Court of Appeal for Ontario
Date: May 7, 2018 Docket: C64503 Judges: Feldman, Watt, Paciocco JJ.A.
Between
Mitchum Mohamed Plaintiff (Respondent)
and
Information Systems Architects Inc. ("ISA") Defendant (Appellant)
Counsel:
- 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 Tire's 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 he 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 respondent's 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 Consultant's work quality to be substandard.
II. ISA's project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.
III. ISA determines it is in ISA's 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 court's 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 appellant's submissions raise three issues:
Did the motion judge make extricable errors of law in his approach to the interpretation of the termination clause of the ICA?
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?
Did the motion judge err in law in finding that the ICA was a fixed term contract, and by applying the principle from this court's decision in Howard v. Benson that the measure of the respondent's 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. Mohamed's 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 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 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. Mohamed's contract" because the caselaw 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.
[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 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.
(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 respondent's 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 appellant'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 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 Tire's 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 is "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 respondent's 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 appellant's 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 judge's 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 respondent's 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 judge's 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: May 7, 2018
"K. Feldman J.A."
"I agree. David Watt J.A."
"I agree. David M. Paciocco J.A."
Footnote
[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.