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How one contract mistake cost a business more than $500K

Marianne Abou-Hamad of Emond Harnden LLP gives us the key takeaways

EH Lawyer Marianne Abou-Hamad discusses the danger of contracts
Marianne Abou-Hamad, associate with Emond Harnden LLP

Sometimes, the worst kind of termination clause is the one that isn’t there.

That was a tough lesson learned in Monterosso v. Metro Freightliner Hamilton Inc., 2023 ONCA 413, a case that recently wound its way through Ontario’s court system.

“We’ve got this elusive case law that employers often don’t know about,” said Marianne Abou-Hamad, an associate with Emond Harnden LLP, adding that businesses need to be aware of what is – and isn’t – in their contracts as this area of the law is constantly changing.

What happened?

Seven months into a five-year fixed-term independent contractor agreement, a group of corporations (Metro) terminated the agreement with the independent contractor (Monterosso) without cause.

Because the contract lacked an early termination clause, it turned out to be a costly decision. 

Monterosso sued, and the trial judge ordered Metro to pay Monterosso for the remaining 65 months of the contract, which amounted to $552,500 plus HST.

Metro appealed the trial judge’s ruling on two grounds. 

They lost one argument and won the other, but the award ultimately remained unchanged — and Metro had to pay Monterosso’s legal fees on appeal as well to the tune of nearly $20K.

First, Metro argued that the trial judge had failed to properly consider emails that it stated indicated the full term of the contract was not meant to be guaranteed. 

Second, Metro argued that the trial judge had erred in ruling that Monterosso was not subject to the duty to mitigate his damages.

The “duty to mitigate” is an obligation to take reasonable steps to find other work after a contract is terminated and, if not met by a party, may reduce the damages awarded in their favour. 

What happened at the Ontario Court of Appeal?

Regarding the first argument, the Court of Appeal agreed with the trial judge’s decision, concluding the “entire agreement clause” in the contract meant the terms couldn’t be changed by any emails that had been exchanged.

For the second argument, however, the Court of Appeal found the trial judge erred regarding Monterosso’s duty to mitigate. 

When an individual’s employment is terminated, they’re usually expected to take reasonable steps to find alternative employment to mitigate their financial losses — the general exception is when an employee is working under a fixed-term employment contract. 

The trial judge erred in applying this exception to Monterosso because he was an independent contractor, not an employee or dependent contractor. 

While Metro bore the burden of proving that Monterosso had failed to meet his duty to mitigate, they provided no evidence to back that claim up. The absence of this evidence, combined with the fact that Monterosso had provided extensive evidence of his unsuccessful job search efforts, meant there were no grounds to reduce the damages award. 

What are the key takeaways for your next contract?

This case certainly qualifies as a cautionary tale, said Abou-Hamad.

“The most important takeaway for businesses is that the early termination of a fixed-term independent contractor agreement may carry significant liability,” she said. “The longer the contract, the more it can hurt.”

Since the smoking gun in this case was the missing termination clause, the obvious solution is adding one to ensure your initial contracts are airtight. 

But if you realize some of your current contracts may need to be renegotiated, the most important concept to understand is consideration, said Abou-Hamad.

Consideration requires both parties to give something of value to enter into a valid agreement. 

“A business must usually provide something like increased compensation or a signing bonus in exchange for entering into the amended contract,” said Abou-Hamad. 

That being said, there’s no guarantee the contract won’t be challenged. 

“Someone who is upset by your decision may still want to file a lawsuit,” said Abou-Hamad. “But at least you have something that will make the other side consider whether it’s worth the cost to sue.”

The final takeaway for business owners is the importance of understanding that different mitigation rules may apply depending on whether an individual working under a fixed-term contract is an employee, a dependent contractor, or an independent contractor. 

Abou-Hamad says this aspect of the ruling could create a ripple effect.

“I think we can expect to see an uptick in litigation,” she said. “Even if there’s a provision in an existing contract classifying an individual as an independent contractor, this case highlights that a new angle of attack could be to challenge that classification.”

To be sure you don’t miss the next big case, subscribe to Emond Harnden’s complimentary Focus Alerts, which contain regular updates on employment and labour law.

And register for Emond Harnden’s next OBJ webinar when partner Paul Lalonde and associate Zoriana Priadka do a deep dive into this case plus two more.

This article is intended to provide readers with general information only. It should not be regarded or relied upon as legal advice or opinion. Accessing, reading, relying on or otherwise using this article does not, under any circumstances, create a lawyer-client relationship between you and Emond Harnden.