Williams HR Law LLP

INDEPENDENT CONTRACTORS HAVE A DUTY TO MITIGATE, BUT RISKS REMAINS FOR ORGANIZATIONS USING FIXED-TERM CONTRACTS

September 20, 2023

Fixed-term contracts can be enticing for organizations, especially when organizations only intend to retain a person’s services temporarily. However, considering the risks of fixed-term contracts is crucial.

In Monterosso v Metro Freightliner Hamilton Inc [Monterosso], the Ontario Court of Appeal (“ONCA”) clarified that independent contractors with fixed-term contracts have a duty to mitigate their damages. While Monterosso is a “win” for organizations, the decision also reminds organizations that fixed-term contracts can be risky if terminated early, as organizations may still be liable to pay the worker the remaining payment under the contract.

Facts

The independent contractor (“IC”) signed a contract with the organization for a fixed term of 72 months. Seven months into the contract, the organization terminated the IC’s services without cause. In response, the IC sued for the remaining 65 months of the contract.

Trial Decision

The trial judge determined the agreement did not have a termination provision and awarded the IC the remaining 65 months of the contract, amounting to $552,500 plus HST. The trial judge held that independent contractors, like employees, have no duty to mitigate where they are entitled to the remainder of a fixed-term contract. The organization appealed this decision.

Ontario Court of Appeal Decision

The ONCA disagreed with the trial judge’s decision, and instead held that independent contractors do have the duty to mitigate in cases where there is a fixed-term contract.

While the ONCA previously held in Mohamed v Information Systems Architects Inc [Mohamed] that the independent contractor in that case was entitled to the remainder of the fixed-term contract without mitigation, this was specifically because the ONCA found the parties intended compensation for the fixed term to be the consequence for failing to terminate the contract in good faith. The case left open the question of whether independent contractors have a duty to mitigate their damages where their fixed-term contract is ended early.

The ONCA distinguished Monterosso from the Howard v Benson Group decision, which held that a dismissed employee with a fixed-term contract is entitled to the balance of the contractual term without any duty to mitigate their damages. Conversely, when an independent contractor’s fixed-term contract is terminated before the term is fulfilled, the independent contractor is only entitled to the remaining payments under the contract if they fulfill their duty to mitigate. In Monterosso, the ONCA answered the question it left open in Mohamed.

In Monterosso, the IC was permitted to perform services for other parties, such that he was not in an “employee-like relationship” with the organization. Accordingly, he had a duty to mitigate his damages after the fixed-term service agreement was terminated with 65 months remaining.

Acknowledging the trial judge’s error, the ONCA nonetheless found the IC fulfilled his duty to mitigate. While the organization argued the opposite, it did not satisfy its burden to prove the IC had failed to mitigate his damages. Notably, the IC filed “extensive evidence detailing his unsuccessful job search efforts”, and while the organization argued he only sought work “beyond the scope of his experience and qualifications”, the ONCA rejected this argument because the organization failed to provide evidence to prove that “there were jobs the [IC] could have taken”.

The organization attempted to argue that the trial judge failed to consider its internal email correspondence, which included a proposed provision in the fixed-term contract that allegedly would have limited the respondent’s entitlements to his last day of active service, rather than the remainder of the contract. While the IC saw this communication several days before signing the contract, the proposed clause was ultimately not included in the final version of the fixed-term contract. Moreover, the ONCA found the fixed-term contract had an “entire agreement clause” and in any event, found the correspondence to be ambiguous. The organization was therefore not permitted to rely on the proposed provision.

As a result, the organization was still liable to pay the remaining 65 months of the contract.

Key Takeaways

Monterosso clarified that independent contractors have the duty to mitigate their damages for the remainder of their fixed-term contract. While this is a “win” for organizations, the decision also reminds organizations that fixed-term contracts remain risky.

Even where there is a duty to mitigate, organizations still have the burden to prove the independent contractor failed to mitigate. In Monterosso, the organization’s failure to prove this was costly, as it was required to pay over $550,000 for the remaining 65 months of the fixed-term contract.

Additionally, what the organization thinks is an independent contractor might truly be an employee. Where an employee is on a fixed-term contract and the termination clause is unenforceable/absent, the employee is entitled to the remainder of the fixed-term contract without mitigation.

Organizations should consider the importance of contractual language and representations made during the negotiation process. While the organization’s communication in Monterosso reflected an intent to include a clause that may have limited its liability upon terminating the contract, its failure to include this clause in the fixed-term contract when there was an “entire agreement” clause proved to be fatal to its argument. Even if the organization did not have an “entire agreement” clause, the correspondence was not clear enough to properly set out the parties’ intentions, underscoring the importance of properly drafted, unambiguous terms.

Organizations should also consider including a clause that expressly addresses the duty to mitigate damages, to create a contractual obligation that can be relied on in the event of a dispute.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.

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