In the recent Ontario Court of Appeal decision Mohamed v. Information Systems Architects Inc., the Court held that although a party may have an otherwise unfettered right to terminate a contract, it still has an obligation to perform the contract in good faith and therefore to exercise its right to terminate the contract only in good faith. The decision may have implications for contracting parties beyond the immediate context of this case.
Mohamed v. Information Systems Architects Inc.
Information Systems Architects Inc. (“ISA”) had engaged Mr. Mohamed as an independent contractor to provide technological consulting services for a six-month project with Canadian Tire. ISA’s agreement with Canadian Tire provided that ISA would not present any consultants who had a criminal record to Canadian Tire for consideration without Canadian Tire’s consent.
Before Mr. Mohamed signed his agreement with ISA, he advised ISA that he had a criminal record from high school. He also agreed to a background security check.
After he began work at Canadian Tire, ISA gave Canadian Tire a copy of its record check report disclosing Mr. Mohamed’s criminal record. Canadian Tire asked ISA to replace Mr. Mohamed. ISA terminated Mr. Mohamed’s agreement.
The agreement between Mr. Mohamed and ISA contained a provision that permitted ISA to terminate the contract if “ISA determines it is in ISA’s best interest to replace the Consultant for any reason.”
The Court stated that although ISA had an otherwise 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.
Because Mr. Mohamed disclosed his criminal record to ISA right at the beginning, before signing the contract and before commencing the project with Canadian Tire, and complied with all the requirements of the security check, ISA’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 contract. The Court held that “the motion judge made no error in concluding that [ISA] breached its obligation to perform the [contract] in good faith by terminating it … on the basis of the criminal record, without trying to secure Canadian Tire’s agreement to [Mr. Mohamed] continuing on the project, and by not offering him any other consulting project.”
Mr. Mohamed was entitled to damages equal to the amount owing under the remaining term of the agreement, with no duty to mitigate.
Some Take Aways
While this case involved a fixed-term consulting contract that did not provide for any notice for termination, it may have implications for contracting parties beyond a pseudo- employment context.
As a result, when considering exercising a discretionary right under an agreement, such as a right to terminate for convenience, contracting parties in any context may now want to consider the implications of the duty of good faith.
Since a court will likely assess whether a party acted in good faith contextually based on the facts and circumstances, contracting parties may now also be motivated to document their internal decision-making processes so that they can readily explain the rationale for their decisions. They may also want to maintain those documents for a period to assist in defending against a charge of not acting in good faith.
This article is not to be relied on as legal advice. The views expressed are those of the writer and do not necessarily represent the views or opinion of the Ministry of the Attorney General or the Legal Services Branch of the Ministry of Municipal Affairs and Housing.
Any article or other information or content expressed or made available in this Section is that of the respective author and not of the OBA.