Case In Point
Must Exercise Termination Rights Under Independent Contractor Agreement in Good Faith, Appeal Court Rules
Date: June 27, 2018
In the recent case Mohamed v. Information Systems Architects Inc., the Ontario Court of Appeal determined that the appellant company failed to exercise its termination rights under an Independent Consulting Agreement (ICA) in good faith. As a result, they were liable to pay to the independent contractor (respondent) the amount owing for the remainder of the term of the ICA.
The respondent had left full-time employment when he entered into the ICA with the appellant, which required him to work on a project with a third party. That third party had specified that unless it otherwise consented, the appellant was not to send any consultant to it who had a criminal record. Prior to entering into the ICA, the respondent had disclosed to the appellant that he had a criminal record from high school. He then commenced work with the third party.
One month into his work, the third party received a security check, which revealed his criminal record, and asked that the respondent be removed. The appellant did so and then terminated the ICA based on the following termination clause in the ICA:
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 sub-standard.
- ISA’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.
- ISA determines that 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.
Specifically, the appellant company relied on paragraph 3 in the termination clause. The Court noted that although the appellant had a “facially unfettered” right to terminate the contract, it also had an obligation only do so in good faith. As the respondent had disclosed his criminal record to the appellant prior to signing the ICA, reliance on the criminal record to terminate the contract one month later was not a good faith exercise of its rights under the ICA.
With respect to the remaining months on the contract, the respondent was willing to accept that his engagement could be terminated without payment in accordance with the termination provisions (and specifically paragraph 3). However, the Court noted that i) when the right to terminate was not exercised in good faith and ii) when the ICA did not provide for what damages would flow from a failure to terminate in good faith, it was reasonable to infer that the parties intended damages to be based on the remaining wages, without a duty to mitigate.
This case is significant as it signals that courts will apply the duty of good faith in when exercising a termination right. It also underscores that, when entering into an independent contractor or consulting agreement, companies should ensure that termination provisions are clearly drafted to set out any entitlement owing should the agreement end prior to its full term.