The Fettered Right to Utilize an Unfettered Right to Terminate a Service Contract

by Michael Cremasco | Mar 15, 2019

On May 7, 2018, the Ontario Court of Appeal released Mohamed v. Information Systems Architects Inc., 2018 ONCA 428, a case that dealt with the circumstances of terminating a fixed-term contract, and whether a seemingly unfettered contractual right to do so is limited by any other factors.

The plaintiff was retained by the defendant, ISA, to provide consulting services pursuant to an “Independent Consulting Agreement” (“ICA”) for a period of six months from November 2, 2015 until May 31, 2016. The project in question was with Canadian Tire. The defendant’s agreement with Canadian Tire included a term that the defendant would not deliver a consultant who had a criminal record, unless Canadian Tire gave its consent.

Before the ICA was signed and before he began work for Canadian Tire, the plaintiff informed the defendant that he had a criminal record and agreed to a background security check. A few days later, the plaintiff again disclosed his criminal record to the defendant in a declaration form. The next day, he began work for Canadian Tire.

One month later, the background security check came back, which unsurprisingly disclosed that the plaintiff had a criminal record. Upon receiving a copy, Canadian Tire asked the defendant to replace the plaintiff. On December 10, 2015, the plaintiff was terminated by the defendant, even though the plaintiff asked to be considered for a different role. In terminating the plaintiff’s contract, the defendant relied on paragraph 11.III of the ICA:

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.

The plaintiff commenced an action against the defendant for breach of the ICA, claiming the full amount of the of contract. The action proceeded to a motion for summary judgment, where Justice Perell awarded the full amount of the contract plus costs. His Honour found that the defendant had failed to use the termination clause in good faith, and thus the defendant had breached the duty of good faith in the performance of contracts.

The defendant appealed, arguing in part that his Honour made an error of law in his approach to the interpretation of the termination clause of the ICA. The defendant argued that that it was an error to refer to the good faith performance obligation in interpreting the termination clause when his Honour also found that “read literally, it appears that under the termination provision, [the defendant] has an unfettered right to terminate [the plaintiff’s] contract”

Feldman J. A. for a unanimous Court of Appeal agreed with that argument in form, but not with the end result:

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 case essentially reinforces the risk that come with fixed-term contracts for service. Termination clauses are difficult to enforce unless they are ironclad, and even the most ironclad termination clause is subject to the employer operating in good faith. In this case, just because it may have been in the defendant’s “best interest” to terminate the plaintiff, the surrounding circumstances provided necessary context to that termination. A contractual right to terminate at will is not completely unfettered, and the facts of each specific termination need to be reviewed in their entirety.