



COURT OF APPEAL FOR ONTARIO

CITATION: Mohamed v. Information Systems Architects Inc.,
    2018 ONCA 428

DATE: 20180507

DOCKET: C64503

Feldman, Watt, Paciocco JJ.A.

BETWEEN

Mitchum Mohamed

Plaintiff (Respondent)

and

Information Systems Architects Inc. (ISA)

Defendant (Appellant)

James A. LeNoury and Raymond MacKinnon, for the
    appellant

Lorne Sabsay, for the respondent

Heard: March 14, 2018

On appeal from the judgment of Justice Paul M. Perell of
    the Superior Court of Justice, dated September 26, 2017, with reasons reported
    at 2017 ONSC 5708.

Feldman J.A.:

A.

Background

[1]

The appellant engaged the respondent to provide technological consulting
    services under an Independent Consulting Agreement (ICA) for a six-month
    project that had an anticipated start date of November 2, 2015 and an
    anticipated end date of May 31, 2016. In the ICA, the parties agreed that the
    respondent would be an independent contractor. The project was with Canadian
    Tire, whose agreement with the appellant included a term that the appellant
    would not send any consultant who had a criminal record, except with Canadian
    Tires consent. After agreeing to work full-time under the ICA, the respondent
    resigned from his permanent, full-time employment.

[2]

Around November 2, 2015, the respondent told the appellant  before he signed
    the ICA and before was assigned to the Canadian Tire project  that he had a
    dated criminal record from high school. He also agreed to a background security
    check. On November 4, he again disclosed his criminal record to the appellant
    in a declaration of criminal record form. On November 5, he began work at
    Canadian Tire, but when the security check report came back one month later disclosing
    the criminal record, Canadian Tire received a copy and, as a result, asked the
    appellant to replace the respondent. Although the respondent asked the
    appellant to consider him for other roles, the appellant terminated the respondents
    engagement on December 10, 2015, relying on para. 11.III of the ICA, which
    states:

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

I. ISA, at their sole discretion,
    determines the Consultants work quality to be substandard.

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

III.
ISA determines it is in
    ISAs 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. [Emphasis
    added.]

[3]

The respondent sued the appellant for breach of the ICA, claiming six
    months remuneration, that is, the full amount that would have been paid had
    the contract been completed, on the basis that the ICA is a fixed term contract
    where the respondent had no duty to mitigate his damages. Both parties moved
    for summary judgment, where the respondent asked the court to award damages for
    breach of contract, and the appellant asked the court to dismiss the action.
    Neither side took the position that a trial of any issue was required.

[4]

The motion judge awarded judgment to the respondent in the full amount
    of $82,540.92 plus $25,000 in costs. He made the following findings: 1) the
    appellant breached the duty of good faith performance of contracts by failing
    to use the termination clause in good faith; 2) in the alternative, the
    termination clause was void for vagueness; 3) the respondent was an independent
    contractor; and 4) the ICA was a fixed term contract, and based on this courts
    decision in
Howard v. Benson Group Inc. (The Benson Group Inc.)
, 2016
    ONCA 256, 129 O.R. (3d) 677, the respondent was entitled to damages based on
    the balance of the fixed term contract with no duty to mitigate.

[5]

The appellant appeals on the basis that the motion judge made extricable
    errors of law in his approach to the interpretation of the contract, and that
    he erred in law in finding that the termination clause was void for vagueness
    and in concluding that the respondent did not need to mitigate his damages or
    account for monies earned in mitigation.

B.

Issues

[6]

The appellants submissions raise three issues:

(1)

Did the motion judge make
    extricable errors of law in his approach to the interpretation of the termination
    clause of the ICA?

(2)

Did the motion judge err in
    finding that the appellant was entitled to terminate the ICA under para. 11.III
    but that it did not do so in good faith?

(3)

Did the motion judge err in law in
    finding that the ICA was a fixed term contract, and by applying the principle
    from this courts decision in
Howard v. Benson
that the measure of the
    respondents damages is the amount owing for the unexpired term of the contract
    with no duty to mitigate?

C.

Analysis

(1)

Did the motion judge err in his interpretation of the termination clause?

[7]

Because the issue before the court was the interpretation and
    enforcement of a non-standard form contract between the parties, on appeal, the
    principles articulated by the Supreme Court of Canada in
Sattva Capital
    Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 SCR 633 apply.
[1]
In
Sattva
, Rothstein J. explained at para. 50 that:

Contractual interpretation involves issues of mixed fact and
    law as it is an exercise in which the principles of contractual interpretation
    are applied to the words of the written contract, considered in light of the
    factual matrix.

