Interpretation of the Employment Contract

Since 1987, the Supreme Court of Canada has made many policy statements on the role of employment in society which are reflective of a purposive and liberal interpretation of the issues to be determined by the court in an employment context.

Chief Justice Dickson – 1987 and 1989

In 1987 Chief Justice Dickson commented ¹ on the importance of work to an individual’s sense of worth and role in his community and the manner in which employment may be terminated is also of considerable importance. This passage has been cited so frequently, it has become an accepted principle of law. It has been long been forgotten that it found its origin in a dissenting opinion. ²

Work is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society.  A person's employment is an essential component of his or her sense of identity, self-worth and emotional well-being.

I would add that not only is work fundamental to an individual's identity, but also that the manner in which employment can be terminated is equally important.

This theme was repeated in 1989 by Chief Justice Dickson, ³ referring to Professor Beatty’s article with approval setting out the meaning of work and its significance to day to day modern life:

As Professor Beatty puts it in "Labour is not a Commodity" in Reiter and Swan, eds., Studies in Contract Law (1980), at pp. 323-24:

The personal meaning of work is seen to go beyond rather than to be completely dependent upon the purposes of production . . . [R]eflecting the characterization of humans as, for the most part, doers and makers, the identity aspect of employment is increasingly seen to serve deep psychological needs . . . It recognizes the importance of providing the members of society with an opportunity to realize some sense of identity and meaning, some sense of worth in the community beyond that which can be taken from the material product of the institution  . . . [E]mployment is seen as providing recognition of the individual's being engaged in something worthwhile . . . [E]mployment comes to represent the means by which most members of our community can lay claim to an equal right of respect and of concern from others.  It is this institution through which most of us secure much of our self-respect and self-esteem.  With such an emphasis on contributing to society one avoids the demoralization that inevitably attends idleness and exile, even when it is assuaged by social assistance.

Iacobucci J. – 1992, 1997, 2001

These sentiments were again followed in 1992 ⁴ by Iacobucci J., initially in his reference to the need to interpret the Employment Standards Act of Ontario as remedial legislation, worthy of a “fair, large and liberal construction”.

Section 10 of the Interpretation Act, R.S.O. 1980, c. 219, provides that every Act "shall be deemed to be remedial" and directs that every Act shall "receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit."  The objective of the Act is to protect the interests of employees by requiring employers to comply with certain minimum standards, including minimum periods of notice of termination.  To quote Conant Co. Ct. J. in Pickup, supra, at p. 274, "the general intention of this legislation [i.e. the Act] is the protection of employees, and to that end it institutes reasonable, fair and uniform minimum standards."  The harm which the Act seeks to remedy is that individual employees, and in particular non-unionized employees, are often in an unequal bargaining position in relation to their employers.  As stated by Swinton, supra, at p. 363:

. . .  the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does.  Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

Accordingly, an interpretation of the Act which encourages employers to comply with the minimum requirements of the Act, and so extends its protections to as many employees as possible, is to be favoured over one that does not.  In this regard, the fact that many individual employees may be unaware of their statutory and common law rights in the employment context is of fundamental importance.  As B. Etherington suggests in "The Enforcement of Harsh Termination Provisions in Personal Employment Contracts: The Rebirth of Freedom of Contract in Ontario" (1990), 35 McGill L.J. 459, at p. 468, "the majority of unorganized employees would not even expect reasonable notice prior to dismissal and many would be surprised to learn they are not employed at the employer's discretion."

