in a fixed‑term contract.This commentary is interesting and correct. The distinction between damages and remuneration is an important one. It lies at the heart of my "Defining Wrongful Dismissal" paper, published last year in the Alberta Law Review. And in this context, it is exactly the line that should divide someone like Mr. Bowes from someone like Mr. Benson. For Bowes, 'pay in lieu' was a term of his contract. For Benson, 'pay in lieu' referred to damages for breach.
What's Next?
This case will pretty firmly set the question to bed in British Columbia, for the time being, as being the opposite from Ontario. In other Provinces, such as Alberta, it balances the scales a little: No longer are we simply looking at a questionable decision from Ontario; now, we're looking at a contentious issue on which appellate courts have disagreed, and where Howard no longer threatens to be particularly persuasive.
Practically, it means that mitigation of fixed term interests is now a very live issue in Alberta and elsewhere. In a case where it creates a significant 'value' difference - say, a scenario where a dismissed employee with a lengthy period left in the contract finds a new job quickly - it will almost certainly be worth litigating.
And while this case definitely tees up the issue as one that may eventually have to be resolved by the Supreme Court of Canada, that is unlikely to happen on this case.
Further Discussion
What if there had been consideration for the second contract?
This is a scenario that the employment law canon is poorly equipped to address: In a case where an employee has substantial termination entitlements, and the employer puts a contract in front of the employee that removes those entitlements (successfully dotting the i's and crossing the t's in terms of fresh consideration and statutory compliance issues) can the employer turn around before the ink's dry and terminate that employment relationship? (This is compounded by the fact that an employer can effectively compel an employee to sign such a contract. Coupled with a termination of the existing employment agreement, an offer to continue the existing employment relationship, but with a new termination clause, with a five cent signing bonus...if the employee declined to sign it, there is plenty of case law to suggest that this could be regarded as a failure to mitigate his or her wrongful dismissal damages.)
Intuitively, there seems to be something wrong with that scenario - there's every reason for judges to bend over backwards finding some way to not hold the employee to the oppressive contractual terms. But, historically, these issues have tended to be resolved on the basis of technical issues, such as lack of consideration, that are not necessarily inherent to the scenario itself.
Similar theoretical issues arise in restrictive covenants. When upholding the General Billposting principle, that wrongfully dismissed employees cannot be held to a non-competition promise, the majority of the Court of Appeal in Globex saw General Billposting as limiting the potential for employers to hire an employee, have them sign such a covenant, and then immediately dismiss them, as a way of reducing competition in the marketplace. The problem with the analysis is this: It is limited to situations of wrongful dismissal, whereas it is quite possible, with a good contractual termination clause, for an employer to dismiss a new employee with negligible notice or pay in lieu, without it being wrongful.
If a court ended up facing such a scenario, in a case where the employer actually had properly implemented ostensibly enforceable language (results-driven analyses aside), it is not clear how a court would address this.
I don't think I'm saying anything particularly controversial that we should not want to allow employers to be able to trick, cajole, or coerce employees into giving up existing termination rights (be it to notice, pay in lieu of notice, or post-employment competitive freedom), and then immediately terminate the contract. But how we get to that result is an important question. Is there something improper about a contract that allows the employer to do so? (Unconscionability; inadequacy of consideration; public policy issues, etc.) Or is it okay for the employer to secure such contractual rights, but not to immediately engage them? (Implied misrepresentations; implied contractual terms; duty of good faith; etc.)
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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