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CONSTRUCTION SUMMIT
2005
THE CONTRACTOR ASKS
“SHOULD I WALK OFF THE JOB?”
THE OWNER ASKS
“SHOULD I TERMINATE THE CONTRACT?”
Submitted by Stanley Naftolin, J.D., Q.C., Counsel
Goldman Sloan Nash & Haber LLP
-2-
INDEX
1. The Preamble
2. The Contract:
a)
Interpretation of Contract;
b)
Exculpatory Clauses in the Contract
3. Fundamental Breach:
a)
Rescission and Repudiation
b)
Fundamental breach vs. breach of fundamental term
4. Breach, Termination and Consequences:
a)
Breach By the Owner;
b)
Breach By the Contractor;
c)
Non-Completion of Contract
d)
Damages and Termination
5. Conclusions:
a)
Effect of Contractor Termination;
b)
Effect of Progress Payments and Failure to Pay
c)
Contracts – Entire or Otherwise
d)
Completion of Contract – Minor Deficiencies
6.
Some of the Case Law
7.
Historical Analysis of Some of the Cases
8.
Conclusion
-3-
Preamble
One of the most difficult questions for any construction lawyer or, for that matter, any
commercial lawyer, giving advice on contracts, is whether or not a breach of the contract
complained of, goes to the root of the contract, thereby allowing the other party to accept the
repudiation of the offending party of its obligations to perform under that contract. The
undertaking involved with respect to giving such advice requires a painstaking, factual
analysis of what has occurred to date, a detailed contract analysis, and in some instances,
trying to determine what the intentions of the parties were at the time of execution of the
contract. This aspect of the analysis becomes even more important when you come across
exclusion clauses which will be discussed later in this paper.
The Contract
It is frequently said, where there is a claim for damages, the best place to start is to
look at the contract. Surprisingly enough, it has been my experience that, in many instances,
the parties and their counsel frequently overlook many of the salient terms of the contract that
set out the protocol that one must follow in terms of dealing with the issue of claims, the
damages that subsequently flow and termination.
It is not uncommon to see one of the parties to the contract who seeks to terminate the
contract relying on what is called an “alleged repudiation” by the other party of its obligations
of performance under the contract. The alleged repudiation being the alleged breach of
contract by that party. It is important to determine and properly conclude that the failure to
perform, goes to the root of the contract and evidences that party’s intention to be bound no
longer.1
a)
Interpretation of Contract
Contract interpretation also becomes very important. It is said that a fundamental
breach is a breach that appears to be so fundamental that it permits the aggrieved party to
1
Alkok vs. Grymek et al, 67 D.L.R. (2d), 718
-4terminate the performance of the contract, in addition to entitling that party to sue for
damages. Some courts have used a strict rule of construction approach when dealing with the
terms of the contract and have stated a fundamental breach is found only through examining
the reasonable intentions of the parties at the time of the contract. 2 If that is the case, which
door do you go through? Pick the wrong door and suffer the consequences.
The question to be asked in all cases of incomplete performance is one of fact: the
answer must depend upon the terms of the contract and of course, the circumstances of each
case. It is for this reason, that is where the courts deal with the circumstances of each case,
that you, as counsel, must understand that the question assumes one of two forms – does the
failure of performance amount, in effect, to a renunciation by the party who makes default?
Does it go so far to the root of the contract as to entitle the other to say, ‘I have lost all that I
cared to obtain under the contract; further performance cannot make good the prior default.’? 3
Remember that a breach of a contract does not necessarily allow you, in law, to
terminate the contract. Depending upon the nature of the breach, one of the following may
occur:
a)
the breach gives the other party the right to rescind the contract, that is, to treat it as
having come to an end; or
b)
the breach may give rise to an action for damages only but does not terminate the
obligations of either party that arise pursuant to the contract.
Goldsmith, in his text Canadian Building Contracts 4 has stated that if the breach is so
serious and fundamental as to go to the root of the contract, the other party may elect to treat
the contract as at an end. If the breach is not so fundamental, that will only entitle the other
party to claim damages that he has suffered as a result of the breach but it will not enable that
party to escape from his own obligations under the contract. This is a critical distinction and
one which the client and counsel must keep in mind. Some of the obligations are vital to the
contract and as Goldsmith has stated, these are generally described as “conditions”. Those that
2
Photo Productions Ltd. vs. Securicor Transport Ltd. [1980] A.C., 827 (Decision of the House of
Lords)
3
Supra, (1)
-5are less important are known as “warranties”. Only breaches of conditions will entitle the
other party to treat the contract as at an end; whereas, a breach of warranty gives rise only to a
claim for damages. Conditions and warranties are dependant upon the intention of the parties
as set out in the contract document and the courts will determine, in each case, which
obligations fall into which category. If you are giving the advice, you must make that decision
when considering walking off the job or terminating the contract.
b)
Exculpatory Clauses in the Contract
Reviewing the contract may disclose numerous exclusion clauses, that is, the contract
may stipulate conditions, such as the failure to perform a particular obligation that would
entitle the innocent party to terminate the contract. This type of clause is known as a
“forfeiture” clause. For those of you who are familiar with the various construction contracts
that are being used, they frequently contain forfeiture clauses entitling one party or the other
to terminate the contract on the occurrence of certain events. Keep in mind that in order for
the forfeiture clauses to be properly enforced and to be relied upon, the protocol set out in the
contract must be strictly followed because if it is not and the contract is found to have been
improperly terminated, the aggrieved party would be entitled to damages for the improper
termination. This is why it is very important to review the contract and in particular, the
protocol required for the purpose of allowing one party or the other to terminate the contract.
