In some instances when a contract is breached, there is an obligation on the parties involved to take steps to limit their losses. This rule, which is referred to as the duty to mitigate, exists to reduce inefficiencies that would be generated if parties thought courts would guarantee their losses. It also stops the parties from maliciously incurring losses.
In Howard v Benson Group Inc. the Ontario Court of Appeal recently considered the duty of an employee on a fixed term employment contract to mitigate losses. In this case, an employee signed a five year, fixed term, employment contract. Two years into the contract, the employer dismissed the employee without cause. The employee claimed they were entitled to three years of unpaid salary and benefits – the amount they would have received if the contract were completed. The employer claimed that they were only required to pay two weeks salary in lieu of notice.
In the initial judgement the employee was only entitled to “common law reasonable notice”, an amount less than three years of salary and benefits. The same judgement also found that the employee had a duty to mitigate their losses. This meant that severance paid to the employee would be discounted by the amount a court determined the employee could have earned before the severance period was up.
The Court of Appeal overturned the initial judgement. The Court of Appeal ruled that the employee was entitled to three years of salary and benefits, not just common law reasonable notice. This is because although there was an early termination clause in the contract, it was too ambiguous to be enforceable. The Court of Appeal noted that where there is no early termination clause in a fixed term employment contract, courts will assume the termination date is the end of the contract. Since the termination date was fixed by contract there was no need for common law reasonable notice.
The Court of Appeal also found that there was no need for the employee to mitigate their losses. Though this may be seen by some as creating a windfall for the employee, the Court of Appeal did not see it that way. Instead, the Court noted that in these types of cases damages are seen as predetermined by the contract. Damages are set either by the early termination clause, or in the absence of such a clause, the court will assume it is the amount left to the completion of the contract. The Court reasoned that since the amount is predetermined it is unfair to give the employer a discount by saying the employee is required to mitigate their losses.
