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Drafting

The Supreme Court of Canada informed us in Creston Moly Corp v. Sattva Capital Corp (2014) that, in contract interpretation, the overriding concern is to determine the intent of the parties and the scope of their understanding, giving words their ordinary grammatical meaning consistent with the surrounding circumstances known to the parties at the time of the contract formation. That is all well and good, assuming that the contract is properly drafted. Unfortunately, we see many contracts, some drafted by laymen and some, unfortunately, drafted by lawyers, that are almost incomprehensible. Looking at the ordinary grammatical meaning of words does not help much when the contract drafter can barely put together a sentence. What does one do when a provision in a contract makes no sense? The judge in Mohamed v. Information Systems Architects Inc. 2017 ONSC 5708 had to answer that question.

Background

An employer hired an employee (who was classified as an independent contractor, but could just as easily have accepted employment as an employee) to work as an information technology consultant for the employer’s clients.

Before the parties entered into an agreement, the employee informed the employer that, 17 years ago when in high school, he had been convicted of assault with a weapon. This information did not dissuade the employer from giving the employee a 6-month, fixed term services agreement, with a particular client in mind. The employee consequently resigned from his previous full-time job.

The employee started work for the client and managed to work for one week before the employer received its criminal background check of the employee. Not surprisingly, that check showed the very conviction of which the employer had already been informed. The employer forwarded the report to its client and the client, as was its right under its agreement with the employer, declined to have the employee work any longer on its IT processes. Instead of finding the employee another project, the employer terminated the agreement one week later.

The employee sued for the balance of the money due on his agreement, approximately $82,000, and brought a summary judgment motion. When asked, during his cross-examination on that motion, what revenue he had earned between the date of his termination and the end of the fixed term, the employee refused to answer the question. He took the position that he was not obligated to mitigate his damages arising from the agreement termination.

Termination Clause

The agreement between the parties contained the following termination provisions in which the employer was referred to as “ISA” and the employee was referred to as the “Consultant”:

“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.

2. ISA’s project with Customer gets cancelled, experiences reduced or altered scope and/or timeline.

3. ISA determines that it is in ISA’s best interest to replace the Consultant for any reason.

4. Immediately, upon written notice from ISA, for any breach of this Agreement by the Consultant.”

The employer relied on the termination provisions to justify its decision to terminate the employee. The judge held that the termination provisions were vague and uncertain and therefore of no effect. He made this pronouncement for two reasons, which, although discussed separately, were in reality conflated into one reason.

Ambiguity

The judge acknowledged that, read literally, the termination provisions gave the employer an unfettered and unqualified right to terminate the employee’s agreement. However, when he added into the mix the doctrine of good faith in the performance of contracts and the contra proferentem doctrine, he decided it was uncertain whether the employer could, in an unfettered manner, determine that it was in its best interests to replace the employee and terminate the agreement.

Although the judge did not mention it, the law has long held that, when a contract gives one party discretion to do something, then, unless stated otherwise in the contract, that discretion must be exercised reasonably. However, the judge did note that the employee was not disturbed by the termination provisions when he signed the agreement because he assumed that the employer would not terminate the agreement for a frivolous reason.

Illogical

The judge also held that the termination provisions were illogical and inconsistent and made no sense in operation (bad drafting). He noted that:

• under remedy #4, the employer must give notice to terminate for the employee’s breach of the agreement
• the length of the notice to be given is not specified and it is unclear why notice should be given to terminate for a breach unless to imply an opportunity for the employee to remedy it
• the employer does not need to give notice if

• • the employer’s project with the client is cancelled (remedy #2)
  • it is in the employer’s best interest (remedy #3)
  • the employee’s work is substandard (remedy #1)

• it is illogical to require notice when the employee breaches the agreement, but not to require notice when he provides poor work, which is just another kind of breach
• it is illogical to require notice to terminate when the employee breaches the agreement, but not to require notice when he has done nothing wrong

Remedy

The judge relied on two texts, by Fridman and McCamus. They state that if an uncertain term of a contract is essential to the contract itself, there is no enforceable contract. Conversely, if the uncertain provision in the contract is not essential, then that provision will be severed from the remaining portions of the contract and the contract will be enforced without reference to it.

The judge implicitly held that the termination provisions were not an essential part of the agreement because he severed those provisions, but enforced the remainder of the agreement.

Damages

The judge noted that, because the agreement was for a fixed term, it did not much matter whether the employee was categorised as an employee, dependent contractor, or independent contractor. Once the agreement was breached, the employee was entitled to the money remaining to be paid under the fixed term of the agreement.

The judge then relied on the decision in Howard v Benson Group Inc. 2016 ONCA 256 to conclude that the employee was entitled to be paid what he would have expected to be paid under the defined term of the agreement and that he was not obliged to mitigate. Accordingly, he was well within his rights to refuse to answer questions as to mitigation.

We find this last conclusion troubling. The law says that a fixed-term employee has the right to sit back, do nothing, and obtain the fruits of the contract until the end of its term. We cannot understand why an employee, who actually mitigates and obtains remuneration during the contract term, is allowed to keep both the money payable under the contract and the money received from mitigation.

Upshot

The employee was sympathetic; he had relied on the services agreement to terminate his prior employment and had been totally forthcoming with the employer regarding his criminal record. Accordingly, we suspect that the judge jumped on the poorly drafted termination provisions to provide the sympathetic employee with relief. Bad drafting has unintended consequences and, in this case, cost the employer a lot of money. The real pity is that we have seen drafting that is much worse.

Updated:

2018 ONCA 428

The Court of Appeal agreed with the employer that, once the motions judge determined that the clause on which the employer relied was clear on its face, he could not then say that, because of other contractual provisions and the contra proferentum rule, that the clause was vague or uncertain. However, the Court read the judge’s decision as one that relied solely on the organising principle of good faith in the performance of contracts applied to an already existing principle (i.e. there had to be an element of good faith or trust in the exercise of discretion). The Court agreed that the employer breached its obligation to perform in good faith by terminating the employment contract without trying to secure the client’s agreement to allow the employee to continue on the project and by not offering him any other consulting project. The Court held that mitigation was not necessary after the breach of a fixed term employment contract and that, in this case, it did not matter whether the employee was a true employee or a dependent or independent contractor. He had given up his permanent full-time job to accept the fixed term contract and it was therefore reasonable to infer that the parties intended that, if the employer did not terminate that contract in good faith, then damages would be based on the wages for the remaining term.

 

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Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.