Canada: Good Faith And The Unfettered Right To Terminate – The Ontario Court Of Appeal Got It Right

Last Updated: June 25 2018
Article by Tara Vasdani

The Ontario Court of Appeal released its decision in Mohamed v. Information Systems Architects Inc., 2010 ONCA 248 on May 7, 2018. While some were quick to argue that an employer's unfettered right to terminate has been compromised, the Ontario Court of Appeal's ruling has much wider implications, and adds some spark to the employee-focused (think Bill 148!) landscape of 2017/2018.

The Respondent in this case, Mitchum Mohamed ("Mr. Mohamed"), was engaged by the Applicant, Information Systems Architects Inc. ("ISA") to provide technological consulting services as an independent contractor, for a fixed-term of six (6) months beginning November 3, 2015 through to May 31, 2016. The contract consisted of a project with Canadian Tire, whose agreement with ISA included a term that the latter would not send any independent contractors with criminal records to work for it, without Canadian Tire's express consent. Of note in this case is the fact that Mr. Mohamed had left permanent, full-time employment in order to fulfill the contract.

Prior to signing the employment agreement (or the Independent Consulting Agreement ("ICA")) with ISA, on November 2, 2015, Mr. Mohamed informed his employer of his criminal record and agreed to a background security check. In addition, he advised ISA of his criminal record in a declaration of criminal record form, on November 4, 2015.

Mr. Mohamed's project with Canadian Tire commenced on November 5, 2015. Approximately one (1) month into the project, as the security check results returned to Canadian Tire, Canadian Tire requested that ISA replace Mr. Mohamed.

In accordance with the ICA, ISA terminated Mr. Mohamed's employment on December 10, 2015. Relying on paragraph 11.III of the ICA, which provided:

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. [emphasis added]

Given the above, ISA terminated Mr. Mohamed's employment "for any reason".

Mr. Mohamed sued for breach of contract. He claimed the balance of the fixed-term contract, and costs. Both parties moved for summary judgment.

At the motion, Justice Perell awarded judgment to Mr. Mohamed, being the balance of the contract, and $25,000.00 in costs. He found as follows:

  1. Information Systems Architects Inc. breached the duty of good faith performance of contracts by failing to use the termination clause in good faith;
  2. In the alternative, the termination clause was void for vagueness;
  3. Mr. Mohamed was an independent contractor; and
  4. the ICA was a fixed term contract, and based on the Court of Appeal's decision in Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 (CanLII), 129 O.R. (3d) 677, Mr. Mohamed was entitled to damages based on the balance of the fixed term contract with no duty to mitigate.

The ISA appealed the decision. It argued that Justice Perell had made extricable errors of law in interpreting the contract, and an error in law in finding that the termination clause was void for vagueness. The employer also appealed the finding with respect to Mr. Mohamed's duty to mitigate.

The first question before the Court of Appeal was whether the motions judge had erred in his interpretation of the termination clause. The motions judge found that, when read literally, the termination provision provided ISA with an unfettered right to terminate. However, "by adding the contra proferentem rule to the contractual interpretation analysis, and by considering the doctrine of good faith in the performance of contracts from Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 S.C.R. 494, it was unclear whether the appellant could exercise its rights under the termination clause in an unfettered manner."

Justice Feldman, writing for the Court of Appeal, agreed with ISA in determining that the motions judge had made an extricable error of law. However, the Court went on to say that:

[11] ... a close reading of the reasons shows that in the impugned paragraphs (paras. 39-40), the motion judge was not interpreting the termination clause to change its literal meaning. Rather, he was assessing the main issue in the action, whether the appellant failed to exercise its right to terminate under the clause in good faith, applying the organizing principle of good faith performance of contracts from Bhasin.

