Good faith required to terminate fixed-term contract early: Court

Ontario Court of Appeal warns employers: Exercising your rights under a termination clause in fixed-term contract requires good faith

In a recent decision, the Ontario Court of Appeal ruled that although a company had an unfettered right to terminate an independent contractor’s fixed-term contract, it had an obligation to exercise its right to terminate the contract only in good faith.

The contractor, Mitchum Mohamed, was engaged by Information Systems Architects (ISA) to provide technological consulting services under an Independent Consulting Agreement (ICA) for a six-month project from Nov. 2, 2015 to May 31, 2016. The parties agreed that Mohamed would be an independent contractor.

The contractor was hired to work for ISA on a project with Canadian Tire. An agreement between ISA and Canadian Tire included a term that ISA would not send any consultant who had a criminal record, except with Canadian Tire’s consent.

Around Nov. 2, 2015, before signing the ICA and before being assigned to the Canadian Tire Project, Mohamed informed ISA that he had a dated criminal record from high school. He also agreed to a background security check.

On Nov. 4, 2015, Mohamed again disclosed his criminal record in a form to ISA and on Nov. 5, he started working on the Canadian Tire Project. One month later, when a security check report came back, it disclosed his criminal record. A copy of this was received by Canadian Tire, and it then asked ISA to replace Mohamed. Accordingly, ISA terminated the ICA on Dec.10, 2015. ISA relied on a clause in the ICA that gave it an unfettered right to replace a contractor.

On appeal, the Court of Appeal agreed with ISA that the motion judge made extricable errors of law in his approach to the interpretation of the termination clause of the ICA.First, upon finding that the meaning of the termination provision was clear when read literally, there was no basis for the motion judge to apply the contra proferentem rule. Second, having found the meaning of the termination clause to be clear, the motion judge’s conclusion that the clause was vague and uncertain because of differing notice requirements was inconsistent.

Despite finding these two extricable errors of law, the Court of Appeal agreed with the conclusion reached by the motion judge that ISA was obligated to exercise its right under the termination clause in good faith and by failing to do so, it breached the agreement with the contractor.

Further, the Court of Appeal also held that although the contract did not provided for damages that would flow from a failure to terminate in good faith, it was reasonable to infer that the parties intended that if the power to terminate was not exercised in good faith, then damages for this breach would be based on the wages owed for the remaining term of the agreement, without a duty to mitigate.

This decision reminds employers and those who engage in independent contracts not only the importance of a properly drafted termination clause but also the need to exercise their rights under the termination clause in good faith. Similarly, employers that terminate for cause must also exercise this right in good faith.

For more information see:

  • Mohamed v. Information Systems Architects Inc., 2018 CarswellOnt 7099 (Ont. C.A.).

Shreya Patel is an articling student with CCPartners in Brampton, Ont. She can be reached at (905) 874-9343 ext. 226 or [email protected].

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