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June 26, 2012

BREAKING NEWS: Appeal Court Says No Duty to Mitigate if Parties Agree to Notice Period

Authors Malcolm MacKillop and Hendrik Nieuwland

It has been common practice in recent years for employers to expressly set out the amount of reasonable notice an employee would receive upon their termination without cause. For the past decade, the Courts in Ontario have said that employees with these termination clauses still had an implied duty to mitigate. So, for example, if an employee’s contract said he was entitled to twelve (12) months’ notice or pay in lieu of notice if terminated without cause, the employee had an implied duty to find reasonable comparable employment; and if he did sowithin the specified notice period the employer would not be obligated to pay the full amount of notice that had been contractually agreed to.

In Bowes v. Goss Power Products Limited, 2012 ONCA 425, a decision released on June 21, 2012, the Ontario Court of Appeal concluded that employees with this type of termination clause have no implied duty to mitigate.

In that case, Mr. Bowes was employed with Goss Power Products Limited (“Goss Power”) as the VP, Sales and Marketing at a salary of $140,000.00. He had a written employment contract which specified that he would be entitled to six (6) months’ notice or pay in lieu of notice if his employment was terminated without cause. The contract was silent on the issue of mitigation.

Mr. Bowes was terminated after three and a half (3.5) years of service. His termination letter advised that he would receive six (6) months’ base salary continuance, which would end if he found a new job. Mr. Bowes did find new work at exactly the same pay two (2) weeks’ later. Goss Power therefore ended his salary continuance. Mr. Bowes sued, claiming that he was entitled receive the full six (6) months’ of pay. The application judge concluded that Mr. Bowes had mitigated his damages and therefore he was not entitled to any further payment. The Court of Appeal reversed this decision.

The Court of Appeal characterized Mr. Bowes’ termination clause as a “liquidated damages” clause. Most often found in commercial contracts, liquidated damages clauses set out a pre-estimate of the damages a party will suffer in the event of a breach of contract. If the clause is reasonable and is not found to be a penalty, the Courts will enforce the clause. Importantly, the Courts have consistently found that liquidated damages clauses are not subject to mitigation. This means that the innocent party is entitled to the entire amount set out in the liquidated damages clause even if the actual damages suffered is less.

In Mr. Bowes’ case, since his termination clause did not refer to any obligation to mitigate, the Court of Appeal concluded that he was entitled to the full six (6) months’ pay even though his actual loss arising from his termination was only two (2) weeks’ pay. The Court of Appeal noted that these termination clauses were typically drafted by employers and imposed on employees (this was in fact the case for Mr. Bowes). The Court of Appeal also referred to decisions like Wallace v. United Grain Growers and Keays v. Honda, which recognize employees as the weaker and more vulnerable party, in order to justify requiring the employer to pay the full amount it had bargained for.

In light of the Bowes decision, employers should do the following to ensure that their termination clauses include the duty to mitigate:

1. Make sure the severance is paid by salary continuance and not by lump sum. A lump sum payment implies that there is no duty to mitigate because it would require an employee to repay any overpayment to the employer if the employee becomes re-employed during the notice period. Courts typically view this process as being unfair to the employee.
2. Make sure that the termination clause expressly states that any and all payments are subject to mitigation.

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