Common sense restored: Baker/Li reshapes the law on termination clauses in Ontario

For years, Ontario termination clause litigation has wreaked havoc on an employer’s ability to rely on their written employment agreements, including those drafted by highly competent employment counsel. Decisions that interpreted single words or sentences in a manner that was never intended and defied common sense resulted in counsel stretching their imaginations when drafting employment contracts to ensure that an obscure, hypothetical, and unlikely ESA violation would not prove fatal to an otherwise well-drafted termination clause.

On August 6, 2026, the Ontario Court of Appeal put an end to that approach.

In Baker v. Van Dolder’s Home Team Inc.; Li v. Wayfair Canada ULC[1], the Court rejected the hyper-technical interpretive methodology that “ignores entirely the overriding concern of modern contractual interpretation” and confirmed that contextual, purposive interpretation governs the enforceability of termination clauses. The decision arose from two appeals involving virtually identical contractual language, including the phrase “at any time,” that produced contradictory results below. In Baker, the motion judge invalidated the clause; in Li, a different judge upheld it. The Court of Appeal resolved this inconsistency definitively, finding both provisions enforceable and ESA-compliant.

For employers and employment counsel, Baker/Li provides something sorely lacking in this area: predictability. Language that many practitioners had abandoned (“at any time,” “for any reason,” “sole discretion,” broad contractual definitions of just cause, and ESA saving clauses) has now been expressly endorsed by Ontario’s highest trial-level appellate court.

The interpretive framework

The Court articulated a five-part interpretive framework[2] synthesizing established Supreme Court of Canada and Court of Appeal principles. Though characterized as “far from being novel,” its clear articulation and direct application to termination clauses is significant:

1. Employment contracts are special: They have “many characteristics that set [them] apart from the ordinary commercial contract,” including the importance of employment to dignity and self-worth, the power imbalance between employers and employees, and employees’ lack of bargaining power.

    

2. The ESA is remedial and s. 5 prevents contracting out: Courts have favoured interpretations that encourage employers to draft ESA-compliant agreements, and where a termination clause could reasonably be interpreted in more than one way, courts should prefer the interpretation benefiting the employee.

    

3. The modern approach to contractual interpretation is practical and common-sense: It focuses on the objective intention of the parties in light of the words used and surrounding circumstances, reading the contract as a whole and giving words their ordinary and grammatical meaning.

    

4. Courts must avoid a legalistic “magic words” approach. Words cannot be read in isolation: “the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.”

    

5. A provision is not ambiguous merely because multiple hypothetical interpretations can be identified: Genuine ambiguity arises only where there are two or more reasonable interpretations in context; courts should not strive to find ambiguity where none exists.

What language is now safe?

“At any time” and “for any reason”

The phrase “at any time” was the central battleground. Following Dufault[3], numerous motion judges had held this language inconsistent with the ESA because the statute prohibits termination at certain times (e.g., during statutory leave) or for certain reasons (e.g., as a reprisal). The Court rejected this reasoning comprehensively:

“Read in context, this wording simply reflects a mutual intention that a without cause termination will be valid and legally effective regardless of when it occurs. But the use of this wording is not intended to render legally effective a termination that is expressly prohibited by the ESA.”

Interpreting such language as authorizing statutory violations would be “self-defeating” and would expose the employer to “far more draconian consequences” including reinstatement and fines of up to $100,000. The Court observed that numerous prior decisions enforced “at any time” provisions without any party raising this argument: “presumably because it simply never occurred to any party to advance such an argument or...it was regarded as too implausible to be worth raising.”

Similarly, “for any reason” is not inconsistent with the ESA. Given the parties’ “scrupulous intention to comply with the ESA, it is illogical to read the inclusion of the words ‘for any reason’ as somehow expressing a contrary intention.” These words simply mean the employer need not give a reason for terminating employment.

The Court’s reasoning also strongly supports “sole discretion” language, citing decisions upholding “for any reason” or analogous phrases including “at its sole discretion.”

ESA saving language and with-cause provisions

One of the most practically significant aspects of Baker/Li is the Court’s robust endorsement of ESA saving language. Mr. Baker’s contract provided that the employer would “at all times, comply with the Employment Standards Act” and that the ESA “shall prevail” over any inconsistent term. The Court found this “confirms the objective intention that, at the time the contract was formed, Van Dolder would comply with the ESA” and expressly approved referential incorporation. Contracts may validly define entitlements by reference to the ESA without reproducing its text.

The with-cause analysis is equally significant. Recent decisions Dufault[4], De Castro[5], and Rahman[6] invalidated with-cause provisions that denied employees all notice and compensation for conduct meeting common law just cause but not the ESA’s higher “wilful misconduct” standard. The Court draws the critical distinction: a broad contractual definition of “just cause” does not invalidate a with-cause provision provided the agreement expressly preserves ESA minimum entitlements.

The Court also rejected the notion that a with-cause provision must explain to “regular employees” the difference between just cause and wilful misconduct, observing that “it is unclear how attempting to draft contractual language to describe these different legal concepts would enlighten ‘regular employees’.”

What this means for employers

1. Baker/Li restores common sense to termination clause interpretation. It does not dilute the ESA’s mandatory minimum standards. Instead, it makes clear that whether an employment contract is enforceable should depend on what the contract actually says, not on which judge happens to hear the case or how that judge interprets the law.

    

2. Ordinary language is not inherently fatal. Phrases such as “at any time,” “for any reason,” and “sole discretion” are not inconsistent with the ESA when the contract, read as a whole, demonstrates compliance with the ESA.

    

3. ESA saving language works. Robust minimum standards clauses are not a “band-aid” but persuasive evidence of the parties’ objective intention to comply with the statute.

    

4. Referential incorporation of ESA entitlements remains valid. With-cause provisions can use broad definitions of just cause, provided the agreement expressly preserves ESA minimums. The line between enforceable and unenforceable is whether the provision strips all entitlements or preserves statutory floors.

The bottom line

Although Baker/Li is a welcome return to orthodox principles of contractual interpretation and, to some extent, swings the pendulum back in favour of employers, it should not be treated as a universal endorsement of existing termination provisions.

Employers who rely on provisions that deny ESA notice, severance, or benefit continuation, or whose for-cause provisions fail to preserve ESA minimums, remain exposed. All termination provisions should therefore be reviewed for coherent, ESA-compliant drafting that reflects the interpretive approach underpinning the Court’s reasoning.

If employers need assistance with the review of employment agreements, a member of our Employment, Labour & Equalities Group would be happy to assist you.

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