Duty to mitigate extended to independent contractors under fixed term contracts?

Photo credit: Pexels/Pixabay

 

The recent Ontario Court of Appeal (OCA) decision in Monterosso v. Metro Freightliner Hamilton Inc., 2023 ONCA 413, the Ontario Court of Appeal (OCA) (“Metro Freightliner”) extends the duty to mitigate their damages upon the early termination of a fixed-term agreement (i.e., take reasonable steps to reduce their damages by attempting to find new work/income) to independent contractors.

Background:

The trial judge, consistent with the then current state of our common law for dependent contractors or employees, held that since the independent contractor agreement between the parties: (a) did not have a termination clause; and (b) did have a clear and unambiguous 72-month fixed term of which he only worked seven months, the independent contractor was: (i) entitled to the remaining 65 monthly payments due under the agreement, which amounted to $552,500; and (ii) not required to mitigate his damages. 

On appeal the companies argued that the trial judge errored in: (a) failing to consider internal email correspondence dated 10 days after the agreement was executed that added a termination clause to the parties’ agreement. This clause provided that the independent contractor would only be paid until the last day of active service and as such the 72-month term was not guaranteed; and (b) holding that the independent contractor was not required to mitigate his damages.

OCA Decision

Enforceability of the Termination Clause:

The OCA rejected the companies’ argument regarding the after-the-fact termination clause. In doing so the OCA noted that the email correspondence was ambiguous while the language of the agreement was clear and unambiguous, so the agreement’s language governs. Also, of significance in holding that the termination clause was unenforceable was the fact that the agreement contained an “entire agreement clause”.  An entire agreement clause specifically excludes from inclusion in the agreement any representations, agreements, or understandings not contained within the four corners of the document.  

Applicability of the Duty to Mitigate Damages:

The OCA agreed with the companies that the trial judge erred in holding that the independent contractor was not required to mitigate his damages “by conflating the situation of independent contractors with that of employees working under fixed term contracts.” Particularly the OCA acknowledged the decision in Howard v. Benson Group Inc., 2016 ONCA 256, leave to appeal refused, [2016] S.C.C.A. No. 240 (“Benson”), which held that employees under a fixed-term contract did not have a duty to mitigate, however noted that it had never found that independent contractors similarly have no duty to mitigate following the breach of a fixed-term contract.  

It emphasized that its decision in Mohamed v. Information Systems Architects Inc., 2018 ONCA 428: (a) raised did not decide the issue as to whether or not the no mitigation principle in Benson applies to independent contractors’ fixed-term contracts; and (b) only found that there was no duty to mitigate in the specific circumstances of that case (i.e., created no rule or principle of general application).

The OCA thereafter decided to the issue as to whether or not independent contractors are required to mitigate their damages when hired under fixed-term contracts.  

In doing so it reviewed the legal principles related to the mitigation of damages, which include:

– in the normal circumstances a duty to mitigate arises when a contract is breached, including contracts with independent contractors; and 

– the terms of a contract may take the parties out of the normal circumstances and provide that there is no duty to mitigate when a contract is breached. Examples of such circumstances include: the independent contractor was in an exclusive, employee-like relationship with the companies, or dependent on the companies.

In applying these legal principles to the case at hand, the OCA noted that: (a) “nothing in this case takes it outside the normal circumstances in which mitigation is required”; and (b) the agreement did the opposite through permitting the independent contractor to perform services for others. Accordingly, there was no basis for the trial judge to decide that the independent contractor was not required to mitigate. That being said, the OCA further held that the companies did not meet their burden of proving that the independent contractor failed to mitigate his damages. As such, it dismissed the appeal.

Employer Takeaways:

The Metro Freightliner case makes it clear that:

– if employers want an independent contractor on a fixed-term contract to be paid only until the last day of active service, they must have a clear and unambiguous termination clause to that effect in the contract.

– unless the terms of a contract provide otherwise, in the normal course a duty to mitigate arises when a company’s fixed-term contract with a contractor is breached.  This duty to mitigate is subject to the surrounding circumstances, including but not limited to whether the contractor is permitted to perform services for others and not in an exclusive, employee-like relationship with the company, or is, in fact, a dependent contractor. Meaning, employers are wise to forego exclusive representation clauses if they wish their independent contractors to be fully independent and to avoid the voiding of their duty to mitigate.  

– like in wrongful dismissal actions, companies must satisfy their burden of proof that the independent contractor failed to mitigate damages. Meaning, they must provide evidence that reasonable opportunities were available to the contractor that the contractor did not take.