Ontario Superior Court on the Enforceability of Termination Provisions in Employment Agreements

April 25, 2022

Written By David Cassin, John Gilmore and Joseph Blinick

In a decision for which leave to appeal was denied by the Divisional Court, the Ontario Superior Court of Justice recently confirmed that a Rule 21 motion, seeking a determination of a question of law, is not an appropriate mechanism for determining the enforceability of a termination provision in an employment agreement.

The Court’s decision in Donaghy v Seasons Retirement Communities [Donaghy] provides clarity regarding the interpretation of termination provisions in employment agreements, and confirms that it is a matter of contractual interpretation, which is a question of mixed fact and law that is not amenable to a motion for determination of a question of law under Rule 21. Prior to Donaghy, there was limited case law in Ontario dealing squarely with the question of contractual interpretation of a termination provision in an employment agreement under Rule 21.

The decision also serves as a strategic lesson for parties litigating under the Simplified Procedure regime of the Rules of Civil Procedure. The Court will generally not look favourably upon parties advancing interlocutory motions in such actions where the motion does not materially advance the action or substantially reduce the overall cost of the proceeding.

Background

The plaintiff worked for the defendant employer for about 10 years, most recently as a Business Manager, until she was terminated for cause in September 2020. The plaintiff then commenced an action under the Simplified Procedure regime against her former employer, seeking damages for reasonable notice at common law, along with additional relief, including moral, aggravated and punitive damages.

The employer maintained that the plaintiff’s employment was properly terminated for just cause as it alleged that she engaged in a sustained pattern of misconduct, including failing to abide by the company’s policies and procedures. The employer also took the position that the plaintiff’s employment agreement contained an enforceable termination provision, which limited any damages for wrongful dismissal to her statutory minimum entitlements as provided for in the employment agreement.

The plaintiff then moved, pursuant to Rule 21.01(1)(a) of the Rules, seeking a determination that the termination provision in her employment agreement was unenforceable.

The Plaintiff’s Rule 21 Motion is Dismissed

The Court dismissed the plaintiff’s motion, finding that Rule 21.01(1)(a) was not an appropriate mechanism for determining issues regarding the enforceability of the termination provision in the employment agreement. The Court confirmed that Rule 21 is generally not appropriate for issues involving contractual interpretation.

Rule 21.01(1)(a) provides that a party may move before a judge for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial savings of costs.

The principal basis of the Court’s dismissal of the plaintiff’s motion was that the matter at issue on the motion was fundamentally one of contractual interpretation, which is a question of mixed fact and law (subject only to certain narrow exceptions, such as for standard form contracts). Specifically, the Court found that the enforceability of the termination provision at issue depends on the interpretation of the termination provision in the employment agreement, considered in light of the factual matrix.

The Court also held that even if the plaintiff was successful in establishing the unenforceability of the termination provision in her employment agreement, the motion would not dispose of any part of the action, substantially shorten the trial or result in substantial cost savings, as required by Rule 21.01(1)(a). In particular, the issue of enforceability of the termination provision was a relatively minor issue in the litigation given that the plaintiff was alleged to have been terminated for cause and, in any event, would not require any additional testimony or evidence at trial beyond what would otherwise be adduced.

The Court also raised concerns about the plaintiff advancing her motion in the context of an action commenced under the Simplified Procedure regime, given that the regime is specifically designed to provide a streamlined process with minimum delays and costs. One of the key objectives of the Simplified Procedure regime is to limit the extent of pre-trial motions. The Court ultimately found that the plaintiff’s motion ran counter to the key objectives of the Simplified Procedure regime and the Rules.

The plaintiff sought leave to appeal the Court’s decision to the Divisional Court. The motion for leave to appeal was dismissed with costs awarded against the plaintiff.

Key Takeaways

This case confirms that the enforceability of a termination provision in an employment agreement is a matter of contractual interpretation, which must be considered in light of the factual matrix, and, as such, is a question of mixed fact and law.

The decision also serves as a warning and important reminder to parties that courts will not look favourably upon parties advancing interlocutory motions in an action proceeding under the Simplified Procedure regime, particularly where the proposed motion does not materially advance and streamline the action or substantially reduce the overall cost of the proceeding. Moving, unsuccessfully, can have significant cost and strategic consequences.

If you have questions about the effect of this decision, or if we can assist in advising your business on a similar or other employment-related issues, please contact the Bennett Jones Employment Services group.

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