Where carefully drafted and properly entered into, employment agreements are a tremendously valuable tool for employers to bring certainty and predictability to the employment relationship. Sometimes, however, employers are surprised by the manner in which courts interpret their agreements. Such may well have been the case in the recent case of Freudenberg Household Products Inc. v. DiGiammarino, 2012 ONSC 5725 (CanLII).
The employer and employee entered into an employment agreement that provided, in part, as follows:
7. In the case that the Company would decide to terminate the contract with the employee in the first 4 years after the signature, the Company will pay to the employee an indemnity compensation of two (2) years salary including the bonuses. In the case the Company terminates the contract following employee’s behaviour that could put the company in financial/commercial danger as a result of illegal or dangerous act, this compensation will not be payable any more. This indemnity will include any other compensation arising from normal labour regulations.
After these 4 years, this indemnity compensation will be no more applicable and the potential separation will be regulated by normal Canadian labour regulations. [emphasis added]
The applicant (employer) requested an interpretation by the court of paragraph 7 of the employment agreement.
It was acknowledged that the termination was without just cause. It was further acknowledged by the the Applicant’s representative that “In the summer of 2011 Freudenberg had internal discussions regarding whether or not to terminate Franca’s employment at that time ostensibly for just cause given her performance or more particularly, her lack of performance. At that time, a decision was made to terminate her employment but to allow the four year term promised by Freudenberg to run its course”.
The Court found that, on a plain reading, paragraph 7 was triggered where the company decides to terminate the contract with the employee in the first four years after the signature and that decision, according to the Court, was reached “in the summer of 2011″ albeit the Company chose to delay the communication of the decision unti the 4 year period noted in paragraph 7 ran its course.
Mr. Justice Morawetz concluded:
However, by delaying the communication of the termination to the Respondent, this does not, in my view, alter the fact that the indemnity provision in paragraph 7 had been engaged. The decision to terminate had clearly been made within the four-year term of the contract. It is this step – the decision to terminate – that engages the indemnity obligation.
If the Applicant intended for the indemnity provision to apply based on the date of termination as opposed to the date of the decision to terminate, then the Applicant should have said so in the employment contract. It did not. Rather, the provision clearly states that it is engaged when the Company decides to terminate the contract.
And that’s the rub – what the parties intended could have been expressed differently. It wasn’t and the Court simply interpreted the words the parties chose to use. The Court awarded 2 years compensation payable which included salary, bonuses and “benefits that were paid to the Respondent during the course of her employment”.
An issue arose about whether the employee had to mitigate her damages arising under the contract. The Court concluded that Bowes v. Goss Power Products Limited 2012 ONCA 425 was the “controlling authority”. Mr. Justice Morawetz summarized Bowes as follows:
The Court of Appeal held that where an employment contract contains a stipulated entitlement on termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate. That is the situation that faces the parties. There is no duty on the Respondent to mitigate.
This short case is instructive on a variety of levels. It is worth carefully ensuring that the terms of the contract reflect the intentions of the parties. This decision turned on the interpretation of a single word (decides). Had the parties used different language, it is likely that this result would not have followed.