‘Just Cause’ Termination Clause Upheld but Decision Ripe for Appeal, The Lawyer’s Daily (September 23, 2021)

(this article originally appeared in the Lawyer’s Daily on September 23, 2021)

By Nikolay Y. Chsherbinin

Termination clauses are akin to prenuptial agreements. Their purpose is to create clarity about an employee’s entitlements at the time of dismissal. If a termination clause does not comply with the Employment Standards Act, 2000 (ESA), it will not be enforced. The issue of enforceability of a termination clause is one of the most frequently litigated areas of employment law. An employment case in point is Rahman v. Cannon Design Architecture Inc., 2021 ONSC 5961, where the court determined that a “just cause” termination provision was valid and declined to imply onto the phrase “just cause for summary dismissal” a standard below the “wilful” standard required by the ESA. This article argues that the case was wrongly decided and should be appealed.

In Rahman, Cannon Design Architecture Inc. (Cannon) hired Farah Rahman as a principal, with a start date of Feb. 16, 2016. Her hiring was preceded by a period of interviewing and negotiations. After a number of interviews, Cannon sent to Rahman a written offer letter dated Feb. 3, 2016. Rahman sought and received independent legal advice regarding her rights at common law and under the ESA in relation to the possible future termination of her employment. Her lawyer’s pre-employment letter raised no concerns regarding the language governing the just cause termination clause contained in the offer. On April 30, 2020, Rahman’s employment was terminated. Cause was not alleged. At the time of her dismissal, she was 61 years of age, earned $185,000 in base salary and worked for Cannon for four years.

Following her dismissal, Rahman launched a wrongful dismissal action, which was adjudicated by way of a summary judgment motion. In her lawsuit, she argued that the language governing the just cause termination clause violated the ESA because it was too broad in the sense that it could be interpreted to permit termination of her employment without notice in situations where the ESA would not authorize it. The challenged clause read: “Cannon Design maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.”

In support of her argument, Rahman referred the court to its earlier judgment in Ojo v. Crystal Claire Cosmetics, 2021 ONSC 1428, where the same phrase “conduct that constitutes just cause for summary dismissal” was declared to be an invalid attempt to contract out of the ESA and, therefore, rendered the termination clause unenforceable. The court disagreed that Ojo represents a conclusive and binding determination that that phrase must be construed as authorizing dismissal in circumstances that would contravene the ESA. It reasoned that every contract “must be interpreted with a view to giving expression to the mutual intention of the parties as expressed in the words used by them. That intent is inferred from an examination of the surrounding circumstances.”

Having found that Rahman was “a woman of experience and sophistication,” received legal advice, renegotiated and improved the “without cause” termination clause and that “none of the parties to the contract at its inception … took objection to the general ‘just cause for summary dismissal’ language used …” the court concluded that it “would be entirely illogical to infer nevertheless an intent to contract out of well-known and long-standing minimum standards. …”

However, those considerations are entirely irrelevant for the proper assessment of the enforceability of a termination clause.

In Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the Court of Appeal for Ontario reaffirmed that the enforceability of the termination clause depends only on the wording of the clause itself, stating: “The wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.” [Emphasis added.]

When it comes to the assessment of the enforceability of a termination clause, the parties’ individual or mutual intentions at the time of formation of an employment contract or, for example, the fact that an employee sought and received an independent legal advice are of no consequence. Because neither consideration can alter the reality that the termination clause drafted by the employer is contrary to law. In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Court of Appeal reminded that the courts “will not enforce termination provisions that are in whole or in part illegal.”

The enforceability or unenforceability of the termination clause depends on whether it is properly worded. The ESA does not define the phrase “just cause.” Definitions of “just cause” are abundant in employment law and it is not easy to enumerate what would constitute just cause in a particular factual situation. However, pursuant to the governing jurisprudence, to be enforceable the “just cause” termination clause must be, in its scope and wording, limited to: “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer,” as mandated by s. 2(3) of the Regulation 288/01.

In Rahman, the motion judge erred because in his assessment of the enforceability of the termination clause he gave significant effect to, inter alia, the parties’ mutual intentions to comply with the ESA, which were set out in the employment contract twice. On that basis, the court concluded that there was “no basis to imply into the general phrase ‘just cause for summary dismissal’ a standard below the ESA’s standard of wilful misconduct absent any evidence that such represents a reasonable construction of the intention of the parties in the context of the employment agreement in question.” On the same basis, the court declined to follow its earlier decision in Ojo, because in its view conclusions reached in that case “are of limited assistance in construing the intention of these parties to this agreement in this context.”

However, in Wood, the Court of Appeal made it clear that: “The question of the enforceability of the termination clause turns on the wording of the clause, the purpose and language of the ESA, and the jurisprudence on interpreting employment agreements” and not on the parties’ intentions. Moreover, the illegal termination clause cannot be used as evidence of the parties’ intention. It was therefore wrong for the court to refuse to imply into the phrase “just cause for summary dismissal” a standard below the ESA’s standard of wilful misconduct.

Rahman’s refusal to follow Ojo has injected further uncertainty into an already unstable field of termination clauses, but this inconsistency in jurisprudence provides yet another ground for an appeal.