[12] At para. 39 of his reasons, the motion judge specifically identified the principle of good faith as "an operative principle in the performance of contracts" – not a principle applicable to the interpretation of contracts. Applying the principle of good faith to the performance of the termination provision, he concluded at paras. 39-40 that the principle "qualifies ISA's rights to terminate without cause", such that the appellant could not "simply, and in an unfettered way, determine that it is in their best interest to replace Mr. Mohamed and then terminate the contract". He added at para. 42 that the appellant was "mistaken in thinking that it had an unfettered right to terminate Mr. Mohamed's contract" because the caselaw supported the respondent's understanding that "there was some element of good faith or trust in the exercise of the provision". The motion judge then went on to find that the appellant breached the ICA by not acting in good faith when it exercised its rights under the termination provision.

[13] Having made the finding of breach, the motion judge nevertheless went on to find, essentially in the alternative, that the termination clause was void for vagueness. I would agree with the appellant that the motion judge made two extricable errors of law in the application of the principles of contractual interpretation in reaching this conclusion.

[14] First, having found that the meaning of the termination provision was clear when read literally, there was no basis to apply the contra proferentem rule. That rule may be used only to resolve an ambiguity (see: Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at pp. 899-900), not to create one.

[15] Second, having found the meaning of the termination clause to be clear, the subsequent conclusion that the clause is vague and uncertain because of the differing notice requirements is inconsistent, and does not bear logical scrutiny. The motion judge identified no basis on the record for concluding that it was not the intention of the parties to require notice of termination only where the respondent's engagement was being terminated for breach of the ICA, or that the clause could not be implemented as it reads.

[16] The result of finding two extricable errors of law in the motion judge's finding that the termination clause is unenforceable is that the finding cannot stand and must be set aside. However, nothing ultimately turns on this conclusion, because of the motion judge's other finding that the appellant was obliged to exercise its rights under para. 11.III of the ICA in good faith and that it breached the agreement by failing to do so.

The second question before the Court of Appeal was whether ISA was entitled to terminate the agreement on the basis of paragraph 11.III of the ICA. The Court found that, where the motions judge had accepted the evidence of Mr. Mohamed stating that he understood the meaning of the termination clause and accepted it because he trusted his employer, Mr. Mohamed understood that there would be an element of good faith in ISA's exercise of the termination provision. This was supported by Bhasin v. Hrynew. As a result, ISA breached the ICA by terminating the agreement in the manner that it did:

[18] I agree 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. Although the motion judge did not state explicitly the basis for concluding that the appellant breached its good faith obligation, he had reviewed the facts and circumstances earlier in his reasons. I see no error in his conclusion.

[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. In my view, the motion judge made no error in concluding that the appellant breached its obligation to perform the ICA in good faith by terminating it under para. 11.III on the basis of the criminal record, without trying to secure Canadian Tire's agreement to the respondent continuing on the project, and by not offering him any other consulting project.

In the end, the Court dismissed ISA's appeal. However, the Court found that Justice Perell had made two extricable legal errors:

(1) having found that the meaning of the termination provision was clear when read literally, there was no basis to apply the contra proferentem rule; and

(2) having found the meaning of the termination clause to be clear, his Honour could not conclude that the clause was void for vagueness/uncertainty.

Despite these errors, the Court found ISA was obliged to exercise its termination right in good faith, and it breached the agreement by failing to do so. ISA's reliance on Mr. Mohamed's criminal record to terminate the contract, despite disclosure by Mr. Mohamed one month earlier, was not a good faith exercise of its rights, particularly where it had not tried to secure Canadian Tire's agreement to Mr. Mohamed's continued work on the project, and had not offered Mr. Mohamed another consulting project.

The Court held that although Mr. Mohamed was willing to accept that his engagement could be terminated with no payment when ISA deemed it to be in its best interests to do so, he expected, as he was entitled to do, that ISA would only exercise its rights under the termination clause in good faith. When that did not occur, Mr. Mohamed was entitled to damages.

Conclusion

The resounding theme of the last year has been stronger and a more sympathetic upholding of employee rights. Whether we observe it through the lens of Bill 148 , or the rise of human rights damage awards, the decision in Mohamed is indicative of a shift in the balance of power between both contracting parties in the employment relationship. The decision not only places the onus on an employer to exercise its rights in good faith, but, continues to offer support to employees who are too often placed into situations of contracts of adhesion.

In Bhasin v. Hrynew, the Supreme Court of Canada held that the new duty of honest performance should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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