Appeal court restores clarity around illegal termination clauses

By Paul Russell, LegalMatters Staff • The Court of Appeal decision in Rahman v. Cannon Design Architecture makes it clear that illegal termination provisions in employment contracts make those provisions void in all circumstances, says Toronto employment and labour lawyer Stephen J. Moreau. 

“The uncertainty around this issue that was raised by the lower court decision our client appealed is gone,” he says. “The law is clear again. It’s back on a proper principled footing.”

Moreau, a partner with Cavalluzzo LLP, represented Farah Rahman at her summary judgment motion and on appeal.

According to the judgment, Rahman was Cannon Design’s “most senior Canadian employee [with] overall responsibility for ensuring the smooth operation of the Canadian operations.” After four years in the position she was terminated without cause. Court documents note Cannon Design paid her four weeks of base salary based on a clause in her contract that read, “if the Employee is terminated … [she] would receive one month’s notice.”

Damages over the common law notice period claimed

“My client responded by asking for compensation equal to what she would have received had she been given reasonable notice under common law principles,” Moreau tells LegalMattersCanada.ca. “That is because the contract provision is illegal since it doesn’t meet the minimum standards set out in the Employment Standards Act (ESA).

“The decision by the appeal court brings this area of law back to where it ought to be, after the confusion caused by the lower court decision,” he adds.

Motion judge weighed in on contract’s ‘fairness’

A Superior Court judge ruled in the company’s favour in 2021. In his judgment, the motion judge described the plaintiff as “a woman of experience and sophistication” who had received legal advice about the employment contract she was asked to sign, “focused particularly upon the termination provisions”.

In detailing the reasons for his decision, Justice Sean Dunphy noted that, out of “fairness” he could not accept that the clause limiting the notice period below ESA standards voided the contract:

“The offer letter, properly and fairly construed in its true context, does not violate the minimum standards of the ESA in the case of ‘just cause for summary dismissal,’” he wrote.

This notion of interpreting the contract fairly “thus permitted the motion judge to treat Ms. Rahman’s alleged ‘sophistication’ as a reason to say that a fair interpretation was one where she did not actually intend to violate the ESA with the contractual words use, even though those words plainly did violate the ESA,” says Moreau.

“It was that kind of reasoning that threw the law into some confusion until the appeal court intervened,” he added.

Moreau says he is pleased the appeal court ruled otherwise.

“Is it fair that my client was asked to sign an agreement that limits what she gets when she’s fired, even though that limitation clause is illegal?” he asks.

Contract law is about interpreting the contract as agreed

“While fairness is a laudable goal, contract law is about enforcing the parties’ agreement. That sounds elementary, but that is what has been reinforced by the appeal court decision,” Moreau says.

 “It doesn’t matter if my client was a ‘woman of sophistication’ or that she had a lawyer review her employment agreement. What matters is that the document she signed had some big problems that made the contract illegal. That is the major takeaway from the decision,” he adds.

This is not the first time an employment contract for a senior employee has been declared void due to an illegal termination clause, Moreau notes, despite the perceived sophistication of the employee or the presence of legal advice. In Rossman v Canadian Solar Inc., an appeal court judge ordered a firm to pay a regional sales manager five months of pay after the firm tried to limit his notice period to four weeks, as stipulated in the employment contract.

‘Termination clause was void at the outset’

According to the 2019 judgment, the court of appeal agreed with a lower court that the five-month notice period was “in accordance with common law principles.” The court added, “the Termination clause was void at the outset, which alone suffices to dispose of the appeal. Even if that were not the case, the Termination Clause contains genuine ambiguity, and is therefore void and unenforceable.” The court made this finding despite the fact that the illegal clause had been reviewed by two lawyers.

In 2021, in Campbell-Givons v. Humber River Hospital, a senior labour relations manager was awarded 4.5 months of notice by the court after her employer gave her three weeks’ pay, based on wording in her employment contract.

A Superior Court judge noted that “various provisions within the ‘with cause’ section of the Termination Clause in the Employment Agreement violate the ESA. I find that these breaches are not ‘clarified; nor ‘saved’ by the ‘At all times…’ language on which the defendant relies and that, therefore, the plaintiff is entitled to damages in lieu of notice beyond the termination payment she received.”

“This plaintiff had nearly the same illegal wording in her contract as my client did,” says Moreau. “And the court said the employment agreement could not be enforced. Even as the manager of labour relations at a major hospital, she signed a contract that turned out to have illegal language that could not be enforced.

“The fact she, more than any plaintiff I can find, would have had ample experience with employment agreements, did not change the analysis,” he says.

Contract must comply with the ESA

Moreau says, going forward, companies and prospective employees should consult with an employment lawyer to ensure any termination clause complies with the ESA. Moreau also urges judges not to try to interpret contracts for “fairness.”

“It sounds obvious, but don’t make judgments about whether the person signing the document is ‘sophisticated’ or should have known better,” he says. “I’m sure there are many times when a judge wants to reward one good side over the other, but sorry, that’s not how it works in contract law. If we go down that path, we then need to inquire into the motives of an employer, such as Cannon Design, when it simultaneously woos a prospective employee while handing over a contract laced with illegality so as to curtail the employee’s rights.”

Moreau adds that few employees would even know that this is being done.

At present, there is no word as to whether Cannon Design will seek to appeal the decision, he says.