[8]

As a result, significant deference is owed to the trier of fact on the
    findings regarding the interpretation of the particular contract. Justice
    Rothstein allowed, however, that there can be an extricable question of law,
    including the application of an incorrect principle, the failure to consider a
    required element of a legal test, or the failure to consider a relevant factor,
    that would still have to be answered correctly by the trier of first instance.

[9]

In this case, the motion judge found at para. 39 that: Read literally,
    it appears that under the termination provision, ISA has an unfettered right to
    terminate Mr. Mohameds contract. However, the motion judge then went on to
    say that by adding the
contra proferentem
rule to the contractual
    interpretation analysis, and by considering the doctrine of good faith in the
    performance of contracts from
Bhasin v. Hrynew
, 2014 SCC 71, [2014] 3
    S.C.R. 494, it was unclear whether the appellant could exercise its rights
    under the termination clause in an unfettered manner. He further found that the
    clause was vague and uncertain and therefore unenforceable, because it was
    illogical that the appellant would be required to give notice of termination if
    it was terminating the contract for breach, but not if it was terminating for
    one of the other reasons.

[10]

The
    appellant submits that the motion judge erred in law by referring to the
contra
    proferentem
rule and the good faith performance obligation in interpreting
    the termination clause, after finding that its meaning was clear when read
    literally. I would agree that this would have been an extricable error of law
    had the motion judge taken that approach.

[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 ISAs 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 Mr.
    Mohamed 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 Mr. Mohameds contract because the caselaw supported the
    respondents 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.

[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.
    That rule may be used only to resolve an ambiguity (see:
Consolidated-Bathurst
    v. Mutual Boiler
, [1980] 1 S.C.R. 888, at pp. 899-900), not to create one.

[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 respondents
    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 judges 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 judges 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.

(2)

Was the appellant entitled to terminate the agreement on the basis of
    para. 11.III of the ICA?

[17]

At
    para. 11, the motion judge accepted the evidence of the respondent on the
    motion that he understood the meaning of the termination clause and accepted it
    because he trusted ISA not to terminate the contract for a frivolous reason.
    In his discussion of good faith as an organizing principle in the performance
    of contracts, the motion judge referred to the respondents understanding that there
    would be an element of good faith in the exercise of the provision by the
    appellant, and found that this understanding was supported by the law from the
Bhasin
decision of the Supreme Court. He concluded that the appellant breached the ICA
    by terminating it in the way and the circumstances that he did.

[18]

I
    agree that 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.
    Although the motion judge did not state explicitly the basis for concluding
    that the appellant breached its good faith obligation, he had reviewed the
    facts and circumstances earlier in his reasons. I see no error in his
    conclusion.

[19]

Because
    the respondent disclosed his criminal record to the appellant right at the beginning,
    before signing the ICA and before commencing the project with Canadian Tire,
    and complied with all the requirements of the security check, the appellants
    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
    ICA. In my view, the motion judge made no error in concluding that the
    appellant breached its obligation to perform the ICA in good faith by
    terminating it under para. 11.III on the basis of the criminal record, without
    trying to secure Canadian Tires agreement to the respondent continuing on the
    project, and by not offering him any other consulting project.

(3)

Did the motion judge err by awarding damages based on the fixed term of
    the contract with no duty to mitigate?

[20]

This
    court recently held in
Howard v. Benson
that an employee under a fixed
    term contract whose employment is terminated without cause has no duty to mitigate.
    The court stated at para. 39 that where a contract provides either expressly or
    by implication for a penalty for early termination of the contract, that is the
    amount that is payable with no duty to mitigate, and in a fixed term contract
    of employment, absent a provision that provides otherwise, the penalty for
    early termination i
s by default the wages and benefits for the
    unexpired term of the contract
.

[21]

In
    his reasons, the motion judge found that the respondent was an independent
    contractor, not a dependent contractor or an employee, but that no matter his
    status, because the ICA is a fixed term contract, damages are based on the unexpired
    term of the contract with no duty to mitigate.

[22]

On
    the appeal, the appellant disputes that the ICA is a fixed term contract. It
    argues secondarily that the principle from
Benson
does not apply to an
    independent contractor. In response, the respondent renews his submission that
    he was not an independent contractor, as he had agreed in the ICA, but was instead
    an employee or a dependant contractor.

