Context and Mutual Intentions Matter: Ontario Court of Appeal Provides Much-Needed Clarity on Termination Clause Enforceability

In a decision that will be welcomed by employers, the Ontario Court of Appeal has provided much-needed clarity on the interpretive framework for termination clauses in employment agreements.

In Baker v. Van Dolder’s Home Team Inc., 2026 ONCA 568, the Court of Appeal resolved two (2) consolidated appeals that had produced inconsistent results at the Ontario Superior Court regarding the enforceability of without cause provisions allowing termination “at any time” or “at any time and for any reason”.

The impugned language in the without cause termination provisions in the two (2) employment agreements at issue were virtually identical. In Baker v. Van Dolder’s Home Team Inc., 2025 ONSC 952, the inclusion of the words “at any time” was held to be inconsistent with the Employment Standards Act, 2000 (“ESA”). It was unenforceable because it could be read as permitting termination in instances prohibited by the ESA, such as at the conclusion of an employee’s statutory leave (s. 53) or in reprisal for attempting to exercise a right under the ESA (s. 74). However, in Li v. Wayfair Canada ULC, 2025 ONSC 2959, a provision permitting without cause termination “at any time and for any reason” was held to be valid and enforceable, because the employment agreement, as a whole, sought to limit to the minimum statutory entitlements under the ESA.

The Court of Appeal unanimously held that a without cause termination provision containing “at any time” or “at any time and for any reason” language is not, on its own, inconsistent with the ESA. Similarly, the Court of Appeal found that a for cause termination provision containing a reference to the common law principle of “just cause” is also not automatically inconsistent with the ESA, particularly where it continues to confirm that the employee will still be entitled to their ESA termination entitlements where applicable. Importantly, the decision clarifies the relevant legal principles governing the interpretation of termination provisions in employment agreements: termination clauses must be read with a common sense view of what is intended by the provision, rather than through a literal and isolated analysis that manufactures ambiguity where none exists.

In short, when considered in context, the termination provisions in both employment agreements reflected an objective intention of the employers to provide Mr. Baker and Mr. Li with the minimum statutory entitlements under the ESA. The provisions were thus valid and enforceable.

This Focus Alert will provide an overview of the Court of Appeal’s interpretive framework for termination clauses in employment agreements, and will also provide some key takeaways for employers, ending with our view on this important decision.

Interpretative Framework

The Court of Appeal provided the following interpretative framework, based on established principles endorsed by its own jurisprudence as well as the Supreme Court of Canada:

1. Employment Agreements are Special – Recognition that employment agreements must be interpreted differently to reflect the bargaining power of the relevant parties.
2. Context and Mutual Intentions Matter – Determining the meaning of a termination provision is still an exercise in contractual interpretation, with the goal being to understand the objective intentions of the parties by reviewing the relevant language as a whole.
   
   1. In this decision, the Court is favouring a shift away from technical and legalistic formulations and towards a “practical, common-sense approach” that focuses on the objective intention of the parties.
   2. The overriding concern is to ascertain what the parties would have reasonably understood their words to mean and to ensure the parties’ objective intention is not thwarted by strict rules of interpretation.
   3. To achieve this objective, courts must read the contract and termination provision(s) as a whole, giving the words used their ordinary and grammatical meaning.
3. Words Cannot be Read in Isolation – No “Magic Words” Approach – Courts should avoid a legalistic “magic words” approach whereby the use of certain words considered in isolation will necessarily determine the legal effect of a contractual provision.
4. No Ambiguity Without Reasonable Competing Interpretations – A contractual provision is not ambiguous merely because it is possible to identify multiple potential or hypothetical interpretations. Genuine ambiguity only arises where there are two (2) or more reasonable but differing interpretations considered in the context of the entire employment agreement. Moreover, courts should not strive to find an ambiguity where none reasonably exists.

Key Takeaways for Employers

1. Termination clauses should be interpreted as a whole, understood in light of the clear intention of the provision, rather than focusing on isolated words. The decision reinforces traditional principles of contractual interpretation. Courts should seek to give effect to objectively expressed intentions and avoid reading contractual language in isolation in an effort to invalidate otherwise ESA-compliant termination provisions. Furthermore, context prevails over “magic words”. Language such as “at any time” or “for any reason” will not, on its own, render a termination provision unenforceable.
2. Referencing ESA entitlements remains acceptable and effective. Employers may validly incorporate ESA minimum standards by reference and are not required to reproduce or explain the statutory regime in detail, provided the employment agreement clearly preserves the employee’s minimum ESA entitlements. Also, repeated references to ESA compliance and language preserving statutory minimum entitlements can be powerful indicators that the employer intended the employment agreement to comply with the ESA.
3. Courts should not manufacture ambiguity. A termination provision is not ambiguous simply because multiple hypothetical interpretations are possible. Ambiguity arises only where there are two (2) or more reasonable competing interpretations when the contract is read as a whole.
4. Well-drafted with cause provisions remain enforceable. A contractual definition of just cause that is broader than the statutory “wilful misconduct” standard will still be enforceable if the employment agreement clearly preserves the employee’s minimum statutory entitlements under the ESA.
5. Careful drafting remains essential. While the decision is favourable to employers, it does not validate all existing termination clauses. As examples, provisions that purport to deny ESA notice, severance pay, benefit continuation, or other minimum statutory entitlements remain vulnerable to challenge.
6. A standalone “minimum standards” clause may be an additional effective tool. The Court of Appeal relied on the fact that Mr. Baker’s employment agreement – which repeatedly stated that the employer intended to comply with the ESA – also contained a standalone “minimum standards” clause, which provided that the employer would, at all times, comply with the ESA, and that the ESA would prevail over any inconsistent contractual term. While such a clause is not required, it does, reinforce the parties’ objective intentions to comply with the ESA as part of the interpretative framework exercise.

In Our View

This decision is a welcome development for employers. It brings much-needed clarity to the question of the enforceability of termination clauses. In recent years, Ontario courts have heavily scrutinized termination provisions and, in many cases, have found them unenforceable based on highly technical and isolated interpretations of particular words or phrases. Here, the Court of Appeal emphasized a common-sense approach, confirming that termination provisions must be interpreted by reading the text of the employment agreement as a whole, with a view to identifying what the parties objectively intended. That said, employers should remain cautious when drafting termination provisions and continue to review existing employment agreements periodically. Termination provisions should be assessed to ensure they are internally consistent, clearly preserve ESA minimum standards, and reflect an objective and coherent intention to comply with applicable employment legislation.

For more information, please contact Kyle Shimon at 343-996-4932 or Samara Belitzky at 613-404-4285.