Equal bargaining power at heart of termination clause judgment

Employment/Labour /
Ellen Low
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By Tony Poland, LegalMatters Staff • An Ontario Superior Court decision last month that upheld termination provisions in an employee’s contract that were claimed to be in violation of minimum labour standards demonstrates the need to review such agreements to keep up with the times, says Toronto employment lawyer Ellen Low. 

In a “somewhat unusual” case, the court found against Farah Rahman, who claimed the termination provisions of her employment agreement were void because they breached Employment Standards Act, 2000 (ESA) minimum standards.

However, in ruling that the termination without cause provision in the contract was enforceable, the court notes the plaintiff is a “sophisticated” and “experienced” executive who sought advice on the agreement from a lawyer.

Plaintiff sought advice before on job offer

“There can be no suggestion that Ms. Rahman was not adequately informed of both the nature of the statutory and common law rights that were the subject of the negotiations and the impact of the contract proposed by the employer on those rights,” Justice Sean Dunphy writes in Rahman v. Cannon Design Architecture Inc. “It is clear that Ms. Rahman sought and received legal advice about her rights at common law and under the ESA in relation to the possible future termination of her employment. 

“It is clear that she knew or ought to have known of the binding nature of the minimum standards in the ESA which cannot be reduced or waived by contract and that she understood that the common law standards in relation to termination of employment are potentially much more generous than both the ESA minimum standards and the termination benefits proposed in the offer letter.”

Low, principal of Ellen Low Employment Law, explains that in interpreting employment contracts, the principle of contra proferentem applies.

“It effectively means that in the event that there are multiple interpretations of the employment agreement, the party who did not create the contract gets the most advantageous interpretation possible,” she says. “In this particular case, the employer and the employee were determined to have equal bargaining power in negotiating the employment agreement. 

“Not only was there an equal bargaining power, which is unusual, but it was determined that the parties shared a mutual intention not to contract out of the Employment Standards Act,” Low tells LegalMattersCanada.ca. “Ms. Rahman received legal advice and the lawyer she hired specifically pushed back on a number of contract provisions but didn’t push back on this one. The enforceability of any termination provision is going to depend on the wording of the actual agreement but also, to some degree, the context in which the contract was created. If there is genuinely no inequality of bargaining power, you’re going to be bound by what you signed.”

Executive relied on earlier judgment

She says the executive relied on Waksdale v. Swegon North America Inc., an Ontario Court of Appeal decision that found if any part of a termination provision in an employment agreement was in breach of the ESA, the entire provision is unenforceable and the employee would be entitled to wrongful dismissal damages.

However, because Rahman had legal advice on her contract, the court found she was on equal footing with the employer, says Low.

“The court is saying that because she received counsel and because she pushed back on some terms, she had the equal bargaining power to try to alter the termination provision,” she says.

“The bottom line is if you have an employment agreement viewed by counsel and you choose to stay silent on some terms, on the assumption that the contract will be resolved in your favour anyway, then guess what? It might not be.”

The ruling was touted as a win for employers but Low says the case is fact-specific and may not necessarily work in every defence.

‘Welcome decision for employers’

“This does seem to point that there is going to be a willingness by the court to entertain an argument that the plaintiff ought not to be able to rely upon contra proferentem where they have made significant and substantial changes to the employee contract,” she says.“It’s a welcome decision for employers, but should be relied upon with caution. It’s not going to be the answer to every challenge but it does provide some support for employers who are hoping that their existing termination provisions are going to be enforceable.

“What this does is it allows employers to present evidence with respect to the negotiation of the employment agreement and then point to the intention of equal bargaining power and the intention between the parties to at least meet ESA minimums. “

The ruling reinforces the need to regularly review employment contracts, Low says.

“The law changes and so does the way in which we interpret contracts, especially following this decision,” she says. “This case demonstrates the importance of having employment agreements reviewed regularly. A contract is a living thing and can be renegotiated. 

“The caution exists that even if you have an employment agreement, even if you had it reviewed by a lawyer when you entered into it, it is still worth reviewing it to ensure new concerns or problems do not arise.”