Legal News

Good faith duty fetters unfettered discretion to terminate independent contractor

The Ontario Court of Appeal has recently ruled that even where a party has an unfettered contractual right to terminate a contract, it must only act on that right in good faith. Such a decision represents an important milestone in the rapidly developing law respecting the overarching principle of good faith contractual performance, law which is only four years old since it was reorganized by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71.

In Mohamed v. Information Systems Architects Inc., 2018 ONCA 428, the defendant, Information Systems Architects Inc. (“ISA”) engaged Mitchum Mohamed to provide technological consulting services under an Independent Consulting Agreement (“ICA”) for a six-month project as an independent contractor. The project was for Canadian Tire. Canadian Tire and ISA had a contract that said ISA would not send a consultant with a criminal record without Canadian Tire’s consent. Mr. Mohamed agreed to work full time under the ICA and resigned from his full-time job.

Before he was assigned the Canadian Tire project – and before he signed the ICA – Mr. Mohamed told ISA that he had a criminal record from high school. He agreed to a background security check. He then worked at Canadian Tire for about a month, at which time the security check came back, and Canadian Tire received a copy. Canadian Tire asked ISA to replace Mr. Mohamed. Mr. Mohamed asked ISA to consider him for other roles. Instead, ISA terminated Mr. Mohamed’s engagement. ISA relied on the following clause in the ICA:

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

III. ISA determines it is in ISA’s best interest to replace the Consultant for any reason.

Mr. Mohamed sued, claiming damages for the balance of the fixed term contract. The judge of the Ontario Superior Court of Justice held that ISA breached the ICA when it terminated the engagement. The Court applied the organizing principle of good faith in the performance of contracts to the termination clause of the ICA, and concluded that the good faith duty embedded in the common law of contract “qualifies ISA’s rights to terminate without cause”, such that the appellant could not “simply, and in an unfettered way, determine that it is in their best interest to replace Mr. Mohamed and then terminate the contract”. In other words, despite having an apparently unfettered contractual right to terminate, the duty of good faith in fact restricted that right, and required ISA to act in good faith before terminating the contract.

The Ontario Court of Appeal upheld this conclusion, noting that Mr. Mohamed accepted the termination clause “because he trusted ISA not to terminate the contract for a frivolous reason”. The Court of Appeal agreed 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.” When ISA elected to exercise its right to terminate on the basis of Mr. Mohamed’s criminal record, without trying to convince Canadian Tire to agree to let him to continue or by not offering him another consulting job, ISA breached its duty of good faith.

The decision of the Ontario courts arguably represent an expansion or new characterization of the Supreme Court of Canada’s organizing principle of good faith in the performance of a contract. The Ontario courts have now presented a case where the overarching principle of good faith has become an actionable rule that can override the language in a contract which assigned broad discretion to a party to decide whether it wants to terminate a contract.

While one cannot predict whether this decision will find favour in British Columbia, organizations need to be cautious that completely unfettered discretion in a contract may yet invite judicial scrutiny of the exercise of that discretion.