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Employers Need to Exercise Good Faith in Termination

Before entering into an agreement, a party may wish to reserve the right to unilaterally terminate a contract for whatever reason it sees fit. The party can insert into the contract a carefully worded clause for that purpose (“Termination Clause”), but as the decision in Mohamed v. Information Systems Architects demonstrates, a Termination Clause will only be effective if it is executed in good faith.  

FACTS

The defendant, Information Systems Architects (“ISA”), hired the plaintiff, Mitchum Mohammed (“Mr. Mohamed”), as an Independent Consultant to work on a six-month project with Canadian Tire. ISA’s agreement with Canadian Tire had already specified that no consultant with a criminal record would work on that project without Canadian Tire’s prior consent.

Prior to signing an Independent Consulting Agreement (“Agreement”) with ISA, Mr. Mohamed agreed to undergo a background security check and disclosed to ISA the fact that he had a criminal record from high school. He even reminded ISA of his criminal record the day after he signed the Agreement, but ISA did not pass that information on to Canadian Tire.

Canadian Tire only learned of Mr. Mohamed’s criminal record a month after he had started working there, when it received results of his background security check. Canadian Tire sent Mr. Mohamed home and asked ISA to send another consultant.

In the Agreement, ISA had been careful to insert a Termination Clause permitting it to “replace the Consultant for any reason” if doing so was in “ISA’s best interest.” Relying on the Termination Clause, ISA decided to terminate its Agreement with Mr. Mohamed. ISA did not assign Mr. Mohamed to any of its other consulting projects.

Mr. Mohamed commenced an action against ISA. In a motion for summary judgment, he was awarded fixed-term damages of six months’ pay, i.e. the full amount of what he would have been paid had he been allowed to finish the project with Canadian Tire, plus costs. There was no deduction from his award for mitigation. The motion judge found that ISA had breached its performance of the contract by not using the Termination Claus in good faith. In the alternative, the motion judge ruled that the Termination Clause was void for vagueness. 

ONTARIO COURT OF APPEAL’S DECISION

The Court of Appeal set aside the motion judge’s conclusion that the Termination Clause was vague. Rather, the Court of Appeal found that the Termination Clause was unambiguous in giving ISA a “facially unfettered right to terminate the contract.” Nevertheless, the conclusion that ISA still had an obligation to exercise that “unfettered right” in good faith was upheld. This conclusion was based on the 2014 case of Bhasin v. Hrynew, where the Supreme Court of Canada ruled that parties have a bona fide obligation to perform contracts in good faith.

The Court of Appeal described Mr. Mohamed’s good faith performance and ISA’s lack thereof: Mr. Mohamed had diligently disclosed his criminal record before signing the Agreement and before starting work at Canadian Tire. He had also taken the background security check just as he had been instructed. ISA, on the other hand, did not ask Canadian Tire to allow Mr. Mohamed to complete his work on the project once he had been terminated. ISA did not even attempt to place Mr. Mohamed with any of its other clients.

Finally, the Court of Appeal upheld the motion judge’s finding that fixed-term damages were due. Regardless of Mr. Mohamed’s status as an independent contractor, the Agreement was for a fixed-term and Mr. Mohamed had expected ISA to exercise the Termination Clause in good faith only. Therefore, damages for the breach were based on wages owing for the remainder of the Agreement, and there was no duty to mitigate.  

OUR THOUGHTS

The above discussed ruling is in line with the Supreme Court of Canada’s decision in Bhasin. Parties entering into an Agreement can add clauses to preserve their rights, but there will still always be a duty to act in good faith when performing the contract. Therefore, even if it seems a party was merely exercising its rights under the contract, legal advice should be sought to check if legal recourse remains.  

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.