How to Identify and Avoid Common Employment Contract Defects 

Employment contracts are crucial documents that outline the terms and conditions of employment. Despite careful drafting, these contracts can still contain defects that may render them unenforceable. Recent judicial decisions highlight the critical importance of clear and enforceable employment contracts. This article provides a comprehensive guide for employers in identifying and avoiding common employment contract defects. 

Ontario Court Invalidates Termination Clause in Employment Contract 
A recent ruling in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 by the Ontario Superior Court of Justice deemed a termination clause in an employment contract unenforceable. The court found that the clause, which allowed the employer to terminate the employee's employment "at any time" and "at its sole discretion," violated the Ontario Employment Standards Act, 2000 (ESA). The clause failed to provide the minimum notice required under the ESA, leading the court to declare it void and unenforceable.

This ruling underscores the importance of carefully drafting termination clauses in employment contracts to ensure compliance with statutory requirements. Employers must ensure that such clauses do not contravene the ESA or any other applicable laws, as doing so could render the clause—and potentially other parts of the contract—unenforceable.

1. Ambiguity in Contract Terms 

Ambiguity occurs when a contractual provision can be reasonably interpreted in more than one way. The Ontario decision in Dufault underscores how unclear contract terms can lead to disputes. Courts aim to honor the parties' original intentions and interpret terms in their plain and literal meaning, but ambiguities that restrict employee rights are often resolved in favor of the employee. 

The court in Dufault found that terms like "at its sole discretion" and "at any time" were ambiguous and could potentially violate the ESA, leading to the invalidation of the termination clause. 

Steps to Avoid Ambiguity: 
Clearly define all terms and conditions. 
Use precise and unambiguous language. 
Review the entire agreement for consistency. 
 
2. Severance Clauses 

When ambiguities or illegalities arise, courts may remove or modify the problematic provision through severance. Including a severability clause can help, but it is not a replacement for clear drafting. Severance clauses play a crucial role in maintaining the enforceability of contracts. 
In the recent ruling, the court highlighted the importance of severance clauses by noting that the invalid termination clause rendered the entire termination provision unenforceable, emphasizing the need for severability in contract terms. 

Steps to Utilize Severance Clauses: 
Include a severability clause to ensure that unenforceable terms can be removed without invalidating the entire contract. 
Ensure key terms, especially those affecting employee rights, are clear and enforceable. 

3. Mistakes in Employment Contracts 

Mistakes can happen when one or both parties misunderstand fundamental facts leading to the contract. These mistakes can be mutual, common, or unilateral, each impacting the contract's enforceability. High-stakes negotiations can exacerbate even minor mistakes. 

Steps to Mitigate Mistakes: 
Verify all facts and terms before finalizing the contract. 
Encourage both parties to thoroughly review and understand the contract. 
Provide opportunities for clarification and legal advice. 

4. Unconscionability 
An unconscionable contract or term is unfair due to an imbalance in bargaining power. The recent court decision highlighted potential unfairness in employment terms, which can lead to industrial action. Courts consider factors like lack of legal advice, vulnerability, and one party’s unfair advantage. 
The court ruled that the employer’s right to terminate "at any time" without proper cause was unconscionable because it placed undue advantage in the hands of the employer, contrary to the protections intended by the ESA. 

Steps to Prevent Unconscionability: 
Ensure employees have access to independent legal advice. 
Avoid exploiting any employee vulnerability. 
Maintain fairness in contract terms and compensation. 

5. Duress and Undue Influence 
Contracts signed under duress or undue influence may be deemed unenforceable. Duress involves threats or pressure, while undue influence stems from exploiting a special relationship. 
Steps to Avoid Duress and Undue Influence: 
Ensure all agreements are made voluntarily. 
Avoid applying pressure or making threats. 
Provide a reasonable period for contract review and acceptance, and to allow the employee to obtain independent legal advice.

6. Substratum Doctrine 

The substratum doctrine applies when significant changes in an employee's role render the original contract obsolete. Courts may refuse to enforce outdated terms that no longer reflect the current employment relationship. 

Steps to Address the Substratum Doctrine: 
Regularly update employment contracts to reflect changes in roles and responsibilities. 
Include provisions that anticipate changes in employment conditions. 
Renegotiate or reaffirm contract terms when significant changes occur. 
Stay informed about best practices in employment law. 
 
Conclusion 
Employment contracts are vital in defining the employer-employee relationship, but common defects can undermine their enforceability. By recognizing and addressing issues such as ambiguity, severance, mistakes, unconscionability, duress, and the substratum doctrine, HR professionals can ensure their contracts are robust and enforceable. The recent Ontario court case in Dufault illustrates how unresolved contract issues can lead to significant disputes. Regular reviews and updates, coupled with clear drafting, are essential for maintaining effective employment agreements. 

Author Bio 
Roberts Obradovic is a Toronto-based law firm specializing in employment, privacy, corporate, and litigation matters. With a commitment to providing expert legal advice and representation, the firm assists businesses and individuals in navigating the complexities of the legal landscape. The team at Roberts Obradovic brings a wealth of experience and a personalized approach to each case, ensuring that clients receive the highest standard of legal support.