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Early termination clause makes for wise policy

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by Daily Commercial News last update:Jul 15, 2008

The Plaintiff’s damages could not be assessed on a “tort-like” basis when the Plaintiff had voluntarily capped those damages by agreeing to a three-month termination clause.
Early termination clause makes for wise policy

Career Corner

By Allison Taylor

Editor’s note: This is part two of series which began Friday, Sept. 24 in DCN.

The Plaintiff’s damages could not be assessed on a “tort-like” basis when the Plaintiff had voluntarily capped those damages by agreeing to a three-month termination clause. The Court stated:

“The relative contractual duties have been expressly set out by the parties in the agreement. Hamilton is entitled to OWB’s performance of these voluntarily assumed duties.

“Hamilton has no compensable interest in the advantages she might have expected under any particular performance of the contract, since the contract itself provided for alternative methods of performance at the election of the Defendant.

“If Hamilton wanted to secure herself of the benefits associated with a given particular method of performance, she should have contracted for only that method of performance.”

The same rationale would seem to apply to a term contract with an early termination clause. Hamilton was an exclusive agent for Open Window and thus had that degree of vulnerability which has led some courts to provide such agents with special, employment-like protections, including an implied term of reasonable notice.

Nonetheless, the Court felt in this case that freedom of contract was the governing principle and that there was no reason to look behind it.

Naturally, issues which might affect whether a party had true freedom to contract, such as unconscionability, could still be used to defeat an oppressive contract, but the principle of assessing damages by a contractual rather than a tort measure has gained reinforcement from this case and would appear to apply equally to an employment as to an agency relationship.

The Court held in Hamilton that a court should set aside a costs award on appeal only if the trial judge has made an error in principle or if the costs award is plainly wrong.

In reviewing the trial judge’s decision, the Supreme Court of Canada could not find such an error and, given the privileged position of a trial judge in assessing first-hand the credibility of witnesses, and the factdriven nature of a case such as this, it restored the trial judge’s cost order.

This case suggests that, as we have frequently advised our clients, it is indeed a wise policy to incorporate an early termination clause into a term contract of employment.

Term contracts of employment can result in significantly higher damages than the common law if the termination occurs early in the term, since the balance of the term usually constitutes the outside limit of damages.

An early termination clause restores what, if it is not the equivalent of reasonable notice, is at least a limit on the quantum of damages in the event of termination, and avoids disproportionately high damages if the termination occurs early in the term, and disproportionately low damages if at the end of the term.

We continue to advocate this approach, and are glad to see it bolstered by the reasons set out in this Supreme Court of Canada case.

Allison Taylor practices employment law with Stringer Brisbin Humphrey in Toronto. ataylor@sbh lawyers.com

The information contained here is for general information only and should not be relied upon as a substitute for legal advice or opinion.

last update:Jul 15, 2008

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