This refrain was again evident in 1997, ⁵ as Iacobucci J. distinguished the contract of employment from the typical commercial agreement and echoed earlier comments made by the same Court:

91                              The contract of employment has many characteristics that set it apart from the ordinary commercial contract.  Some of the views on this subject that have already been approved of in previous decisions of this Court (see e.g. Machtinger, supra) bear repeating.  As K. Swinton noted in “Contract Law and the Employment Relationship: The Proper Forum for Reform”, in B. J. Reiter and J. Swan, eds., Studies in Contract Law (1980), 357, at p. 363:

. . . the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does.  Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

92                              This power imbalance is not limited to the employment contract itself.  Rather, it informs virtually all facets of the employment relationship.  In Slaight Communications Inc. v. Davidson, 1989 CanLII 92 (SCC), [1989] 1 S.C.R. 1038, Dickson C.J., writing for the majority of the Court, had occasion to comment on the nature of this relationship.  At pp. 1051-52 he quoted with approval from P. Davies and M. Freedland, Kahn-Freund's Labour and the Law (3rd ed. 1983), at p. 18:

[T]he relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power.  In its inception it is an act of submission, in its operation it is a condition of subordination. . . .

93                              This unequal balance of power led the majority of the Court in Slaight Communications, supra, to describe employees as a vulnerable group in society: see p. 1051.  The vulnerability of employees is underscored by the level of importance which our society attaches to employment.  As Dickson C.J. noted in Reference Re Public Service Employee Relations Act (Alta.),  1987 CanLII 88 (SCC), [1987] 1 S.C.R. 313, at p. 368:

Work is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society.  A person's employment is an essential component of his or her sense of identity, self-worth and emotional well-being.

94                              Thus, for most people, work is one of the defining features of their lives.  Accordingly, any change in a person's employment status is bound to have far-reaching repercussions.  In “Aggravated Damages and the Employment Contract”, supra, Schai noted at p. 346 that, “[w]hen this change is involuntary, the extent of our ‘personal dislocation’ is even greater.”

95                              The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection.  In recognition of this need, the law ought to encourage conduct that minimizes the damage and dislocation (both economic and personal) that result from dismissal.  In Machtinger, supra, it was noted that the manner in which employment can be terminated is equally important to an individual's identity as the work itself (at p. 1002).  By way of expanding upon this statement, I note that the loss of one's job is always a traumatic event.  However, when termination is accompanied by acts of bad faith in the manner of discharge, the results can be especially devastating.  In my opinion, to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period.

96                              This approach finds support in the words of my colleague, Gonthier J., in Farber, supra.  Writing for a unanimous Court he stated at p. 859:

. . . for the employment contract to be resiliated, it is not necessary for the employer to have intended to force the employee to leave his or her employment or to have been acting in bad faith when making substantial changes to the contract’s essential terms.  However, if the employer was acting in bad faith, this would have an impact on the damages awarded to the employee.

These are broadly principled policy approaches to employment law issues and have been used repeatedly as guides of interpretation. This approach was again evident in McKinley v BC Tel, a 2001 decision. Iacobucci J., again writing for the Court, reflected on the sense of identity and self-worth individuals derive from their employment and the significance of this factor in adjudicating upon termination issues:

53                              Underlying the approach I propose is the principle of proportionality. An effective balance must be struck between the severity of an employee’s misconduct and the sanction imposed. The importance of this balance is better understood by considering the sense of identity and self-worth individuals frequently derive from their employment, a concept that was explored in Reference Re Public Service Employee Relations Act (Alta.), 1987 CanLII 88 (SCC), [1987] 1 S.C.R. 313, where Dickson C.J. (writing in dissent) stated at p. 368:

Work is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person's employment is an essential component of his or her sense of identity, self‑worth and emotional well‑being.

This passage was subsequently cited with approval by this Court in Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at p. 1002, and in Wallace, supra, at para. 95.  In Wallace, the majority added to this notion by stating that not only is work itself fundamental to an individual's identity, but “the manner in which employment can be terminated is equally important”.

54                              Given this recognition of the integral nature of work to the lives and identities of individuals in our society, care must be taken in fashioning rules and principles of law which would enable the employment relationship to be terminated without notice. The importance of this is underscored by the power imbalance that this Court has recognized as ingrained in most facets of the employment relationship. In Wallace, both the majority and dissenting opinions recognized that such relationships are typically characterized by unequal bargaining power, which places employees in a vulnerable position vis-à-vis their employers. It was further acknowledged that such vulnerability remains in place, and becomes especially acute, at the time of dismissal.

