contract_employment

Right Decision: Using “Good Faith” in Lieu of Hard Line

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* The names in this article have been adjusted to initials to protect our client.

Would you rather count on “good faith” from your boss or know what can lose you your job and what can’t? Sabsay Lawyers recently won a favourable decision at the ON Court of Appeal in the area of contract law, right on the verge of employment law, that brings this question to the forefront.

Facts of the case

In brief, here is a summary of the facts underlying 2018 ONCA 428 (CanLII). A company hired our client on a part-time, independent contract basis, and he did well. They assigned him to a third party, and he did well working for that third party. Right at the beginning of the relationship, our client disclosed that he had a criminal record. He went so far as to say what the offense was that he was convicted of, when he was convicted, and to put the same information on his consent form to a security check. The company told him that it wouldn’t be an issue, hired him and assigned him to a third party. Then, after one month of working part-time and maintaining his full-time job, the company offered our client a full-time job with the same party. He quit his job and accepted the offer.

Within one week, the company terminated his engagement with the third party because, it said, the third party had found out about his criminal record and wouldn’t allow him to work for them anymore. Our client remained open to other assignments, but the company did not assign him to any other clients or give him any more work. So, our client sued for the wages he should have earned under the contract. Sabsay Lawyers advocated for him and won a decision at the ON Superior Court of Justice in his favour.

Decision at ON Superior Court of Justice

The summary judgment decision covers three essential points, among other findings. The Honourable Justice Paul M. Perell found:

  1. The company breached a duty of good faith by failing to exercise good faith in its application of the termination provisions.
  2. The termination provisions on which the company relied were void for vagueness.
  3. The agreement was a fixed term contract. Therefore, the plaintiff had no duty to mitigate. The damages owed to him were the wages that should have been paid if the contract had been fulfilled.

The company (“the Appellant”) appealed, and the ON Court of Appeal upheld points one and three. That meant that our client won. Nevertheless, point two bears a closer look.

Termination provisions: Ambiguous or clear?

Here are the termination provisions at issue:

11.0 TERMINATION 

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

I. [the Appellant] at their sole discretion, determines the Consultant’s work quality to be sub-standard.

II. [the Appellant]’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.

III. [the Appellant] determines that it is in [its] best interest to replace the Consultant for any reason.

IV. Immediately, upon written notice from [the Appellant], for any breach of this Agreement by the Consultant.

(2017 ONSC 5708 (CanLII) at para 10)

Perell J found in favour of the plaintiff’s position. He wrote:

“[T]he termination provision is vague and uncertain. The provision is illogical and inconsistent and it makes no sense in operation. Visualize, under paragraph 11, ISA must give notice if it terminates for a breach of the Agreement by M.M. How much notice is not specified and why notice should be given in order to terminate for breach is unclear unless one is to imply an opportunity for M.M to remedy the breach. In contrast to the provision for termination with notice, under paragraph 11, no notice is required for ISA to terminate: (1) if it determines that M.M work quality is sub-standard, which rather sounds like another breach of contract; (2) if ISA’s project with the customer gets cancelled, experiences reduced or altered scope and/or timeline, which rather sounds like termination for frustration or external third party causes; or (3) if it is in ISA’s best interest to replace the consultant for any reason. It is illogical that the termination provision requires notice to terminate M.M contract where he breaches the contract but to not require notice when he provides poor work, which is just another kind of breach of contract. It is illogical that the termination provision requires notice to terminate M.M contract where he breaches the contract but requires no notice if he has done nothing wrong.

[44] I conclude that the termination provision in the Independent Consulting Agreement is unenforceable on the grounds of vagueness or uncertainty. The contract should be read as if it did not contain any termination provision.”

(2017 ONSC 5708 (CanLII) at paras 43-44)

The Court of Appeal did not agree. It concluded:

[14] First, having found that the meaning of the termination provision was clear when read literally, there was no basis to apply the contra proferentem rule…

[15] Second, having found the meaning of the termination clause to be clear, the subsequent conclusion that the clause is vague and uncertain because of the differing notice requirements is inconsistent, and does not bear logical scrutiny. The motion judge identified no basis on the record for concluding that it was not the intention of the parties to require notice of termination only where the respondent’s engagement was being terminated for breach of the ICA, or that the clause could not be implemented as it reads.

