Journal

Otherwise known as
Michael’s soapbox

2018-05-22T17:48:23+00:00 May 23, 2018|Employment Contracts, Employment Law|

Unfettered Right to Terminate a Fixed Term Contract Requires Good Faith and No Mitigation

The Ontario Court of Appeal released Mohamed v. Information Systems Architects Inc., 2018 ONCA 428 (CanLII) on May 7, 2018.  This case involved the termination of a fixed term contract.  The plaintiff (respondent) was engaged as an independent contractor from November 2, 2015 through to an anticipated end date of May 31, 2016.  The respondent was assigned to work at Canadian Tire.  There was a term in the contract between Canadian Tire and the appellant that it would not send any consultant who had a criminal record, except with Canadian Tire’s consent. 

On or about November 2, 2015, Mohamed told the appellant – before he signed the independent contractor agreement and before was assigned to the Canadian Tire project – that he had a dated criminal record from high school.  He began work at  Canadian Tire.  About a month later the criminal background check came back, and Canadian Tire told the appellant to replace the respondent. 

The company terminated the respondent’s contract on December 10, 2015 based on the following provision in the contract:

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. [Emphasis added.]

The respondent sued claiming 6 months damages represented the loss from the date of termination to the end of the term of the contract.

The judge awarded judgment to the respondent in the full amount of $82,540.92 plus $25,000 in costs.  The judge found that:

  1. the appellant 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. the respondent was an independent contractor; and
  4. the ICA was a fixed term contract, and based on this court’s decision in Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 (CanLII), 129 O.R. (3d) 677, the respondent was entitled to damages based on the balance of the fixed term contract with no duty to mitigate.

The company appealed.  It argued, among other things, that the judge erred in finding that there was an obligation to exercise the unfettered right to terminate the contract in good faith. 

The Court of Appeal dismissed the appeal and held:

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.

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. 

The Court of Appeal also agreed that, when terminating a fixed term contract there was no duty to mitigate.  A number of Court of Appeal support this conclusion including Fisher v. Hirtz, 2016 ONSC 4768 (CanLII), Bowes v. Goss Power Products Ltd., 2012 ONCA 425 (CanLII) and Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 (CanLII). 

Although the Court of Appeal would not unequivocally say this principle applied to all fixed term contracts of independent contractors, it was prepared to say that it applied in the respondent’s case because, for example, he had given up full-time employment to accept a fixed term arrangement for 6 months and that, by agreeing to an unfettered right to terminate by the appellant, he was giving up his right to damages for termination without cause.  It was reasonable for the appellant to expect that the unfettered right to terminate would only be exercised in good faith and when this didn’t happen, he could expect compensation to the end of the contract and mitigation was not required.

Conclusion

Quite frankly, independent contractor agreements are dangerous (the governments post-Bill 148 focus on misclassification of relationships is a case in point).  Fixed term contracts are extremely risky as cases like Benson and Mohamed clearly show.  The acceptance of the principle of good faith termination (even where the contract provides and unfettered right to do so) adds another wrinkle to the analysis.