In most cases, the ordinary rules of construction that apply to contracts are strictly
applicable to exclusionary provisions. Chitty on Contracts states that:
“if the clause is expressed clearly and unambiguously, there is no
justification for placing upon the language of the clause a strained
and artificial meaning so as to avoid the exclusion or restriction of
liability contained in it.”5
When dealing with exculpatory clauses, they are strictly construed and construed
against the interests of the party who drafted the document containing them. This is the rule of
4
5
Goldsmith, Canadian Building Contracts, [4th ed., Toronto: Thomson Carswell 1988]
Supra, n. (2) f the Photo Production Case at pages 846 and 851
-6“contra proferentem”. Cheshire and Fifoot, in their learned text, Law of Contract 6, have
stated:
“If there is any doubt as to the meaning and scope of the excluding
or limiting term, the ambiguity will be resolved against the party
who has inserted it and who is now relying on it. As he seeks to
protect himself against liability to which you would otherwise be
subject, it is for him to prove that his words clearly and aptly
describe the contingency that has in fact arisen.”
The Courts also consider as previously set out herein, the reasonable expectations of
the parties.7
You must be very careful when advising about termination of the contract in the event
that the parties did not follow the strict protocol as prescribed in the contract. If certain
protocol and terms of the contract have not been acted upon, one party may not be able to take
advantage of a particular contractual term which would allow them to terminate the contract
as a result of default by the other party. The courts have, in cases where the parties, by their
course of conduct, been deemed to have amended their written agreement so that it does not
represent their original intention, refused to enforce the agreement, even if the existing
contract requires changes in the agreement to be in writing. The courts have indicated that, in
those circumstances, they have the authority to refuse enforcement. 8
FUNDAMENTAL BREACH
The Supreme Court of Canada has stated that fundamental breach occurs:
“….. where the event resulting from the failure of one party to
perform a primary obligation has the effect of depriving the other
party of substantially the whole benefit that the parties intended
should obtain from the contract. Fundamental Breach represents an
exception to the rule that the contract continues to subsist and that
6
9th ed. at pages 152-153
Consolidated – Bathurst Export Ltd. vs. Mutual Boiler and Machinery Insurance Company, (1993)
1 S.C.R. 12 (SCC)
8
Shelanu Inc. vs. Print Three Franchising Corporation – Decision of the Ontario Court of Appeal,
64 O.R. (3d) 533.
7
-7the damages be paid for the unperformed obligations of both parties.
This exceptional remedy is available only where the very thing
bargained for has not been provided.”9
The difficult question to answer when giving advice to clients is, how do you
determine whether a particular breach is fundamental? Madam Justice Wilson in the case of
Beaufort Realties (1964) Inc. vs. Chomedey Aluminum Co. noted in her reasons for judgment
the following:
“…. Canadian Courts have tended to pay lip service to contract
construction, but to apply the doctrine of fundamental breach as if it
were a rule of law. While the motivation underlying the continuing
use of fundamental breach as a rule of law may be laudatory, as a
tool for relieving parties from the effects of unfair bargains, the
doctrine of fundamental breach has spawned a host of difficulties;
the most obvious is how to determine whether a particular breach is
fundamental. From this very step, the doctrine of fundamental
breach invites parties to engage in games of characterization, each
party emphasizing different aspects of the contract to show either
that the breach occurred went to the very root of the contract or that
it did not. The difficulty of characterizing a breach as fundamental
for the purposes of exclusion clauses, is vividly illustrated by the
differing view of the trial Judge and the Court of Appeal in the
present case.” 10
Professor S.M. Waddams has written extensively on the issue of fundamental breach
and he has stated that the doctrine of fundamental breach has many serious deficiencies as a
technique of controlling unfair agreements. His comments were related to the doctrine
requiring the Court to identify the offending provisions as “exemption clauses”, then to
consider the agreement apart from the exemption clause, to ask itself whether there would
have been a breach of that part of the agreement and then to consider whether that breach was
“fundamental”.
As can be seen from the references to the Supreme Court of Canada decision in Hunter
and the comments of Professor Waddams, counsel may have a difficult time in determining
9
Hunter Engineering Inc. vs. Syncrude Canada [1989] 1 S.C.R. 426
Beaufort Realties (1964) Inc. vs. Chomedey Aluminum Co., [1980] 2 S.C.R., 718
10
-8what has been a fundamental breach which would allow the offended party to the contract to
terminate the contract.
If a party’s breach is non-material, the non-breaching party’s duty to perform may be
suspended until the breach is remedied, or cured. However, a non-material breach will not
excuse performance by the non-breaching party. Only a material breach excuses the nonbreaching party from its contractual obligations. In order to determine whether a breach goes
to the root of an agreement, the Court must examine all of the circumstances surrounding the
contract, such as the statements and promises of both parties, which are often different in
nature and importance, as well as their uniqueness and meaning.11
The New Brunswick Court of Appeal in the case of McDonald vs. Migliore
12
references Cheshire and Fifoot, The Law of Contract, [9th ed. 1976] at pages 571 to 572 which
states as follows:
“of what nature then must a breach be before it is said to be called
‘fundamental’?