[16] The result of finding two extricable errors of law in the motion judge’s finding that the termination clause is unenforceable is that the finding cannot stand and must be set aside. However, nothing ultimately turns on this conclusion, because of the motion judge’s other finding that the appellant was obliged to exercise its rights under para. 11. III of the ICA in good faith and that it breached the agreement by failing to do so.”

-Emphasis added

(2018 ONCA 428 at paras 14-16)

Good faith

The Honourable Justice Kathryn N. Feldman wrote for the Court of Appeal:

although the appellant had a facially 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.”

(2018 ONCA 428 at para 18)

An employment law blog post aptly translated this to common parlance. “[I]f you have the right to terminate at will, you have to use that power in good faith.”

(Sean Bawden, “Unfettered Right to Terminate Contract Must be Exercised in Good Faith: ONCA” (Ottawa: 14 May 2018) online: Labour Pains) 

For anyone looking at their contract (or asking their lawyer to look at their contract) and finding broad termination provisions, the decision may lead to mixed feelings. It upholds as clear the termination provision that says:

the contract offeror can terminate an engagement at any time, without notice, if it “determines that it is in [its] best interest to replace the Consultant for any reason.”

Nevertheless, the Court of Appeal comes to the conclusion that is fair. It does so on the basis of the doctrine of good faith in the performance of contracts from Bhasin v. Hrynew2014 SCC 71 (CanLII), [2014] 3 S.C.R. 494. Feldman, J.A. wrote, for the Court of Appeal:

[11] However, a close reading of the reasons shows that in the impugned paragraphs (paras. 39-40), the motion judge was not interpreting the termination clause to change its literal meaning. Rather, he was assessing the main issue in the action, whether the appellant failed to exercise its right to terminate under the clause in good faith, applying the organizing principle of good faith performance of contracts from Bhasin.

[12] At para. 39 of his reasons, the motion judge specifically identified the principle of good faith as “an operative principle in the performance of contracts” – not a principle applicable to the interpretation of contracts. Applying the principle of good faith to the performance of the termination provision, he concluded at paras. 39-40 that the principle “qualifies ISA’s rights to terminate without cause”, such that the appellant could not “simply, and in an unfettered way, determine that it is in their best interest to replace M.M and then terminate the contract”. He added at para. 42 that the appellant was “mistaken in thinking that it had an unfettered right to terminate M.M contract” because the case law supported the respondent’s understanding that “there was some element of good faith or trust in the exercise of the provision”. The motion judge then went on to find that the appellant breached the ICA by not acting in good faith when it exercised its rights under the termination provision.

[13] Having made the finding of breach, the motion judge nevertheless went on to find, essentially in the alternative, that the termination clause was void for vagueness. I would agree with the appellant that the motion judge made two extricable errors of law in the application of the principles of contractual interpretation in reaching this conclusion.

Essentially, the takeaway is, the contract-offeror (i.e. the contracting party standing in the place of an employer) must exercise its right to terminate in good faith. This is sound reasoning and a valid way to get to the right decision. However, if independent contractors or employees could always rely on good faith on the part of employers, they wouldn’t wind up in court in the first place.

Editor’s Note: The original post titled “Contracts in the Court of Appeal: Right Decision: using “Good Faith” in lieu of hard line” was published on May 18, 2018, by Roselyn Kelada-Sedra. It can be found here.


Roselyn

Roselyn Kelada-Sedra’s purpose as a lawyer is to provide individuals, particularly artists, with an advocate who understands their world and their needs. She knows the challenges and priorities involved in collaborating to make something – having worked as an actor, writer and co-producer on a range of projects, from indie theatre to national TV.

As an associate at Sabsay Lawyers, Roselyn handles entertainment law in the areas of theatre, film, and television. She also practices civil litigation and criminal defence at Sabsay Lawyers. You can learn more about her practice and background at Roselyn.ca/law.

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