'The language needs to be very, very straightforward': employment lawyer explains risks of dispute resolution clauses in employment contracts
A recent Ontario court ruling sheds light on how dispute resolution clauses in employment agreements can lead to the very scenarios they are designed to avoid — especially when dealing with independent contractors.
The case, Fowlie et al v. Wrestling Canada Lutte, saw an employee contracted as Wrestling Canada Lutte’s complaints and appeal officer sue for breach of contract. According to his claim, he was denied his contracted right to a dispute resolution. A motion judge agreed with him in a 2023 decision – but this latest appeal reversed that decision and awarded the employer $17,000 in legal costs.
As employment lawyer Jordan Bailey, of Zubas Flett Liberatore in Toronto, explains, this distinction is significant because as an independent contractor, the employee was not covered by the Employment Standards Act (ESA), which played a role in how the court interpreted the dispute resolution clause in his contract.
Rules of dispute resolution clauses
Employers sometimes use dispute resolution clauses to provide additional protections or prevent drawn-out litigation. However, as this case demonstrates, their enforceability depends on how they are written; the contract agreement included a dispute resolution clause, stating that if a dispute arose, both parties would meet to resolve it before proceeding to arbitration under the Arbitration Act.
“It wasn't clear that they had to use this clause before they could terminate the contract, and so that's essentially what the case hinged on,” says Bailey.
“They said that there was no requirement to use the dispute resolution. It just said if there was a dispute that came up that couldn't be resolved informally, then they would go to dispute resolution. But it doesn't mention anything about terminating the contract. And the termination clause for this independent contractor agreement said that they just had to give 30 days’ notice, which they had done.”
Source: 2024 ONSC 7196 (CanLII) | Fowlie et al v. Wrestling Canada Lutte et al | CanLII
It's an unusual move outside of the labour and union context, says Bailey, and this case is a demonstration of why that is – rather than protecting the contractor, which is usually the main intent of a dispute resolution clause, it created ambiguity, he says.
“In most of these agreements, you wouldn't have one of these clauses because it essentially creates more of an obligation on the employer to find a resolution, and can have the effect of limiting their employer rights,” Bailey notes.
“It's quite common in collective agreements. In fact, almost all collective agreements have some sort of trigger to the grievance process, which then takes you to an arbitrator, and so that's what these clauses are framed on.”
Dispute resolution conditions must be explicit
The Ontario Divisional Court ultimately ruled that the dispute resolution clause in Fowlie v. WCL did not prevent the employer from terminating the contract, because the clause did not explicitly state that dispute resolution had to take place before termination.
The court’s reasoning was clear – the contract permitted termination with 30 days' notice, and the dispute resolution clause did not specifically require a process be before termination.
“A valid ‘without cause’ termination of the contract cannot be a dispute; therefore, the Dispute Resolution Clause cannot apply,” the decision stated.
“There is no term of the contract that gives [the contractor] the right to ‘clear his name’ in the absence of a justiciable dispute. (Nor is that a recognized right such that its alleged violation gives rise to an independent cause of action).”
Best practices for drafting dispute resolution clauses
The employee’s charge came out of his alleged misunderstanding that the dispute resolution clause was “a valuable and substantial ‘contractual right’ in that it provided ‘a venue to put his case to an arbitrator before termination and have a decision from that arbitrator that could remediate the reputational damage done’ to him by the termination of the contract.’”
This is why clarity is paramount when creating arbitration or dispute resolution language in a contract, says Bailey. Ambiguous language can open the door to legal challenges even when an employer follows the contract’s terms to the letter, as was done in this case.
“If an employer is going to use these types of clauses, I think one of the most important things is being very clear what the clause is saying, and also the reasons that you would use this,” he says, explaining that since there was no direct and clear link between the clause and the termination conditions of the contract, it could not be found enforceable.
“When the employer terminated the contract, ended the contract, they just followed what was written in there, which in the agreement said that they just had to give 30 days’ notice, and then they could terminate the contract.”
Independent contractor agreements vs. employment contracts
Although the court decided in favour of the employer in this case, holding the contractor to the exact terms of the agreement, Bailey stresses that the outcome would likely be different if it were a regular employee-employer relationship and contract.
“You couldn't do that in an employer-employee relationship,” he says.
“That's not valid termination, because the Employment Standards Act has a whole bunch of protections around ending employment that don't exist in the contractor and employer, employee-for-services relationship.”
When contractors are considered a “sophisticated party”, Bailey outlines, there is less lenience around ambiguous contractual language in the eyes of a court or arbitrator, “whereas employees aren't considered sophisticated parties, which is why they the agreements are read in a different way.”
“It's based on how likely is it that the person really understood what was being said, and so in employment agreements, that's why it really has to be clear … an employee agreement, has to be very clear what is and isn't happening, so that someone without a lawyer can read it and understand it. And if they don't understand it, then it's usually read in a way that is for the employee, so preserving their rights.”
Lessons for hr professionals
Although not recommended in regular employment contracts, Bailey says that when they are being used, for example if an independent contractor requests one, drafting precise, crystal clear clauses is crucial.
His advice for drafting or reviewing employment contracts and dispute resolution clauses:
Be explicit: If dispute resolution must occur before termination, state this clearly.
Define terms: Specify what constitutes a dispute, how resolution will proceed, and what methods (e.g., arbitration, mediation) will apply.
Evaluate necessity: Weigh the benefits of dispute resolution clauses against potential limitations on flexibility.
Bailey emphasizes that dispute resolution clauses should be carefully considered rather than added reflexively, as poorly executed clauses can result in more disputes, rather than less.
“Be very clear,” he says.
“Why you're using these clauses and what the purpose is, and then the language needs to be very, very straightforward as to when they're being used.”