There are two alternative tests that may provide the answer. The
Court may find the decisive element either in the importance that the
parties would seem to have attached to the term which has been
broken or to the seriousness of the consequences that have in fact
resulted from the breach.”
There is an abundance of case law dealing with fundamental breach and whether
fundamental breach will allow the party who is affected by the fundamental breach to avoid
any exclusion clauses in the contract. We would then need to consider an argument based on
“fundamental breach” or, a breach “going to the root of the contract”. These expressions are
used in the cases to denote two different things, namely: (i) a performance totally different
from that which the contract contemplates (this is the reference to whether or not a
fundamental breach entitles a party to relief inspite of the exclusion clause); (ii) a breach of
Supra, n.1, See Mr. Justice Spence’s comments at page 456 where he sets out a passage which is
found in Anson’s Law of Contract (21 STEd.)
12
64 N.B.R. (2d.) 431
11
-9contract more serious than one which would only entitle the other party merely to damages
and which would entitle the party to refuse performance or further performance under the
contract and to claim for damages. As you can see, there is some confusion, but nevertheless,
the concept of fundamental breach still appears to be alive and well, albeit, confusing.
Since there appears to be two types of fundamental breach, it is important to note the
distinction between these two. One is a fundamental failure of consideration and the other is a
breach that repudiates the contract, thereby entitling the innocent party to accept the
repudiation and to refuse further performance of its obligations, [terminate the contract]
although it will be entitled to seek damages. There is a repudiation that is said to be a
rescission of the contract.
There are a number of types of breaches that have been found to be fundamental
breaches that I am aware of in construction law and they include; abandonment of the work
site by the contractor; owner’s eviction of the contractor from the work site; and failure to
make payments when payments are due pursuant to the terms of the contract. The latter is
probably the clearest fundamental breach of any deemed fundamental breach, 13 where the
Supreme Court of Canada in the circumstances of this case, felt that the refusal to make
progress payments constituted a fundamental breach of the contract regardless of any
exemption or exclusionary clauses in the contract.
Clients and counsel must realize that, if there is a termination or rescission, there is no
going back.
a)
Rescission and Repudiation
a)
The Supreme Court of Canada in Guarantee Company of North America vs. Gordon
Capital
14
expressed the distinction with respect to the term “rescission” and “repudiation”
and stated the following:
13
14
Supra, n. 10
[1999] 3 S.C.R., 423 (S.C.C.)
- 10 “repudiation, by contrast, occurs by words or conduct
invincing an intention not to be bound by the contract.
Contrary to rescission, which allows the rescinding party to
treat the contract as if it were void ab anitio, the effect of
repudiation depends on the election made by the nonrepudiating party. If the non-repudiating party accepts the
repudiation, the contract is terminated, and the parties are
discharged from future obligations, although rights and
obligations that have already matured are not extinguished. If
the repudiation is not accepted, the contract remains in
being for the future and each party has the right to sue for
damages for past or future breaches. Courts must be sensitive
to the potential for misuse of the term “rescission” and must
analyse the entire context of the contract and give effect,
where possible, to the parties’ intent.”
Once again, you can see in the Supreme Court of Canada where he indicated
that you must analyse the entire context of the contract to give effect to its terms
and the parties’ intentions.
Repudiation will relieve the party from future performance but repudiation preserves
certain of the contractual rights acquired before the repudiation. Therefore, a repudiatory
breach has important implications that may negate certain contractual obligations while, at the
same time, preserving other contractual obligations that are mutually intended to survive
repudiation. It all depends upon the analysis of the contract and the terms set out therein
coupled with what is deemed to be the intention of the parties.15
b) Fundamental Breach vs. Breach of Fundamental Term
It has been said that there may be a difference between fundamental breach and breach
of a fundamental term. Professor G.H.L. Fridman, Q.C., in his book, The Law of Contract in
Canada16 stated that “in order to characterize the kind of breach involved in any given
instance, regard must be paid to the promised performance in light of the expectations thereby
See “The Common Law Enforceability of Exculpatory Provisions in Canadian Construction
Contracts: The Divination of Intent – The Primacy of Commercial Reasonability” by R. Bruce
Reynolds [2004 The International Construction Law Review, p. 417 - 419]
16
The Law of Contract in Canada by G.H.L. Fridman, Q.C., Carswell, 2nd ed.[1986], pgs. 531, 534.
15
- 11 raised in the promisee, and the effects of non-performance upon those expectations. Thus, the
law becomes more interested in fundamental breach than in so-called fundamental terms.”
Professor Fridman went on further to state that the concept of fundamental breach has
been referred to as a breach in consequence of which the performance of the contract becomes
something totally different from that which the contract contemplates. This, of course, is
nothing new from what has previously been set out in this paper. It simply emphasizes the
nature of the breach that is required.
