Case shows courts won’t let employers profit from bad faith terminations

Does an unfettered right to terminate still exist?

Perhaps not any longer. In Mohamed v. Information Systems Architects Inc., Ontario Court of Appeal Justice Feldman confirmed that an unfettered right to terminate must be exercised in good faith.

Mitchum Mohamed was retained by Information Systems Architects Inc. (ISA) to provide consulting services under an Independent Consulting Agreement (ICA) for six months.

Before he signed the ICA, Mohamed informed ISA that he had a criminal record dating back from high school. He agreed to a background security check and also disclosed his criminal record in a Declaration of Criminal Record form. One would think that that would be the end of it.

Mohamed was assigned by ISA to a project with Canadian Tire despite the fact that Canadian Tire’s agreement with them required that they not send any consultant with a criminal record, except with Canadian Tire’s consent.

A month later, when the security check report came back disclosing his criminal record, Canadian Tire asked ISA to replace Mohamed. ISA terminated Mohamed’s engagement, relying on a paragraph in the ICA permitting ISA to terminate when “ISA determines it is in ISA’s best interest to replace the Consultant for any reason.”

Mohamed sued for breach of contract and won, both at the Superior Court of Justice and on appeal. Madame Justice Feldman of the Ontario Court of Appeal brought together employmentl aw and contractual interpretation concepts, dismissed ISA’s appeal and awarded damages to Mohamed. Because Mohamed had disclosed his criminal record right away, before signing and before the Canadian Tire project, his employer’s reliance on his criminal record to terminate the contract one month later was not a good faith exercise of its rights under the termination clause.

In 2014, the Supreme Court of Canada declared that good faith was an organizing principle of contract law. This became known as the Bhasin (named after the appellant in the case) principle of good faith performance of contracts. The ISA case was the first time it was applied to the performance of a termination provision.

The court held that ISA failed to use the termination clause in good faith. ISA could not simply, in an unfettered way, determine that it was in its best interest to replace Mohamed and then terminate the contract — they breached the ICA by terminating him in the circumstances that it did, despite the wording of the contract.

Given that this is a new application of Bhasin principles, there are new implications for employers and employees alike. Employers will need to be even more explicit in contract drafting and specifically delineate what will permit the contract’s termination. And they will then have to exercise that right in good faith. Courts will not permit employers to profit from their bad faith terminations. For example, even if an employer has an otherwise enforceable provision restricting a terminated employee’s right to stock options, bonuses or other condiments of remuneration, bad faith could be seen to vitiate that clause.