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Right to terminate BUT in good faith

In this case, a failure to terminate in good faith ended in damages for the breach of contract.

terminate in good faithIn the recent case of Mohamed v. Information Systems Architects Inc., the Ontario Court of Appeal confirmed that even an “unfettered” right to terminate an independent contractor must be exercised in good faith.

Background

The Appellant, Information Systems Architects Inc. (“ISA”), engaged the Respondent, Mitchum Mohamed (“Mohamed”), to provide technological consulting services under an Independent Consulting Agreement (“ICA”) for a six month project. The project was with Canadian Tire (“the Project”), whose agreement with ISA included a term that ISA would not send them any consultant with a criminal record without their consent.

After agreeing to work full-time under the ICA, Mohamed resigned from his permanent, full-time employment. Before signing the ICA and before being assigned to the Project, he disclosed to ISA that he had a criminal record from high school. He also agreed to a background security check and disclosed his criminal record in ISA’s declaration of criminal record form.

A month after starting the Project, Canadian Tire received the results of his security check which revealed his criminal record. As a result, they asked ISA to replace him. ISA did so and then terminated the agreement based on the following termination clause in the ICA:

“This agreement and its Term shall terminate upon the earlier occurrence of:

I. ISA, at their sole discretion, determines the Consultant’s work quality to be substandard.

II. ISA’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.

III. ISA determines it is in ISA’s best interest to replace the Consultant for any reason.

IV. Immediately, upon written notice from ISA, for any breach of this Agreement by the Consultant.”

Consequently, Mohamed sued for breach of the ICA and was awarded damages in the amount of $82,540.92. The motion judge made the following findings:

  1. 1. ISA breached the duty of good faith in the performance of a contract by failing to use the termination clause in good faith;
  2. 2. in the alternative, the termination clause was void for vagueness;
  3. 3. Mohamed was an independent contractor; and
  4. 4. the ICA was a fixed term contract, and based on the Court of Appeal’s decision in Howard v. Benson Group Inc., Mohamed was entitled to damages based on the balance of the fixed term contract with no duty to mitigate.

ISA appealed.

Decision

The Court of Appeal found that the motion judge made “extricable errors of law” in his approach to the interpretation of the termination clause of the ICA. Firstly, the motion judge applied the contra proferentem rule, despite concluding that the termination provision was clear when read literally. Secondly, having found the meaning of the termination clause to be clear, the motion judge concluded that the clause was “vague and uncertain”.

Despite these errors of law, the Court of Appeal agreed with the conclusion reached by the motion judge. It held that:

although the appellant had a facially unfettered right to terminate the contract, it had an obligation to perform the contract in good faith and therefore to exercise its right to terminate the contract only in good faith.

The Court of Appeal wrote as follows:

[19] Because the respondent disclosed his criminal record to the appellant right at the beginning, before signing the ICA and before commencing the project with Canadian Tire, and complied with all the requirements of the security check, the appellant’s reliance on the criminal record to terminate the contract one month later was not a good faith exercise of its rights under the termination clause of the ICA.

Although Mohamed was willing to accept that the ICA could be terminated with no payment when ISA deemed it to be in its best interests to do so, the Court held that he had a reasonable expectation, that ISA would only exercise this right in good faith. That did not occur, so he was entitled to damages.

Further, although the contract did not provide for what damages would flow from a failure to terminate in good faith, based on the specific terms and circumstances of the contract, the Court held it was reasonable to infer that the parties intended that damages for this type of breach would be based on the wages owed for the remaining term of the agreement, without a duty to mitigate.

Takeaways

This decision confirms that termination clauses will not be voided where there is no good reason to do so. More importantly, however, the Court of Appeal confirmed that based on Bhasin v. Hrynew, the duty of good faith in contract extends to the exercise of a party’s otherwise unfettered right to terminate a contractor agreement.

Authored by Stuart Rudner and Anique Dublin (Law Clerk)

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Stuart Rudner, Rudner Law

Employment Lawyer and Mediator at Rudner Law
Stuart Rudner is a leading HR Lawyer, mediator and a founding partner of Rudner Law, a firm specializing in Canadian Employment Law. At Rudner Law, their approach is simple. They want to understand your circumstances, your concerns, and your goals. They will then ensure that you understand the legal regime along with your rights and obligations. Once that is done, they work with you to design a cost-effective strategy that meets your needs. They want to be your trusted advisor.Read more
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