[23]

The
    motion judge specifically found that the respondent was an independent
    contractor, referring to the analysis in his recent reasons in the case of
Fisher
    v. Hirtz
, 2016 ONSC 4768. He was of the view, however, that regardless of
    how the respondents status as a worker may be characterized, the principle in
Benson
,
which followed and applied
Bowes v.
    Goss Power Products Ltd.
, 2012 ONCA 425, 293 O.A.C. 1, applies in the
    circumstances, because the ICA is a fixed term contract and the damages should
    therefore be based on the fixed term of the contract with no duty on the
    respondent to mitigate.

[24]

The
    appellants main argument is that the principle from
Benson
does not
    apply because the term of the ICA is not unambiguously framed as a fixed term contract:
    the start and end dates have some flexibility built in, plus the ICA was
    terminable by the appellant if Canadian Tire discontinued the project. I see no
    basis to find unreasonable the motion judges conclusion that neither the minor
    contractual flexibility in the commencement and end dates of the ICA, nor the
    possibility that the project could be discontinued, make the ICA a contract of
    indefinite duration. There is therefore no basis to interfere with his finding that
    it is a fixed term contract.

[25]

The
    next issue is, what flows from that finding in law? Should the damages in this
    case, where the respondent agreed to be hired as an independent contractor and
    not an employee, still be based on the fixed term provision with no duty to
    mitigate?

[26]

Without
    deciding whether the principle from
Benson
would apply to all fixed
    term contracts of independent contractors, I agree with the motion judge that
    it applies in the respondents specific circumstances. One of the rationales
    from
Bowes
and
Benson
for finding that the parties intended
    that compensation for breach of the agreement would be paid for the fixed term
    with no duty to mitigate is by analogy to a liquidated damages clause. A second
    rationale is ensuring fairness and certainty for workers.

[27]

In
    my view, those two rationales also apply on the facts of this case. As in
Benson
,
    the agreement that the parties made did not contemplate the situation that
    occurred. In
Benson
, the termination clause that the employer had
    relied on was struck out based on ambiguity, leaving the court to determine the
    intention of the parties on termination, based on the balance of the contract. Similarly
    in this case, the appellant had broad grounds under which it could terminate
    the ICA so that no damages would ever be payable. But what occurred instead was
    that the appellant breached the ICA by failing to terminate in good faith,
    thereby triggering a right to damages that was not contemplated by the
    agreement. The court is therefore again left to discern the intentions of the
    parties from the remaining provisions of the ICA and the surrounding
    circumstances.

[28]

The
    respondent gave up his permanent full-time job to accept the fixed term contract
    with the appellant, which provided full-time work but for six months. By specifically
    agreeing that his engagement could be terminated without any compensation when
    the appellant deemed it to be in its best interests to do so, the respondent was
    giving up his right to damages for termination without cause, just as the
    employee in
Benson
did by agreeing to a fixed term contract.

[29]

Although
    he was willing to accept that his engagement could be terminated with no
    payment when the appellant deemed it to be in its best interests to do so, the
    respondent expected, as he was entitled to do, that the appellant would only
    exercise its rights under the termination clause in good faith. When that did
    not occur, the respondent was entitled to damages. Although the contract does
    not provide for what damages would flow from a failure to terminate in good
    faith, based on the specific terms and circumstances of this contract, it is
    reasonable to infer that the parties intended that if the power to terminate
    was not exercised in good faith, then damages for breach would be based on the wages
    owed for the remaining term of the agreement, without a duty to mitigate.

[30]

I
    would therefore find no error in the motion judges decision to apply
Benson
in the circumstances of this case, or to award damages based on the balance of
    the term of the contract with no duty to mitigate.

D.

Result

[31]

For
    these reasons, I would find that while the conclusion reached by the motion
    judge that the termination clause is void for vagueness should be set aside,
    the result he reached that the appellant breached the ICA, that it is a fixed
    term contract, and that damages for breach are the amount owing for the unexpired
    term of the contract without deduction for mitigation, should all be affirmed.

[32]

I
    would therefore dismiss the appeal with costs fixed in the agreed amount of
    $10,000 for fees and disbursements, plus HST.

Released: K.F. May 7, 2018

K. Feldman J.A.

I
    agree. David Watt J.A.

I
    agree. David M. Paciocco J.A.





[1]

The
    motion judge referred to the ICA as a standard form contract, referring to a
    standard form used by the appellant. However, the ICA is not an industry-wide standard
    form contract within the meaning of
Ledcor Construction Ltd. v. Northbridge
    Indemnity Insurance Co.
, 2016 SCC 37, [2016] 2 SCR 23, at para. 25. The
    appellant conceded in oral argument that the contract is properly governed by
    the standard of review set out in
Sattva
.


