Canadian Independent Contractors: Must Mitigate Notice Claims

The general legal rule with all claims for breach of contract is that the allegedly damaged party needs to take steps to mitigate that damage. For many years, Canadian employment law has been aligned with this principle, with claims by dismissed employees being subject to a duty to look for other work, and the value of these claims reduced by earnings during any common law notice period.

A recent decision by the Ontario Court of Appeal has held that independent contractors also have a duty to mitigate the damages, if any, arising from the termination of their contract.

In Monterosso v Metro Freightliner Hamilton Inc., 2023 ONCA 413, the Court considered an appeal by a company which had engaged an individual as an independent contract for a 72-month term.

When the contractor was terminated just seven months into the term of the contract, he proceeded to sue, claiming his contract fee for the remaining 65 months of the contact.

The trial judge closely reviewed the terms of the contract, and found that it did not have a termination provision. As a result, in accordance with prevailing law relating to term contracts, the contractor Monterosso was awarded more than $500,000 in damages on account of the fees he would have received for the remaining five plus years of the contract. The reasons of the trial judge also held that the contractor did not have an obligation to mitigate his damages when the contract was terminated.

The company appealed on a number of grounds, including that there were communications not reference in the contract which made it clear that the contract could be terminated during its terms based on notice being provided. The Court of Appeal rejected this ground of appeal, finding that the contract had a so-called “entire agreement” clause, which confirmed that the contract represented the entire and only agreement between the parties, with any collateral discussions or documents not being incorporated as a result.

On the appeal as it related to the issue of mitigation, the company won the battle but lost the war. The Court accepted the company’s position that the trial judge had been incorrect in finding that an independent contractor did not need to mitigate their damages in a dismissal case. The Court essentially confirmed that there is no distinction between the circumstances which arise when employees or contractors are terminated – any dismissed party must make reasonable efforts to look for other work, and their claim will be reduced by earnings during whatever notice period is awarded.

The Court of Appeal’s reasons note that the trial judge improperly conflated the situation of a contractor with that of employees working under a fixed term contracts. In the case of employees, the Court held in a seminal decision from 2016 (Howard v Benson Group Inc.) that employees engaged under a fixed-term agreement do not have a duty to mitigate. That is distinct, however, from the situation with contractors. The Court ruled that “nothing in this case takes it outside the normal circumstances in which mitigation is required.”

The difficulty for the appellant employer in this particular case is that they did not satisfy their own legal burden, which is to prove a failure to mitigate. In particular, there was no evidence, such as job search or earnings information, before the trial judge which showed that the contractor had failed to mitigate their damages upon termination. As such, while there was technically a “win” in the appeal, it did not result in any change to the finding on damages, with the Court of Appeal dismissing the appeal.

Takeaway for Employers

This decision highlights the challenges with the use of fixed-term contracts, including when engaging independent contractors. If the company does not clearly delineate a right to terminate the engagement mid-contract, there is a very real possibility that a dismissed contractor will be able to claim damages for the balance of the contract. And while any such claim will be subject to mitigation, it is also important to know that a party cannot simply state that there is a mitigation obligation. Instead, any reduction in damages based on a failure to mitigate needs to be supported by appropriate evidence.