There are a litany of cases that go on to describe what the courts state was fundamental
breach. A fundamental breach in a number of cases has been defined as one which: a)
destroys the whole contractual substrata;
b) is undermining the whole contract;
c) is
involving a totally different performance of the contract from that intended by the parties; d)
is involving an event which deprives the innocent party of substantially the whole benefit
which that party was to obtain under the contract; e) entitles the innocent party to treat the
contract as repudiated.
Therefore, the notion of repudiation inherently refers to some act which anticipates the
due performance of the contract. As a result of this, it is confusing to define a fundamental
breach in terms of repudiation of a contract, although to bring the doctrine of repudiation or
anticipatory breach into play requires a breach, which undoubtedly qualifies as a breach. To
put it in simple terms, the party terminating the contract does so on the basis of the breach
committed by the other party, which breach is the repudiation of the contract by the defaulting
party which allows the other party to terminate. As I have said, it can be very confusing.
In any event, it is clear that it is a question of fact whether the breach complained of by
the innocent party amounts to a fundamental breach or some other kind of breach. And when
you look at fundamental breach, and as previously stated in my paper, that depends upon the
terms of the contract, the intended benefit to the innocent party, the purpose of the contract
- 12 and the material consequences of the breach. All of this is clearly set out in Professor
Fridman’s text.17
BREACH TERMINATION AND CONSEQUENCES
a)
Breach By the Owner
We now move on to what are the consequences of termination of the contract. The
only way to answer that question is to look at the case law that has developed over the years
and to examine the texts of some eminent authorities such as Goldsmith, Waddams and
Fridman. In that regard, Goldsmith, on Canadian Building Contracts18 hereinbefore referred
to, has stated in Chapter 5 of his book entitled Breach of Contract and under the heading
“Breach of Contract: By Owner”, and the sub-heading “Payment of Contract Monies”, the
following:
“A contractor is not, in the absence of some express provision in the
contract, entitled to payment until substantial completion of the
work. On completion ….. the owner must pay the agreed price. In
the case of defects in the work, he may have the right to set up a
counter-claim for damages to remedy the defective work, but he
cannot escape liability for payment of the price agreed upon.
Whether the owner is entitled to set off a counter-claim against his
obligations to pay the contractor, will depend on whether the two
claims are inextricably entwined and it would be unfair to permit the
contractor to be paid in the absence of a reduction to allow for the
counter-claim. In the case of contracts providing machinery for
interim payments, the owner must pay whatever amount has become
payable under the terms of the contract within the time
specified, or within a reasonable time, and failure to do so will
amount to a breach of contract.”
b)
Breach By the Contractor
17
Supra, n. 16
Supra, n. 4, Chapter 3, Breach of Contract, pp. 5-1 to 5-5 and pp. 5-10 to 5-15 under the headings,
“Breach of Contract: By Owner” and “Breach of Contract: By Contractor”
18
- 13 We then go on to look under the heading “Breach of Contract: By the Contractor”,
which states the following:
“Breaches of contract by the contractor relate almost exclusively to
performance of the work, since that is his principle obligation …..
apart from the question of non-completion and defective work, a
contractor is under an obligation equivalent to that of the owner not
to delay the work beyond any express period for completion and, in
absence of such a provision, to carry out the work with reasonable
expedition.”
c)
Non-Completion of Contract
Goldsmith goes on to say in his text under the heading “Non-Completion”, the
following:
“Apart from the fact that a contractor who fails to enter upon or
substantially complete his contractual obligations is not entitled to payment
of the contract price, failure to complete, either wholly or partially, is a
breach of contract.
It is not always easy to determine whether the owner or the contractor is
responsible for non-completion. For example, a contractor may be guilty of
a minor deviation from the specifications, and the owner may be
unreasonable in his demands for a guarantee to compensate for such
deviation. If the owner’s demands are disproportionate to the seriousness of
the deviation, his refusal to make payments as they become due will amount
to a repudiation of the contract which will entitle the contractor to abandon
the work.”
d)
Damages and Termination
In Chapter 6, “Remedies for Breach”, under the heading “Damages and
Termination”,19 Goldsmith states:
“As has already been noted, where a breach is of a term of the contract
which the parties have stated to be important or the guilty party has evinced
an intention no longer to be bound by the terms of the contract, that amounts
19
Supra, n. 4
- 14 to a repudiation of the contract, and the innocent party may accept that
repudiation and terminate the contract. A mere, trivial breach will not likely
amount to repudiation, and whether in any given circumstances, the breach
is sufficiently fundamental so as to amount to repudiation, is in every case, a
question to be determined in light of the terms of the particular contract.”
CONCLUSIONS
What does all this mean? As has been stressed during the course of this paper, the
terms of the contract and the intention of the parties is obviously very important. When is the
owner entitled to terminate the contract? It seems from the relevant authorities and the case
law that has developed, that the owner may be entitled to terminate the contract if it is
abundantly clear that during the course of the work its contractor is not willing or is able to
perform the work. This does not mean that mere bad or defective work will entitle the owner
to terminate the contract but in the event that the contractor’s work is so bad or is so defective
so as to amount, in substance, to a failure or refusal to carry out the contract work, this may
amount to a repudiation. Goldsmith certainly in his text has come to that conclusion.20
Having had a quick look at when an owner may be entitled to terminate, what does the
contractor look for with respect to the owner’s conduct which would allow the contractor to
terminate? If it appears that an owner has clearly repudiated the contract, meaning that the
contractor has come to the conclusion that the breach by the owner is a repudiation of the
contractual terms, the contractor then may accept the repudiation and terminate the contract.
