Good Faith Obligations In Employment Agreements

July 03, 2018

Mohamed v. Information Systems Architects Inc. 2018 ONCA 428

                This recent decision from the Court of Appeal for Ontario has implied a good faith obligation on employers when exercising what would, at first glance, appear to be an unfettered contractual right to terminate.

                The basic facts were as follows.

                A company engaged an individual (the “Consultant”) to provide consulting services for a six month project. Under the terms of the ICA, the parties agreed that they would be independent contractors. The project was with Canadian Tire. The agreement between the company and Canadian Tire included a term that the company would not send someone who had a criminal record, unless Canadian Tire consented.  Before the Consultant signed the ICA and before he started on the project, he disclosed the fact that he had a criminal record relating to an incident when he was in high school. The company allowed the Consultant to start the project, but when Canadian Tire discovered the criminal record about a month later, it insisted that the Consultant on the project be replaced.  The company then terminated the Consultant’s engagement under the ICA relying on the termination provisions which included the following:

“This agreement and its Term shall terminate upon the earlier occurrence of:…

III. (the Company) determines it is in (its) best interest to replace the Consultant for any reason.”

         The Consultant successfully sued and was awarded damages equivalent to the balance of the payments under the ICA. The judge at first instance based his decision, in part, on the view that the termination clause was too vague to be enforceable. The Company appealed.

The Court of Appeal made the following determinations:
  • It disagreed with the judge at first instance that the termination clause was too vague. As far as it was concerned the clause was very clear.
  • Nevertheless, despite the clause’s clarity which, on its face, gave the company an unfettered discretion to terminate the contract, it had an obligation to only exercise that right in good faith.
  • Because the Consultant had disclosed his criminal record before signing the ICA and before starting the project, the company’s reliance on the termination clause was not, therefore, a good faith exercise of its discretion.
  • Though the court did not make a general rule with respect to all independent contractor agreements, it found that under this agreement, the Consultant was entitled to damages equivalent to the balance of the term of the contract without a duty to mitigate because:
    • the company breached the implied good faith obligation under the contract; and, therefore, the Consultant was entitled to damages; and
    • although there was nothing in the contract which stated what damages would flow from such a breach the court stated that it was reasonable to infer that the  parties intended the damages to be the amounts owing for the balance of the term of the contract without the duty to mitigate.
            Although this case dealt with an independent contractor agreement, I believe it has a wider implication for similar provisions in employment agreements. It also highlights the fact that even though an employment contract may seem to give an employer a very broad discretion to terminate the agreement , that discretion must not be exercised capriciously or in bad faith.
 
Jeffrey A.L. Kriwetz
E-mail: jkriwetz@garfinkle.com
Direct Line: 416.869.7618
 
 
*Please note: The views expressed in this article are those of the writer and have been provided for information purposes only. Nothing in this article should be relied on as specific legal advice in any particular case. For such advice, please contact the writer directly.
               
 

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