Fixed-Term (Employment) Contract: The Danger of Early Termination

McGuinty v. 1845035 Ontario Inc.: Why Fixed-Term Contracts Without Termination Clauses Are an Employer's Biggest Risk

Fixed-term employment contracts seem straightforward. A defined start date, a defined end date, clear terms. What many Ontario employers do not realize is that a fixed-term contract without a properly drafted early termination clause is one of the most financially dangerous documents they can sign. The Ontario case McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home) (2019 ONSC 4108) illustrates exactly what can go wrong and how a single missing clause can result in liability for years of unearned salary.

Case

McGuinty v. 1845035 Ontario Inc.

Citation

2019 ONSC 4108

Court

Ontario Superior Court of Justice (affirmed on appeal)

Contract term

10-year fixed-term

Termination clause

None

Outcome

Constructive dismissal established; full remaining contract value awarded

Do your fixed-term employment contracts contain early termination and mitigation clauses?

Without them, early termination of a fixed-term contract may result in liability for the full remaining value of the contract with no obligation on the employee to seek new work. Get your contracts reviewed before you need them.

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What happened

Mr. McGuinty had operated his family's funeral home in North Bay for decades. When he sold the business to the defendant company, he agreed to stay on as General Manager under a 10-year fixed-term employment contract guaranteeing an annual salary of $100,000, plus commissions, benefits, and a company vehicle. Less than a year into the agreement, the employment relationship deteriorated significantly.

After Mr. McGuinty went on medical leave, the employer revoked his company vehicle, changed the locks on the business, and ceased paying his commissions. Mr. McGuinty took the position these actions fundamentally breached his contract and filed a constructive dismissal claim. The contract contained no early termination or cancellation clause.

What it cost

Contract value remaining

9 years

Annual salary guaranteed

$100,000

Total damages awarded

$1,274,173.83

Mitigation required

None

What the courts found

Finding 1

The employer's conduct was constructive dismissal

The Ontario Superior Court found that revoking the vehicle, changing the locks, and ceasing commissions collectively demonstrated an intention not to be bound by the contract and fundamentally breached its essential terms. Constructive dismissal was established. The absence of a termination clause meant the employee was entitled to the full remaining value of the contract.

Finding 2

No mitigation was required without a mitigation clause

Where a fixed-term contract does not contain a clause requiring the employee to mitigate their damages on early termination, the employee is entitled to the full remaining contract value without any obligation to seek new employment. The Court awarded $1,274,173.83 representing nine years of salary, commissions, benefits, and expenses. The employer could not reduce this by pointing to the employee's failure to find a new job.

Finding 3

Condonation was not established on appeal

The employer argued on appeal that Mr. McGuinty had condoned the breaches by not objecting promptly, which would have prevented the constructive dismissal claim. The Ontario Court of Appeal rejected this. Condonation requires proof that the employee continued to work under the changed conditions or otherwise accepted them. Going on medical leave and filing a claim demonstrated the opposite of acceptance. The Court of Appeal upheld the full award.

The most significant element of this decision is the interaction between the fixed-term contract and the absence of a mitigation clause. In an indefinite employment contract, an employee dismissed without cause is required to mitigate by seeking comparable employment, which can reduce the damages award. In a fixed-term contract without a mitigation clause, no such reduction applies. The employee receives the full remaining contract value regardless of what they earn or do not earn from other employment.

Three employer lessons from this decision

Every fixed-term contract needs an early termination clause

Without an enforceable early termination clause, an employer who ends a fixed-term contract before its expiry whether through constructive dismissal or formal termination faces liability for the full remaining value of the contract. There is no common law right to early termination of a fixed-term agreement and no proportional notice period. The entire remaining term is owed. This exposure can reach hundreds of thousands or millions of dollars for longer-term contracts. An early termination clause drafted in compliance with Ontario's Employment Standards Act, 2000 is essential in every fixed-term agreement.

A mitigation clause is not automatic in fixed-term contracts

In indefinite employment contracts, the duty to mitigate applies as a matter of common law. In fixed-term contracts, it does not apply automatically it must be expressly included. Without a mitigation clause, the employee is entitled to the full remaining value of the contract with no obligation to reduce damages by seeking new work. Employers who omit this clause in a fixed-term agreement face liability for the full remaining term even if the employee immediately takes well-paid employment elsewhere.

Constructive dismissal exposure is amplified in fixed-term contracts

In an indefinite contract, constructive dismissal entitles an employee to common law reasonable notice typically months of salary calculated on the Bardal factors. In a fixed-term contract without a termination clause, constructive dismissal entitles the employee to the full remaining contract value. This amplification means that unilateral changes to key employment terms stopping commission payments, removing a vehicle, locking the employee out carry dramatically higher consequences in a fixed-term context than they would in an indefinite employment relationship. Get legal advice before making any change to a fixed-term employee's terms.

Do your fixed-term contracts contain early termination and mitigation clauses?

The absence of these clauses in a fixed-term agreement can result in liability for the full remaining contract value with no mitigation obligation. Our team advises employers across Ontario on employment agreements and contract drafting. Get your contracts reviewed before you face a claim.

Get Your Contracts Reviewed Or call us: 1-800-771-7882

Practical takeaways for Ontario employers using fixed-term contracts

Include an early termination clause in every fixed-term employment contract and ensure it complies with Ontario's Employment Standards Act, 2000 a non-compliant clause is unenforceable

Include an express mitigation clause requiring the employee to seek comparable employment on early termination without it, no mitigation obligation exists

Before making any unilateral change to a fixed-term employee's compensation, benefits, or working conditions, get legal advice constructive dismissal in a fixed-term contract carries full remaining contract liability

Do not assume that a fixed-term contract automatically limits your liability it is the clauses within the contract that determine exposure, not the structure of the agreement

Review existing fixed-term contracts before renewal a contract that was reasonable in its original form may have grown significantly in remaining value and now represents a substantial undocumented liability

Does your business use fixed-term employment contracts in Ontario?

The absence of early termination and mitigation clauses in a fixed-term contract is one of the most common and costly drafting oversights in Ontario employment law. Our team advises employers on employment agreements including fixed-term contracts, termination clauses, and mitigation provisions. Contact us for a confidential consultation.

Call us at 1-800-771-7882 or fill out the form below and we will be in touch.

The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Achkar Law Professional Corporation and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Achkar Law Professional Corporation. ©

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