He may also sue for any damages which he has suffered as a result of the owner’s breach
(repudiation). Again, the contractor must determine whether the actions taken by the owner
clearly amounts to a repudiation of the contract or do the owner’s actions merely point to a
breach of the contract which would only allow the contractor to claim for damages. Once
again, as the authorities have stated, every case will stand on its own merits and becomes a
question that must be determined in the light of the terms of the contract.
a)
Effect of Contractor Termination
- 15 -
If in fact the contractor terminates the contract, take note that an owner is excused
from any further obligations under that contract but he will be liable to the contractor for work
performed to the date of termination and in all likelihood, will be liable on a quantum meruit
basis.
Although it is not usual in building contracts for the contractor be paid a lump sum at
the completion of the project. In the absence of a partial payment, a contractor is not entitled
to any payment until the work has been completed. This is a critical distinction in terms of
what a contractor may be entitled to receive by way of compensation in the event that a
contract is terminated. Some contracts provide for payments for completion of separate stages
of the work to be done which would entitle the contractor to payment when that phase of the
work is completed. These payments are not strictly progress payments but, in fact, are
probably final payments in the sense that each phase of the work is a separate and complete
work in itself and upon completion of that stage of the work, it entitles the contractor to
payment. Progress payments, on the other hand, are payments made to the contractor during
the progress of the work on an agreed basis before the contractor has actually earned the right
to payment as a result of completion of the work. These payments of course are made on
account of the contract price but they are not, strictly speaking, instalment payments.
b)
Effect of Progress Payments and Failure to Pay
Where the contract sets up progress payments, a contractor is entitled to be paid those
payments properly calculated on the formula and protocol set out in the contract. Failure to
pay the contractor constitutes a breach of contract on the part of the owner and if the owner
fails to pay the contractor based on the terms of the contract with respect to that particular
progress payment that has been certified to be paid, that action by the owner will likely entitle
the contractor to regard the contract as having been repudiated by the owner and therefore, the
contractor would be entitled to terminate the contract.
20
Supra, n. 4, p. 6-4
- 16 -
c)
Contracts – Entire or Otherwise
I once again come back to the distinction in the contracts where, if the contract is an
entire contract, meaning all of the work must be completed before there is any entitlement to
payment, the contractor is not entitled to payment unless he has performed all of the work.
Therefore, when advising a contractor whether or not to terminate the contract, you must give
careful consideration to the terms of the contract with respect to the manner in which
payments were to be made. The right of payment depends on the terms of the contract and
therefore, if it is a lump sum contract, completion will be a condition precedent to the right to
payment. Although I am sounding like a broken record, once again, you must look to the
terms of the contract when making any decisions with respect to termination. Therefore, if it is
a lump sum contract providing for payment upon completion, the contractor must complete
before he is paid. If he does not complete, he may very well lose his right to payment for work
done pursuant to the terms of the contract.
d)
Completion of Contract – Minor Deficiencies
When I refer to completion of the contract, this is the term that is usually set out in the
contract but in fact, the courts and the authorities on the subject make reference to whether the
contract has been substantially performed. Trivial defects in the work for example, and minor
deficiencies do not amount to the work not being substantially complete. That said, that would
not relieve the contractor from remedying the defects or providing some form of
compensation to the owner for the cost of having the defects remedies.
Simply keep in mind that where failure to substantially perform the contract, it will be
a question of fact and one that will be required to be determined by the court. Nevertheless,
partial performance in these circumstances will not entitle a contractor to any payment unless
there is some specific provision found in the contractual terms.
- 17 SOME OF THE CASE LAW
A review of the relevant authorities was undertaken by Master David Sandler thus
providing me a sound basis for many of the authorities dealing with the principles of
repudiation, termination, compensation and consequences. In the case of Heyday Homes Ltd.
vs. Gunraj,21 Master Sandler was required to do a complete analysis of contract in that case:
what amounted to repudiation; what was the breach and was the breach fundamental in
nature? He also canvassed whether or not the action against the owner was justified and the
nature of the damages that flowed as a result of the actions taken by each party.
Master Sandler’s case reviews the case law relating to repudiation, breach,
fundamental breach and damages. The decision is under appeal but he goes through a history
of the case law. Although under appeal, in the writer’s respectful opinion, the Master’s
decision is right on. As a result of the appeal, it now raises the inconclusiveness of the state of
the law. It is a very important construction law decision and Master Sandler’s treatment of the
facts and his analysis of the applicable law amounted to a Herculean task that he undertook
and completed over a very lengthy period of time.
Master Sandler, in his more recent decision of Oleg Kaplun v. Sergei Mihhailenko et
al references his previous decision in Heyday and states that all of the cases that are
summarized show:
“that where each party to a contract is alleging fundamental
breach and repudiation by the other, the Court must determine which
party committed a substantial breach which amounts to a
repudiation, i.e., evidencing an intention no longer to be bound by
the terms of the contract. In making this assessment, the test is an
objective one, and even a direct or indirect intention by a party
allegedly in breach that it wished to continue the contract is not
necessarily conclusive in rebutting a finding of a repudiation of the
contract. A party may be bound to have repudiated a contract even
when the party honestly believes it wants to continue with the
contract to completion.”22
21
22
(2004) 31 C.L.R. 3rd., 66
Kaplun vs. Mihhailenko, 2005 CanLII 16625 (ON S.C.)
