The Duty of Good Faith and Independent Contractors

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In a recent case from the Ontario Court of Appeal, Mohamed v. Information Systems Architects Inc., an independent contractor was awarded damages for the full term of his contract (six months). This was the case even though the consulting agreement contained a termination provision indicating that the contractor could be terminated at any time at the discretion of the company.

In this case, Information Systems Architects (“ISA”) hired the Plaintiff as an independent contractor under an Independent Consulting Agreement for a six-month project working on a project with Canadian Tire.   One of the requirements of the position was that a criminal record check be performed. At the initial stages and before he was assigned, the Plaintiff disclosed to ISA that he had a criminal record.  ISA placed him at Canadian Tire. After about a month of work, Canadian Tire discovered this fact and asked that he be replaced. As a result, ISA terminated the consulting agreement relying on paragraph 3 of the termination clause in the consulting agreement, which provided:

This Agreement and its Term shall terminate upon the earlier occurrence of:

 

  1. ISA, at their sole discretion, determines the Consultant’s work quality to be sub-standard.
  1. ISA’s project with Customer gets cancelled; experiences reduced or altered scope and/or timeline.
  1. ISA determines that it is in ISA’s best interest to replace the Consultant for any reason.
  1. Immediately, upon written notice from ISA, for any breach of this Agreement by the Consultant.

 

The Plaintiff sued ISA for the full amount of the contract. In finding in favour of the employee, the motion judge ruled that ISA breached the duty of good faith required in the performance of contracts. The Court of Appeal determined that while ISA had an express right to terminate the contract “for any reason”; it had an obligation to perform the contract in good faith. ISA breached its obligation of good faith by using paragraph three (3) of the termination clause on the basis of his criminal record which had been fully disclosed by the Plaintiff. ISA did not make any attempt to get Canadian Tire’s agreement for the Plaintiff to continue working on the project and did not offer him any other consulting work. As a result, the Court of Appeal awarded the Plaintiff the full amount outstanding under the fixed term contract.

This case affirms that independent contractor agreements will be subject to the duty of good faith that was recognized by the Supreme Court of Canada in Bhasin v. Hrynew in 2014 as a general organizing principle applicable to commercial contracts. Despite the contractual language which provided ISA with an unfettered right to terminate the agreement for any reason, it had an obligation to terminate the contract only in good faith. Organizations who hire independent contractors on fixed term contracts should be careful when ending independent contractor relationships before the end of the fixed term in the absence of good faith reasons for the termination, and clear contractual language supporting that decision. The case does not limit an organization’s right to have early termination provisions in independent contractor agreements, but it does require that those provisions be relied upon and exercised in good faith.