Before the Ontario Court of Appeal’s recent decision in Mohamed v Information Systems Architects Inc (“Mohamed”), it had always been assumed that a contracting party could rely on a contract’s termination clause to end the contract at any time and for any reason.  Considering the Court of Appeal’s decision in Mohamed, this no longer appears to be the case.  In Mohamed, the Court imported the duty of good faith, as set out in Bhasin v Hrynew (“Bhasin”), into a party’s reasons for terminating a contract.  Specifically, the Court found that a party may not exercise an unfettered contractual right to terminate a contract without a “good faith” reason.  While Mohamed involved an independent contractor and not an employee, nothing appears to prevent this ruling from applying to all contracts, including termination clauses found in employment contracts. 

Background

Information System Architects Inc. (“ISA”) hired Mr. Mohamed as an independent contractor for a fixed 6-month term to work on a project with ISA’s client, Canadian Tire.  Canadian Tire and ISA had an agreement that ISA would not provide contractors with criminal records.  Before signing an Independent Consulting Agreement (“the Agreement”) with ISA, Mr. Mohamed disclosed his assault charge from high school to ISA.  However, Canadian Tire did not learn of Mr. Mohamed’s criminal record until his security check report arrived a week after he started the project.  Canadian Tire promptly asked ISA to replace Mr. Mohamed. 

ISA removed Mr. Mohamed from the project and was unable to find him other work.  ISA terminated Mr. Mohamed’s employment, relying on the following termination clause in the Agreement:

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 sub-standard.

II. ISA’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.

III. ISA determines that 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.

Mr. Mohamed sued ISA for breach of the Agreement.  He argued that the termination clause was void for vagueness, so ISA could not rely on it.  Mr. Mohamed sought the remaining value of the contract – nearly $82,000 – for ISA’s breach. 

ISA argued that it lawfully terminated its relationship with Mr. Mohamed through its contractual rights in the Agreement.  The termination provision was not void and both parties understood it.    

The motion judge, Justice Perell, awarded judgment to Mr. Mohamed.  Justice Perell found that ISA breached the duty of good faith for not having “good faith” reasons to terminate Mr. Mohamed.   

ISA appealed the decision.  Amongst other grounds, ISA argued that Justice Perell erred in referring to the doctrine of good faith in interpreting the termination provision, which provided an unfettered right to terminate the contract for any reason.

Failure to Provide Good Faith Reason for Ending a Contract Will Result in Inability to Rely on Termination Clause

Justice Perell found that the termination clause gave ISA the unfettered right to terminate Mr. Mohamed’s contract for any reason.  However, Justice Perell also found that the doctrine of good faith from Bhasin “qualifies” this unfettered right, so that ISA cannot terminate Mr. Mohamed’s agreement without a “good faith reason.”  Thus, without a good faith reason, ISA could not rely on its termination clause.  The Court of Appeal agreed with Justice Perell. 

Implicit in Justice Perell’s finding that ISA could not rely on the termination clause is a finding that ISA’s reliance on Mr. Mohamed’s previously disclosed criminal record as the basis for termination was not in good faith.  The Court of Appeal agreed.  The Court of Appeal further held that ISA failed to perform the Agreement in good faith by terminating it on the basis of the criminal record, without trying to ask Canadian Tire to reconsider its request to remove Mr. Mohamed, and by not offering Mr. Mohamed other projects to work on.

The Court of Appeal went on to dismiss ISA’s appeal, and upheld Mr. Mohamed’s award of the remaining value of his fixed term contract.

Implications of this Case for Employers

Employers have always had the right to terminate employees without cause, so long as they provided reasonable notice or compensation in lieu thereof.  In Bhasin, the Supreme Court of Canada confirmed the principle of good faith in the performance of contracts, which requires contracting parties to have appropriate regard to the contractual interests of the other party.  This means a party cannot seek to undermine the other party’s interests in bad faith.   

The Mohamed decision suggests that employers may need a good faith reason to terminate a contract and in order to rely on a termination clause.  In Mohamed, ISA’s reason for terminating Mr. Mohamed’s agreement – the criminal record that ISA knew about upon hiring him – was not a good faith reason.  However, the threshold for what constitutes a good faith reason for termination remains unsettled.  Can an employer terminate an employee because they are not a “good fit” for the company?  Will the employer have to prove the employee was not a good fit?

This decision adds an additional layer of uncertainty to the enforceability of termination clauses in employment contracts.  For now, what is clear is that employers need to carefully consider their reasons for termination, regardless of the existence of an enforceable termination clause.