Thought Leadership

A changing tide: The Ontario Court of Appeal adopts a common-sense approach to interpreting termination clauses and provides much-needed guidance

By Rick Dunlop and Jennifer Ronalds

There has been much uncertainty in recent years with respect to the enforceability of termination clauses in employment contracts. In Baker v. Van Dolder’s Home Team Inc., 2026 ONCA 568, released August 6, 2026, the Ontario Court of Appeal addressed two companion appeals[1] concerning the enforceability of termination clauses in employment contracts and provided a clearer interpretive framework for termination provisions.

Given that a properly drafted termination clause is necessary for an employer to limit, or rebut, the common law presumption that a dismissed employee is entitled to reasonable notice, this decision will likely have a significant impact on many employers.

Modern approach to contractual interpretation

The Court reaffirmed that employment contracts must be interpreted differently than ordinary commercial contracts, given the importance of employment to an individual’s dignity. The Court stressed that this remains an exercise in modern contractual interpretation: a practical, common-sense approach that seeks the parties’ objective intention from the words used, read as a whole and in light of the surrounding circumstances, rather than technical or legalistic “magic words” formulations.

Must be a real ambiguity

A termination clause is not ambiguous simply because more than one reading is conceivable; genuine ambiguity arises only where there are two or more reasonable but differing interpretations when the clause is considered in the context of the entire agreement. The Court emphasized that courts should not strain to create an ambiguity where none reasonably exists.

Hypothetical illegality is not enough

The fact that a literal reading of a clause could produce an illegal result in a hypothetical situation (such as a hypothetical conflict with employment standards legislation) does not, on its own, mean the parties objectively intended that result; the clause must still be read in its full context to determine what the parties actually intended.

“At any time” and “for any reason” do not necessarily authorize unlawful terminations

Both appeals turned on similar termination language. In the first contract, Mr. Baker’s, the employer could terminate employment without cause “at any time”; in the second, Mr. Li’s, the employer could terminate without cause “at any time and for any reason”. The terminated employees argued that, read literally, this wording permitted their employers to terminate them in circumstances expressly prohibited by law.

The Court rejected this argument and adopted a common-sense and practical approach to contractual interpretation. The Court focused on the wording and surrounding circumstances. Properly understood, “at any time” confirms that a termination without cause is permissible regardless of when it is effective, subject only to any contractual provisions to the contrary and any statutory obligations. Similarly, “for any reason” means the employer need not provide a reason when terminating without cause, not that the employer can terminate for a reason that is contrary to statutory obligations.

In Mr. Baker’s contract, the Court found it particularly helpful that the agreement contained a separate clause committing the employer to comply with the Ontario Employment Standards Act (the “ESA”) “at all times”.

In Mr. Li’s contract, the Without Cause Provision itself repeatedly tied every payment to what the ESA required, and expressly guaranteed that he would never receive less than his statutory minimum entitlements. In both cases, this reinforced that the termination language was not intended to override statutory protections.

Defining “just cause” is permissible, if the employment standards floor is preserved

The Court also confirmed that a with cause termination clause may define “just cause” for contractual purposes, even where that definition is broader than the wilful misconduct standard under employment standards legislation, as long as the employee’s minimum statutory entitlements are preserved regardless of how the contractual “cause” standard is met.

This distinction matters for Nova Scotia employers. The Nova Scotia Labour Standards Code, like the Ontario ESA, uses a wilful misconduct standard for statutory notice. With cause clauses here should not conflate that statutory threshold with a broader contractual or common law just cause standard.

The outcome

The Court allowed Van Dolder’s appeal, finding that both its Without Cause and With Cause termination provisions complied with the ESA, and dismissed Mr. Baker’s wrongful dismissal action. The Court dismissed Mr. Li’s appeal, upholding the lower court’s finding that Wayfair’s Without Cause Provision was enforceable.

What this means to employers

This is a helpful appeal court decision that will likely be given significant persuasive weight by other courts across Canada. That said, every jurisdiction has slightly different employment standards legislation, and the weight given to this decision will depend upon the jurisdiction.

Employers should take this opportunity to reflect on how their own employment agreements could be improved or defended in light of this decision, and to consider carefully the extent to which its lessons apply in their own jurisdiction.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the authors or a member of our Labour and Employment Group.

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[1] Baker v. Van Dolder’s Home Team Inc. , 2025 ONSC 952 and Li v. Wayfair Canada ULC. , 2025 ONSC 2959, respectively.