- 18 The Master, in the Kaplun case, further goes on to review the manner of termination
that was given and looked at whether or not the manner in which the contract was terminated
was in accordance with the contract provisions. This again highlights the reason why you
must follow the contract protocol in order to properly terminate a contract. A pre-condition of
the party exercising a right to terminate the contract may be provided for in the contract
document and must be strictly adhered to. This statement is not etched in stone and the
conduct of the parties throughout the course of the construction phase will come into play if
the parties generally did not comply with contract terms.
The Master, in the Kaplun case, goes on further to discuss what he calls “the second
central issue”, and asks “can the plaintiff, who has been found to have repudiated, recover
anything for the work he did?” If the plaintiff was in fundamental breach, can he recover
payment for any work that he has done and has not yet been paid for? If the plaintiff
contractor was in fundamental breach, certainly the plaintiff contractor cannot recover
damages for any loss of profit. In such a case, it would be the owner who would be entitled to
damages for breach of contract from the contractor who was in fundamental breach. The
Master goes on to analyse what is required in order for a plaintiff to recover anything if it was
found to have improperly repudiated the contract. You must also look at whether or not the
contract was “entire” or “divisible”. You must also look to whether or not the contractor
abandoned the contract and was there substantial completion in the event that the contract was
an entire contract or was there substantial completion of those clearly divisible portions of the
contract which specified payments to be made upon the completion of certain phases of the
construction. In the Kaplun case, the Master found that the contractor had not achieved
substantial completion of those parts of the work that were still in the contract and left to be
done. Such being the case, and based on the Master’s findings with respect to the facts of this
case, he ruled that the plaintiff contractor could recover nothing on the lien claim for unpaid
invoices, nor could the contractor claim for unbilled work actually done.
I often state that business decisions must be made. The legal world is often murky.
Therefore, it is a business decision vs. a legal decision. Sometimes business wins out and you
sit back and wait for the possible consequences that may arise as a result of the law.
- 19 -
Historical Analysis of the Cases
The first case that one must look to is the case of H. Dakin vs. d. Lee. 23 In this case,
the plaintiff was the builder suing for damages for payment for work done. The plaintiff
builder was to make repairs to a house for a lump sum relying on some specifications that
were provided. There was a finding that the work was substantially completed but there were
some minor defects. The trial Judge in that case held that the plaintiff could recover nothing
and that decision was appealed to the Divisional Court which stated that the builder could
recover unless, inter alia, the builder had abandoned the work and left it unfinished. The
Divisional Court did not find that to be the situation based on the
facts of the case. The Court ruled that the cost of correcting the defects would be deducted
from any amount owed to the builder. Therefore, the Court came to the conclusion that the
contract (the work to be performed pursuant to the contract) was completed except for minor
defects and deficiencies and as a result of that finding, the builder was entitled to receive
payment less the cost for rectifying the deficiencies. The Court also made it clear that if only
part of the work contracted for was done and the rest of the work was abandoned, that the
result would have been otherwise. That “otherwise” would mean that the plaintiff builder
would have recovered nothing and this is critical. This is one of the consequences that arises
in the event that the terms of the contract provide for a lump sum payment upon completion of
the work and the builder fails to complete. The builder probably recovers nothing.
This principle was clearly stated in the case of Hoenig vs. Isaacs24 where Lord Justice
Somerville at page 178 stated:
“In a contract to erect buildings on the defendant’s land for a lump sum,
the builder can recover nothing on the contract if he stops before the
contract is completed in the ordinary sense – in other words, abandons
the contract. He is also usually in difficulty in recovering on a quantum
meruit because no new contract can be inferred from the mere fact that
the defendant remains in possession of his land.”
23
[1916] 1 KB 566 (CA)
- 20 The critical issue as you can now see is whether there has been substantial compliance
with the contractual terms and again that becomes a question of fact for the court to
determine. Once again, that points out the dangers of terminating contracts unless you are
more than just reasonably satisfied that one or the other of the parties has committed a
material breach, which material breach by the offending party would be deemed to be a
repudiation of the contract allowing the innocent party to terminate the contract. Therefore,
when examining the situation, you may have to determine whether entire performance of the
contract was a condition precedent to payment. The courts have stated that that depends, once
again, on the true construction of the contract. Therefore, in examining the terms of the
contract, you must come to the conclusion that the contract would not be interpreted as an
entire contract thereby preventing a contractor from claiming payment as a result of only
part of the work being done which work did not amount to substantial completion of the
contract. The term “substantial completion” in this paper does not necessarily mean
substantial completion pursuant to the terms of the Construction Lien Act, but that would, in
my respectful opinion, be a good start in determining whether or not there has been substantial
completion of the contract.
