From JDSupra, Rhonda Levy and George Vassos discuss a recent case in Ontario in which the court said that an independent contractor has an obligation to take reasonalbe steps to attempt to find other work if a fixed-term agreement is terminated early. Rhonda and George write:
In Monterosso v. Metro Freightliner Hamilton Inc., 2023 ONCA 413, the Ontario Court of Appeal (OCA) found that independent contractors have a 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).
Three companies engaged an independent contractor for a 72-month term, but they terminated his services seven months later. The independent contractor sued for the payments due for the remaining 65 months under his agreement with the companies.
Decision of Trial Judge
Finding that the agreement did not have a termination clause and that it clearly and unambiguously provided for a 72-month fixed term, the trial judge awarded the independent contractor the remaining monthly payments due under the agreement, which amounted to $552,500.
The trial judge also found that the independent contractor was not required to mitigate his damages when the agreement was terminated.
The companies argued that the trial judge failed to consider internal email correspondence dated 10 days after the agreement was executed, which added a provision to the agreement to ensure that the independent contractor would only be paid until the last day of active service (Termination Clause). The companies submitted that the Termination Clause, which they said the independent contractor had seen, would be superfluous if the agreement’s 72-month term was guaranteed and, in these circumstances, it would be inequitable to allow the independent contractor to rely on the 72-month term.
The companies also argued that the trial judge erred in holding that the independent contractor was not required to mitigate his damages.
Decision of the OCA
The Termination Clause
The OCA rejected the companies’ argument regarding the Termination Clause because the email correspondence they relied on was ambiguous while the language of the agreement was clear and unambiguous. In addition, the agreement contained an “entire agreement clause” designed to avoid the argument raised by the companies.
Independent Contractor’s Duty to Mitigate Damages
With respect to mitigation of 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.”
In its reasons, the OCA acknowledged that in Howard v. Benson Group Inc., 2016 ONCA 256, leave to appeal refused,  S.C.C.A. No. 240, it held that employees under a fixed-term contract did not have a duty to mitigate; however, the court noted that it had never found that independent contractors similarly have no duty to mitigate following the breach of a fixed-term contract.
The OCA emphasized further that in Mohamed v. Information Systems Architects Inc., 2018 ONCA 428, it did not decide whether the principle in Benson applies to independent contractors’ fixed-term contracts, but held only that there was no duty to mitigate in the specific circumstances of that case.
The OCA then reviewed the legal principles related to the mitigation of damages, which provide that a duty to mitigate arises when a contract is breached, including contracts with independent contractors; however, the terms of a contract may provide otherwise. The OCA then noted that “nothing in this case takes it outside the normal circumstances in which mitigation is required” and provided the following examples of circumstances that might have done so: the independent contractor was in an exclusive, employee-like relationship with the companies, or dependent on the companies. The OCA observed that, instead, the agreement permitted the independent contractor to perform services for others. Accordingly, the court found that there was no basis for the trial judge to decide that the independent contractor was not required to mitigate.
The OCA found, however, that the companies did not meet their burden of proving that the independent contractor failed to mitigate his damages. Accordingly, the court dismissed the appeal.
Bottom Line for Employers
Metro Freightliner puts companies on notice that if they want an independent contractor on a fixed-term contract to be paid only until the last day of active service, any termination clause to that effect in the contract must be clear and unambiguous.
This case also clarifies that unless the terms of a contract provide otherwise, a duty to mitigate arises when a company’s fixed-term contract with a contractor is breached, provided the contractor is permitted to perform services for others; however, a duty to mitigate will not arise if the contractor is in an exclusive, employee-like relationship with the company, or is, in fact, a dependent contractor.
Metro Freightliner also reminds companies that they must satisfy their burden of providing evidence that the independent contractor failed to mitigate damages and that reasonable opportunities were available to the contractor; without providing such evidence, a defense of failure to mitigate will not succeed.
To avoid significant liability upon the early termination of a fixed term agreement with an independent contractor, companies are encouraged to seek the drafting assistance of experienced employment counsel.