These broad rules of construction inevitably have impacted the interpretation of written employment agreements and indeed all issues with respect to non-unionized employment matters. ⁶

The date line of decided cases should be examined when reviewing the impact of precedent cases as the words of the Supreme Court in this string of decisions since 1987 forward have had a noticeable effect on the common law which was not evident in the earlier writings of the Court.

The Ontario Court of Appeal in Rasanen v Lisle-Metrix also observed that the interpretation of the employment contract must be mindful of the inherent power imbalance in the relationship:

Recent decisions of this court and the Supreme Court of Canada recognize that the judicial interpretation of contracts between employers and employees must be informed by the power imbalance between the two and the importance of employment to an individual’s dignity and sense of self-worth.

The Alberta Court of Appeal in its 2022 decision endorsed the same liberal interpretation of employment contracts: ⁷

[13]           Interpretive principles have therefore evolved to protect employees. One such principle is that, “in employment law, uncertainty ought to be resolved in favour of the employee”: Holm at para 34. The Ontario Court of Appeal put it this way: “[f]aced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee”: Wood v Fred Deeley Imports Ltd, 2017 ONCA 158 at para 28; see also Miller v Convergys CMG Canada Limited Partnership, 2014 BCCA 311 at para 15; Singh v Qualified Metal Fabricators Ltd. (2016), 33 CCEL (4th) 308 at para 15.

Good Faith - In Employer’s Sole Discretion – OCA- 1985

A clause which allows the employer to act in its singular discretion, consistent with the sentiments of the above Supreme Court decisions which were to follow, was interpreted by the Ontario Court of Appeal in its 1985 decision of Greenberg v Meffert, to require the exercise of such action be made in good faith. ⁸

The plaintiff, employed as a real estate agent, had signed an agreement which allowed the employer to exercise its “sole discretion” with respect to the payment of real estate fees on transactions relevant to the plaintiff, which closed following the plaintiff’s departure from its employ.

In examining the meaning of the agreement and how it should be interpreted, the Court noted that clauses of this nature generally fall into two categories, one requiring a subjective interpretation and the other mandating an objective test:

Provisions in agreements making payment or performance subject to "the discretion", "the opinion" or "the satisfaction" of a party to the agreement or a third party, broadly speaking, fall into two general categories. In contracts in which the matter to be decided or approved is not readily susceptible of objective measurement -- matters involving taste, sensibility, personal compatibility or judgment of the party for whose benefit the authority was given -- such provisions are more likely construed as imposing only a subjective standard. On the other hand, in contracts relating to such matters as operative fitness, structural completion, mechanical utility or marketability, these provisions are generally construed as imposing an objective standard of reasonableness: see, generally, 4 Hals., 4th ed., p. 612, paras. 1198-9; Corbin on Contracts (1960), vol. 3A, ss. 644-48; Williston on Contracts, 3rd ed. (1957), ss. 675A and 675B; Hudson, Building and Engineering Contracts, 10th ed. (1970), chapter 7.

The tendency, the Court stated, is to look for words which clearly oust the implication that the discretion is to be exercised reasonably:

In any given transaction, the category into which such a provision falls will depend upon the intention of the parties as disclosed by their contract. In the absence of explicit language or a clear indication from the tenor of the contract or the nature of the subject-matter, the tendency of the cases is to require the discretion or the dissatisfaction to be reasonable: Minster Trust, Ltd. v. Traps Tractors, Ltd. et al., [1954] 3 All E.R. 136 at p. 145. This construction imposes the least hardship in that it produces a result that cannot be said to be unfair or unjust to either of the parties. Other things being equal, I think it preferable that provisions of this kind be construed as implying the less arbitrary standards of the objective test: American Law Institute, Restatement of the Law, Second: Contracts 2d (1981), s. 228.

The Court of Appeal, apart from requiring that this term be interpreted as requiring fair and reasonable exercise of discretion, also saw the clause as ambiguous and hence invoked the contra proferentem principle in this conclusion.