I am not suggesting that you throw in the towel if the contract is not substantially
complete because there may be a way to convince a court that inspite of the terms of the
contract, that quantum meruit may apply. If the contract is, as stated herein, as a lump sum
contract and if the work has not been substantially performed and if there has been failure of
performance that goes to the root of the contract, e.g., if the work has only been half done or
the work is entirely different from that contracted for, then it is clear that no action will lie for
a lump sum payment. If the contractor in these circumstances is to be paid, he can only be
paid for what he has done if the owner caused the work to be incomplete or there is something
to justify the conclusion that the parties have entered into a fresh contract. Once again, this is
a question of fact and is often very difficult to determine until you hear both sides of the story.
This principle was clearly set out by Lord Justice Denning in the Hoenig case.
24
[1952] A All ER, (176) C.A.
- 21 In the case of Bradley vs. Horner 25, the contract was an entire one and there were no
terms allowing for progress payments. Therefore, the plaintiff could only recover if the work
was satisfactorily completed. In this case, the painter left the job when it had only half
finished the job and on the facts of that case, the court held that the plaintiff had abandoned
the job and therefore, could not recover for the value of the work that he did on a quantum
meruit basis.
The courts have, on occasion, found that where a contractor has abandoned the
contract, nevertheless, the Contractor was entitled to receive some payment inspite of the fact
that it may have been a lump sum contract. If the owner was found to have waived the
abandonment by having adopted the fruits of the contract insofar as it had been performed,
then the contractor may very well be allowed to recover the amount owing to it under the
contract less a deduction for the owner’s claim to repair defects or to complete the contract. In
that regard, you can refer to the case of Tanenbaum vs. Wright-Winston.26
The Supreme Court of Canada in the case of Alkok vs. Grymek et al,27 in reviewing the
contract that provided for payments by installments, dealt with the terms of the contract and in
particular, where the contractor failed to provide proof that subtrades had been paid which
was a requirement set out in the contract before an instalment was to be paid by the owner to
the contractor. In this case, two payments were made without proof of subcontractor
payments. The owner took the position that the contractor was in breach and terminated the
contract. This was a lien action and the trial Master said the contractor (plaintiff) could
recover nothing and that the owner was entitled to terminate because of the refusal of the
contractor to provide the evidence of payment set out in the contract. The Master was of the
view that this went to the root of the contract.
The Court of Appeal overturned the Master’s decision and stated that the proof of
payment of the subtrades was a condition precedent to payment and that there was no doubt
25
26
27
(1957) l0 D.L.R. (2d) 446 (Ont. C.A.)
[1963] 2 O.R. 320 (HCJ)
Supra, n.1
- 22 the owner was entitled to require such proof before it had to pay but that the contractor was
entitled to continue with the work. At this stage, the Court of Appeal said the owner was not
in a position to terminate for failing to provide proof. If the owner had made the request in
specific terms that the contractor must provide proof of payment, and the contractor refused
to proceed, then the Court of Appeal, interestingly enough, came to the conclusion that this
would have given the owner grounds for termination and since this did not occur, the owner
was found to have improperly terminated the contractor. The Court of Appeal concluded that
the contractor could not recover payment based on the contract because of its provisions and
its non-compliance. The Court of Appeal held that the contractor did have a right in law to
claim upon a quantum meruit for the value of work done over and above the payments made
but unfortunately, there was no evidence given at the trial as to the value of the work done.
The Supreme Court of Canada rejected the contractor’s “cost to complete” approach
with respect to damages but did find that there was merit in a quantum meruit award by
assuming that the value of the additional work at each completed stage corresponded to the
amount agreed to in the contract and that that had to be paid on completion of that stage.
In the Alkok case, there does not appear to be any material reference to the fact that
since the owner paid the contractor two payments absent receipt of proof of payment to the
subcontractors, that the owner was deemed to have waived that condition and therefore, was
obliged to continue to pay absent the provision of the proof of payment to the subcontractors.
This is an argument that may have had some merit had it been argued, but it does not appear
to have been argued. It is interesting to note that the Court did recognize that the owners paid
two installments and part of the third, refusing to pay the balance of the third and any
subsequent payments that were due until such time as the contractor satisfied the owner’s
architect, that payments to the subcontractors had been made. The Court stated that the owner
was entitled to require that the contractor continue its work upon the contract and that the
owner was entitled to refuse to pay the contractor until he satisfied the provision. The Court
further stated that if the contractor had refused to proceed on that basis, then the contractor
would have been in breach of the provision of the contract going to the root thereof, and the
owner would have been entitled to terminate the contract.
- 23 -
I find it interesting that the Court would determine that failure to provide the
declaration stating that the subtrades had been paid would be a material breach entitling the
owner to terminate. The Court did state that the contractor did not indicated by word or
conduct an intention to so act or not to be bound in every way by the contract. As a result, the
contractor did not give the owner the opportunity to terminate the contract on the ground that
the contactor had been in breach of a term going to the root. The Court stated that it was true
that the contractor was in breach of the term requiring it to satisfy the owner’s architect that
the subcontracts had been paid but that this term was a mere ancillary term which could be
enforced by the owner simply refusing to make payments until they were satisfied. Therefore,
as a result of the owner not specifically stating “produce the proof of payment or we are
terminating”, that they did not show sufficient grounds to support their termination of the
contract. Therefore, what this case does is set out what should have been done by the owner in
these circumstances and even if there was a breach, the owner must take steps to crystallize
the breach so that he would be legally entitled to terminate as a
result of the proper demands being made on the contractor.28
In another case where the subcontractor withdrew its forces because of non-payment
by the contractor, the court found that the subcontractor was the innocent party who had
terminated the subcontract because of a fundamental breach by the general contractor in not
paying amounts due. The subcontractor in this case was entitled to recovery subject to some
deductions for some deficiencies. See the case of Wells Construction Ltd. vs. Thomas Fuller
Construction (1987)29
The problem with giving advice of a general nature becomes evident when one
reviews the case of Coba Industries Ltd. vs. J. Adams Dev. Corp.30 This is a case where the
contractor admittedly abandoned the contract midway through and yet the Court of Appeal
held that it was entitled to recover damages for work it had invoiced until the date of the
