The enforceability of termination clauses in Ontario is the subject of many Court of Appeal decisions. In Mohamed v Information Systems Architects ("Mohamed"), the Ontario Court of Appeal held that an employer cannot rely on a termination provision where it does not exercise that termination provision in good faith. The Court of Appeal further held that the employer's breach of its duty of good faith was actionable even though the employer had not otherwise breached the contract.
In Mohamed, the defendant company, Information Systems Architects Inc. ("ISA") engaged the plaintiff, Mitchum Mohamed ("Mr. Mohamed") to provide technological consulting services as an independent contractor for Canadian Tire, one of ISA's clients.
Part of Canadian Tire's agreement with ISA was that it would not provide a consultant who had a criminal record without Canadian Tire's prior consent. So, when ISA hired Mr. Mohamed, it informed him he would be required to undergo a background security check, to which Mr. Mohamed agreed.
Before signing the Independent Contractor Agreement ("ICA"), Mr. Mohamed informed ISA that he had a dated criminal record. Mr. Mohamed again disclosed this fact when filling in a declaration of criminal record form. ISA made no objections and allowed Mr. Mohamed to begin work at Canadian Tire.
About one month later, Canadian Tire became aware of Mr. Mohamed's criminal record and requested that ISA replace Mr. Mohamed with another consultant. When informed of this, Mr. Mohamed asked ISA to consider him for other roles. Instead, ISA terminated him, relying on the termination provision in the ICA, which provided that:
This agreement and its Term shall terminate upon the earlier occurrence of:
- ISA, at their sole discretion, determines the Consultant’s work quality to be substandard.
- ISA’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.
- ISA determines it is in ISA’s best interest to replace the Consultant for any reason.
- Immediately, upon written notice from ISA, for any breach of this Agreement by the Consultant [Emphasis added by Feldman JA].
ISA argued that this provision gave it an unfettered right to terminate Mr. Mohamed at any time. Despite this, Mr. Mohamed sued ISA, arguing that the Defendant had a duty to exercise its right to terminate in good faith. The motions judge agreed, applying the organizing principle of good faith performance established in Bhasin v Hrynew, 2014 SCC 71.
In upholding this decision, Feldman JA, writing for the Court of Appeal, ruled:
"I agree that although the appellant had a facially unfettered right to terminate the contact, it had an obligation to perform the contract in good faith and therefore to exercise its right to terminate the contact only in good faith...."
Pointing to Mr. Mohamed's disclosure of his criminal record before signing the ICA and before commencing his project with Canadian Tire and his compliance with the security check, the Court of Appeal held that ISA's subsequent reliance on the criminal record in terminating the contract was not a good faith exercise of its rights under the ICA.
The Court then determined that the appropriate quantum of damages should be based upon wages for the remaining term of the contract, relying on Howard v Benson Group Inc, 2016 ONCA 256. Importantly, these damages are not subject to mitigation. However, the Court noted that it was not deciding whether it was always appropriate to apply the principle from Benson principle in cases involving independent contractors.
This case is notable in two respects. First, this decision reinforces that good faith is not only an organizing principle of contract law, but also a material term of employment agreements. Here, unlike other cases involving breaches of the duty of good faith, ISA did not breach the termination provision of the ICA. Its breach was its failure to exercise its rights under the termination provision in good faith. This case confirms that employers will be held liable for breaches of this implied duty even where there is no breach of an explicit term in the agreement.
Second, the Court confirms that independent contractors, in the appropriate circumstances, can be awarded damages based on the length of their fixed-term agreements, and that these damage awards will not be subject to a duty to mitigate. For some independent contractors on multi-year contracts, this could result in hefty damages if their contract is wrongfully terminated. However, given the Court's cautious approach to when it will be appropriate to award these damages, it remains to be seen what impact this decision will have.