Oct 24, 2017

ONTARIO COURT OF APPEAL SUMMARIES (OCTOBER 16 – OCTOBER 20, 2017)

North v. Metaswitch Networks Corporation, 2017 ONCA 790 (CanLII)

North v. Metaswitch Networks Corporation, 2017 ONCA 790

[Feldman, Sharpe and Roberts JJ.A]

Counsel:

Ben Hahn, for the appellant

Tracy Kay and Carrington Hickey, for the respondent

Keywords: Contracts, Illegality, Severability Clauses, Employment Law, Wrongful Dismissal, Employment Standards Act, 2000, S.O. 2000, c. 41, s. 5, Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, Oudin v. Centre Francophone de Toronto, Inc., 2015 ONSC 6494, 2176693 Ontario Ltd. v. Cora Franchise Group Inc., 2015 ONCA 152

Facts:

Doug North’s employment with Metaswitch Networks Corporation was governed by a written employment contract (the “Agreement”). When North’s employment was terminated without cause, a dispute arose as to whether he was entitled to be paid in accordance with the Agreement, or based on common law reasonable notice.

The Agreement contained a termination clause that amounted to a contracting out of the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “ESA”). However, the Agreement also contained a severability clause. The issue before the application judge and on this appeal is the interpretation and application of the two clauses in light of s. 5 of the ESA, which prohibits employers and employees from waiving or contracting out of any employment standard prescribed by the ESA, except to provide a greater benefit to the employee. The application judge used the severability clause to excise what she found to be the offending part of the termination clause, but applied the rest of the termination clause.

Doug’s employment was terminated in accordance with paragraph 9(c) of the Agreement, the relevant part of which provides:

  1. Termination of Employment (c) Without Cause – The Company may terminate your employment at any time in its sole discretion for any reason, without cause, upon by [sic] providing you with notice and severance, if applicable, in accordance with the provisions of the Ontario Employment Standards Act (the “Act”). In addition, the Company will continue to pay its share all [sic] of your employee benefits, if any, and only for that period required by the Act.

The reference to notice in paragraphs 9(b) and (c) can, at the Company’s option, be satisfied by our provision to you of pay in lieu of such notice. The decision to provide actual notice or pay in lieu, or any combination thereof, shall be in the sole discretion of the Company. All pay in lieu of notice will be subject to all required tax withholdings and statutory deductions.

In the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.

Issues:

(1) Did the application judge err in law by using the severability clause of the Agreement to save the termination clause that contravened the ESA?

(2) Did the application judge err in law by failing to find that the severability clause had no application to a clause of the Agreement that was rendered void by s. 5(1) of the ESA?

Holding: Appeal allowed.

Reasoning:

(1) Yes. The application judge erred in her approach to the interpretation and application of the severability clause. It is convenient to restate para. 17(a) of the agreement here for ease of reference:

  1. General Provisions (a) If any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.

The severability clause directs that the part of the agreement that is to be severed is the part that a court would find to be illegal. The rule from Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, following Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, is that where a termination clause contracts out of one employment standard, the court is to find the entire termination clause to be void, in accordance with s. 5(1) of the ESA. It is an error in law to merely void the offending portion and leave the rest of the termination clause to be enforced. As a result, the application judge erred in law by severing only the offending sentence that referred to using only base salary to calculate termination pay in lieu of notice, rather than the entire termination clause. Para. 17(a) requires that the part to be severed is the part that a court would find to be illegal, which must be the entire termination clause.

(2) Yes. When a severability clause is introduced into the contract, the issue is whether: (i) the severability clause can be used to remove the illegality in the termination clause; or (ii) because the termination clause as drafted is void as a result of s. 5(1), there is nothing on which the severability clause can act. The court considered both approaches.

First approach:

In Oudin v. Centre Francophone de Toronto, Inc., 2015 ONSC 6494, the motion judge relied on the wording of the specific severability provision in the employment contract that directed modification “only to the extent necessary” to comply with the law (paras. 35, 40). The motion judge found that this established the clear intention of the parties (para. 42).

The problem with this approach is that employers will be incentivized to contract out of the ESA but include a severability clause to save the offending provision in the event that an employee has the time and money to challenge the contract in court. Similar concerns were recognized by this court in 2176693 Ontario Ltd. v. Cora Franchise Group Inc., 2015 ONCA 152, where the court declined to order severance of an illegal clause in a franchise agreement because, if the only consequence to a franchisor is that the illegal clause is read down to make it legal, franchisors would be encouraged to draft illegal contracts.

Second approach:

The other approach is to first assess the termination clause to see whether there is any contracting out of an employment standard. If there is, then the termination clause is void, and there is nothing to which the severability clause can be applied. In that way, the severability clause is not void, but it is inoperative where the agreement contracts out of or waives an employment standard. This approach is the one that is consistent with the intent of the ESA and the Supreme Court decision in Machtinger. Nor does it do any injustice to the contractual interpretation principle of ascertaining the intention of the parties. Because the termination clause is void, it cannot be used as evidence of the parties’ intentions to comply with the ESA. This approach also causes no disadvantage to employers, who are free to make a legal contract that limits an employee’s rights on termination to the standards set by the ESA.

This conclusion does not make the severability clause void. It continues to have application to the rest of the agreement. However, it cannot have any effect on clauses of the contract that have been made void by statute. Those terms are null and void for all purposes and cannot be rewritten, read down or interpreted through the application of a severability clause to provide for the minimum standard imposed by the ESA.

The court therefore held that s. 5(1) of the ESA makes the severability clause, para. 17(a), inoperative on the termination clause, which contracts out of an employment standard.

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