28
29
Supra,n.1 at page 721
22 C.L.R. 144 (Nfld. C. S.)
- 24 repudiation less set off for owner’s damages for breach of contract. The contract did provide
for payments to be made as the work progressed and thirty-two (32%) percent of the work had
been completed when the contractor stopped work because it had run into financial problems.
It repudiated the contract and that repudiation was accepted by the owner. The Court of
Appeal stated that there having been an abandonment of the contract part way through, in the
circumstances of this case, the contractor was entitled to sue for unpaid instalments that the
contract provided for. The owner, of course, would have rights of set-off for damages it
sustained for rectifying deficiencies and completing the contract. Once again, and as I have
stated throughout, it appears that this decision was based as a result of a detailed analysis of
the contract and based on all of the facts as they were put forward. This is the kind of case that
highlights the difficulty that you have in determining whether the contractor should walk off
or the owner should terminate.
In another case, the contractor contracted to build a house for the owner. There was
substantial delay by the contractor in pursuing the work and the owners terminated the
contract. The contractor alleged a repudiation by the owner and the contractor sued for work
done and not paid for. The owner’s position was that they terminated as a result of the delays
caused by the contractor. In this case, the trial judge held that the contract was properly
terminated by the owner and held that the contractor could recover nothing and that the
owners could recover the cost of completing and repairing the project over and above the
contract price. Once again, this highlights the uncertainty of what might occur if the matter
was to proceed to court.31
In a construction lien action where the plaintiff was the subcontractor and the
defendant was the general contractor, the general had issued a payment cheque for certified
work around the same time that the parties got into a dispute. The general contractor stopped
payment and refused to make further payments until the subcontractor posted a bond for the
entire balance of the subcontract. This was not a contractual requirement. As a
30
31
(1987), 24 C.L.R., 214 (P.C.C.A.)
MacLean vs. Winters (1990), 35 C.L.R. 148, (M.S.Co.C.t.)
- 25 result of this, the subcontractor withdrew its workers and claimed the amount that was
certified to be owing but also a further amount for material and services provided since the
date of the certified work which work was done prior to the subcontractor leaving the project.
The question was, who was in fundamental breach? The trial judge found that the contractor
was in fundamental breach and that entitled the subcontractor to treat the contract as
terminated and to sue for damages. The Court of Appeal agreed with the trial judge.
Therefore, in this case, the subcontractor was entitled to sue for damages and those damages
would be the amount owed as a result of the certified work plus the additional work done and
the general contractor would not be entitled to claim for completion costs of the subcontract
work. It is unclear whether the contractor would have been entitled to set off some of the
claim for damages against any deficient work that had to be rectified by the owner.32
Conclusion
My advice to all counsel advising their clients with respect to what should be done
where one party is considering walking off the job or the other party is considering
terminating the contract, is to be extremely careful because the advice you give could, and
may, come back to haunt you. As you can see, you may find yourself between the devil and
the deep blue sea when considering whether or not the offending party, as a result of its
alleged breach, repudiated the terms thereby giving the non-offending party comfort in
terminating the contract. Based on the case law that I have referred to in this paper, you can
see that the terms of the contract, the actual facts and the judge deciding the case all play
important roles with respect to the advice that you may be required to give. It is for this reason
that I caution you to tread lightly when considering terminating a contract unless you are more
than reasonably certain that the termination is proper.
Of course, this requires a risk analysis undertaking and as soon as one mentions the
word “risk”, that in itself should raise the red flag to caution you with respect to the proposed
steps that you may be contemplating taking. The risk analysis undertaken cannot be casually
Safinco Mechanical Ltd. vs. Toronto District P.S.B. (2002), 14 C.L.R. (3d), 306, aff’d (2003), 24
C.L.R., (3d), 166
32
- 26 done when considering advice to be given with respect to the contract, repudiation, what
constitutes repudiation, what constitutes fundamental breach and the nature of the damages
that may be awarded. The consequences are far too great in the event that the opinion given
turns out to be wrong. That said, even if there is a thorough risk analysis undertaken, based on
the case law, that does not guarantee that the outcome of the case will be as you would want
it, namely, that you have made the right decision and that you will be totally successful in
your claim.
CONCLUDING REMARKS
I would like to thank you for allowing me the opportunity of presenting this rather
complicated topic since, regardless of the number of opinions I have given, the review that I
have undertaken, certainly amounted to a refresher course for myself. Needless to say, there
were some surprises when I reviewed some of the learned authorities’ comments and the
present state of the case law. Be careful!
Snaft\PAPERS\Construction Summit 2005