Does an employee have a duty to mitigate where there is a fixed severance

entitlement set out in the contract and no corresponding provision imposing

an express requirement to mitigate?

In Bowes v. Goss Power Products Ltd.

1

, the employee, Peter Bowes, entered into a written

employment contract with Goss Power Products Ltd. in September 2007. Under this contract,

which was drafted by Goss, Bowes was hired in the position of Vice-President, Sales and

Marketing. His employment was subsequently terminated by Goss, without cause, in April

2011.

The contract of employment provided in paragraph 30(c):

30. The Employee’s employment may be terminated in the following manner and in

the following circumstances:

...

(c) By the Employer at any time without cause by providing the Employee with the

following period of notice, or pay in lieu thereof:

...

Six (6) months if the Employee’s employment is terminated prior to the completion of

forty-eight (48) months of service; and

As Bowes was employed less than 48 months at the time of the termination of his employment,

the letter of termination Goss issued to him stated that he would be paid his salary for six months

but he would be required to seek alternate employment during this period and keep Goss

apprised of his efforts.

Two weeks after the termination of his employment, Mr. Bowes secured alternative employment

at about the same salary he was earning with Goss. Once Goss became aware that Bowes had

secured alternative employment, Goss took the position that Mr. Bowes had mitigated his loss

and, therefore, was only entitled to three weeks’ salary under the Employment Stadards Act of

Ontario and paid him such.

Consequently, Mr. Bowes brought an application in the Superior Court of Justice of Ontario to

have the termination provision of the employment contract interpreted, arguing that the contract

delineated the termination pay he was due and owing and he had no duty to mitigate to obtain

that termination pay. He also argued that the termination pay should be paid to him as a lump

sum at the time of the termination of his employment.

The application judge ruled against Bowes stating where the contract of employment contains a

fixed severance entitlement, the contract is subject to a duty to mitigate unless the agreement,

directly or indirectly, relieves the employee of this obligation. According to the application

judge, since the contract in this case did not provide an exemption from the duty to mitigate and

since Bowes had found alternate employment, Bowes was not entitled to the full amount under

the contract as he had mitigated his loss. The judge further held that severance payment is not

required to be paid as a lump sum.

Mr. Bowes appealed the decision to the Ontario Court of Appeal. The Court of Appeal, in

reversing the application judge’s decision, stated: KORNFELD LLP

…the application judge erred in deciding that an agreement specifying a fixed notice

period, in the event of dismissal without cause, was akin to damages in lieu of reasonable

notice at common law. This mischaracterization led him to wrongly conclude that there

was a presumption that the appellant had a duty to mitigate and that, since the agreement

was silent in respect of mitigation, the presumption had not been rebutted. On this basis,

he determined – wrongly in my view – that the parties intended, at the point of

contracting, that mitigation would be applicable to the calculation of damages upon

termination.

The Court of Appeal also observed that while there is some confusion about the law on this issue

as a result of trial decisions going both ways, at the appellate level, the decisions support the

principle that mitigation is an irrelevant consideration where an employment contract contains a

fixed severance entitlement on termination without cause, particularly where there is not an

express contractual requirement to mitigate imposed on the employee. The court then succinctly

and very persuasively summarized the justification for its conclusion as follows:

• By contracting for a fixed sum the parties have contracted out of the Bardal

“reasonable notice” approach or damages in lieu thereof. There is no material

difference whether the quantum contracted for is fixed or readily calculable from the

terms of the agreement.

• By specifying an amount, the stipulated quantum is characterized as either liquidated

damages or a contractual sum.

• Mitigation is a live issue at law only where damages are at large, i.e. damages in lieu

of reasonable notice. Mitigation is not applicable if the damages are either liquidated

or a contractual sum.

...