Originally appeared in Lang Michener LLP InBrief, and Lexology and Martindale.com Legal Library.
Author: Lai-King Hum
Fall 2008

The obligation to mitigate refers to the duty of a person claiming damages to do whatever is reasonable to minimize those damages. This obligation applies to all breach of contract claims, including fixed-term employment contracts. However, as highlighted in the recent case of Orr v. Magna Entertainment Corp., there are exceptions to this general principle. One exception is where the fixed-term contract of employment provides for a severance amount that is immediately payable, or shortly thereafter, upon termination.

Graham J. Orr had worked for the Magna group of companies for 13 years. He had a very senior position and was paid handsomely. In the fall of 2000, Magna’s Frank Stronach offered Orr a job as CFO at Magna Entertainment Corp. (“MEC”).

Orr insisted on and obtained an employment agreement with a generous termination clause. If fired in the first three years of the agreement, MEC was obliged to provide severance pay or notice of 24 months. If fired after three years, severance pay or notice was then reduced to 12 months. Severance pay in either case was payable within 30 days of termination.

Orr started working for MEC in January of 2001, but by mid 2002, Stronach and the CEO of MEC were unhappy with Orr’s performance and decided to replace him as CFO. In March of 2003, Orr was given notice he would be replaced, but no date was given for the effective date of termination.

Orr and Magna executives, including Stronach, discussed the possibility of a comparable position within the Magna group of companies. Ultimately, Orr was told that his last day as CFO would be in July of 2003 but Magna would continue looking for a position for him.

Orr grew frustrated. He felt Magna was playing him. He was worried that if he stayed with MEC until January 2004 (the three year mark), MEC would try to pay him only one year’s severance instead of two. A senior executive assured Orr that Magna had no intent to string him along until after three years were up and then try to pay him only one year’s severance. Stronach also addressed Orr’s concerns and frustrations, and told Orr not to worry. A job was arranged for Orr within the Magna group of companies. Although it was a lesser position, he was promised that Magna was still looking for a comparable position.

Despite these assurances, on January 9, 2004, just nine days after three years were up, Magna gave Orr one year’s working notice of termination from his lesser position. Orr was again told that this did not mean anything, and that Magna was still looking for a comparable position for him.

In June of 2004, however, Orr was finally told not to bother going into work. There was no other position for him at Magna.

Orr sued the Magna companies and Stronach personally, claiming 24 months’ severance pay of $1,650,000 from the March 2003 notice of termination.

Stronach and the Magna companies defended by saying that Orr had taken another job within the Magna group after his termination from MEC, and that since Orr had stayed on at Magna past three years, under the contract, he was only owed 12 months’ severance pay.

In his decision released early this year, Justice Klowak of Ontario’s Superior Court of Justice awarded Orr the full amount claimed plus interest. He found that Orr stayed on with Magna and agreed to forgo demanding his severance only because of the assurances of a comparable position. Orr had not given up his claim to severance pay. Orr had been left “in the twilight zone” of having neither his old position nor a comparable one, and no comparable position was ever offered. Instead, Orr’s worst fears came true; that is, from March 2003 until June 2004, he had been strung along.

Ultimately, Justice Klowak found only the Magna companies liable to pay the severance amount of $1,650,000 to Orr. The claim against Stronach personally was dismissed.

Regarding mitigation, Justice Klowak cited with approval Justice Nordheimer’s decision in Graham v. Marleau, Lemire Securities Ltd., which also dealt with a fixed-term employment contract. Justice Nordheimer summarized the jurisprudence to date, and listed the principles with respect to the obligation to mitigate:

1. The principle of mitigation applies to a claim arising from any breach of contract, whether fixed- term or of indefinite duration.
2. The principle of mitigation also applies where there is an agreed-upon severance provision.
3. Even where there are agreed-upon severance provisions, there are exceptions to the principle of mitigation. In some cases, the contract of employment can be interpreted as having exempted, expressly or by implication, the employee from the duty to mitigate. Examples of such exemptions are:
   1. There is an express waiver of the duty to mitigate.
   2. There is an express obligation to continue the payments under the employment contract.
   3. The employment contract provides that the severance amount is payable immediately at, or very shortly after, the date of termination, implicitly suggesting a waiver of the obligation to mitigate as neither the employer or the employee could know whether mitigation could occur.

Justice Klowak, accordingly, concluded that there was an implied waiver of the duty to mitigate in the case before him. Since the parties had agreed to severance pay being payable within 30 days of termination, well prior to when either Magna or Orr could know whether mitigation could occur, the implication was that there was a waiver of the duty to mitigate.

Orr was therefore entitled to the full amount of his claim against Magna pursuant to the termination provisions in his original fixed-term employment agreement, with no obligation to mitigate.