Sole discretion does not mean sole discretion. As to the need to interpret the clause fairly, Robbins J.A continued:

A sales agent signing this contract has the right to expect that he will be dealt with fairly. Termination of employment does not automatically eliminate his entitlement to commission, call for the imposition of a penalty, or relieve the company of all obligation towards him. The clause does not so provide; quite to the contrary, its presence serves to assure the agent that notwithstanding termination, the company will make a discretionary decision with respect to the commission earned on the listing. If this provision is to have purpose and substance, the discretion must be exercised in a reasonable way, not arbitrarily or capriciously but for good reason. Simple fairness dictates that construction, and particularly so where the exercise of the discretion can result in a windfall to the company. It can keep for itself a commission which but for the termination it would not have obtained, while the agent whose listing led to the sale receives nothing. In this employment relationship, based as it is upon a splitting of commissions, I think it only fair and just, and not too onerous, to require the employer company to show that in the circumstances relevant to the transaction its decision was not unreasonable.

This decision foreshadowed the words of Chief Justice Dickson in 1987 some two years later. It remains an important cornerstone of interpretation today.

This principle was referenced with approval in a June 2006 decision from the Ontario Court of Appeal. ⁹ A further Ontario case in the February of the same year noted that the good faith concept of Greenberg is entirely consistent with the Supreme Court decision of Bhasin. ¹⁰

Reasonable Intention of the Parties

The basic rules of interpretation of any contract will also apply. A court will look to the writing with the objective of implementing the reasonable intentions of the parties. To this end, the words used will be read by using the usual “plain and literal” meaning without reference to a dictionary definition.

If the agreement contains an ambiguity, the first step in the analysis is to interpret this in such a manner as reflects the intent of the contracting parties at the time of the formation of the agreement, in a manner which makes commercial sense.

In the process of this interpretation, a court may consider allowing extrinsic evidence, if it is necessary to assist in the determination of the intent of the parties. As stated by the B.C. Court of Appeal in Rhebergen v Creston Veterinary Clinic:

Generally a court must endeavour to resolve ambiguity in order to determine the mutual intention of the parties to a contract by interpreting the wording of any given clause in the context of the whole of the agreement as well as the factual matrix that gave rise to the agreement and against which it is intended to operate: Jacobsen v. Bergman, 2002 BCCA 102 (CanLII), 2002 BCCA 102, paras. 3-6.  Recourse to extrinsic evidence for that purpose may be had but only if what can be said to be the mutual intention of the parties cannot otherwise be objectively derived: Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459 (CanLII), 2006 BCCA 459 at para. 23.

Should the ambiguity remain unresolved, the court may apply the principle of contra proferentem.

It may not always follow that it is the employee who has the edge in this argument. While many employment contracts may indeed be contracts of adhesion, and in many circumstances, it is the employee who is the vulnerable party, as noted by the above case law, this is not a conclusive statement.

The employment contract in Foreman v 818329 Ontario Limited was drafted by counsel for the plaintiff employee and the ambiguity, for this reason, was read against her interest.

A similar conclusion was made in Ross v Christian & Timbers, which did not involve an argument of contra proferentem, but did engage the concept of the plaintiff as a sophisticated party, and hence denied the protections of the vulnerable employee as depicted in Machtinger.

A Search for the True Intent

As noted by the Court of Appeal in Ceccol, the issue in the interpretation of the written contract is a search for the reasonable expectation of the parties. MacPherson J.A stated,

I agree with the trial judge's conclusion. His observation about the importance of the parties' reasonable expectations is a faithful application of one of the leading decisions of the Supreme Court of Canada in the contract law domain. In Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888 at p. 901, 112 D.L.R. (3d) 49, Estey J. said:

[T]he normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties.

Limiting Terms to be Red-Lined?

The Supreme Court of Canada recently suggested in Matthews that a restrictive clause in an employment agreement must be “adequately brought to the employee’s attention”. The case did not turn on this issue as it was not argued, but the point nonetheless was made. ¹¹