Termination Problems: When Can You Walk Away From a Contract?
Construction projects don’t always go as planned. Delays, add-ons, and changes to plans are common. Parties can sue when losses occur. When this happens, the contract itself is the key guide to the parties’ obligations.
However, sometimes things go very wrong. There are times when matters go so far sideways that one of the parties wants to bring the contract to an early end. For example, by taking the position that the other side has “repudiated” the agreement and treating the contract as if it is at an end.
An Example – Fundamental Breach & Repudiation in the Construction Context
The Alberta Court of Queen’s Bench applied the principles of repudiation in the construction context in the recent decision of RPM Investment Corp v Lange, 2017 ABQB 305. This was a case involving a construction agreement for a new home.
While the relationship between the Owners and Contractor started off smoothly, frustrations soon developed. Among other things, the Contractor accused the Owners of seriously delaying making design decisions, resulting in construction difficulties. The Owners complained that the Contractor wasn’t doing the work based on their specifications.
Matters came to a head when the Owners sent an email to the Contractor stating that they were “giving notice of our intent to terminate effective November 8, 2010” saying that they believed that the Contractor had abandoned the contract and committed a fundamental breach.
The Contractor didn’t agree, but decided to treat this email as a repudiation and walked away from the contract. The Owner subsequently hired another builder to finish the job.
The Contractor then sued the Owner for its damages resulting from the repudiation. The Owners countersued, claiming the Contractor had abandoned the job and done substandard work.
The Decision – Who walked away first?
After assessing the evidence, the Court sided with the Contractor. While parts of the work did not meet the Owners’ expectations, they were not so serious as to amount to a “fundamental” breach. Further, the Court found that the Contractor did not abandon the project.
The result in this case came down to repudiation. The Court held that the Owners’ termination email repudiated the contract, by effectively indicating that the Owners no longer intended to be bound by it. This gave the Contractor the option to accept the repudiation, or reject it. The Contractor elected to accept the repudiation, and communicated this clearly within a reasonable time.
The Contractor was thus able to sue for damages resulting from the repudiation.
What does this mean for you?
Issues involving fundamental breach and repudiation are difficult – once you choose a position, it may be difficult to come back from it. Parties considering taking drastic steps should consider their options clearly before doing so.
The RPM Investment Corp case provides a cautionary tale – the Owners’ said that they didn’t mean to repudiate the contract, but the Court found that they had. This meant that their ability to sue the Contractor was limited to anything that happened before the repudiation. The Owners were also responsible for the costs of a new builder to finish the job, plus any damages that the Contractor suffered due to the early end of the contract.
If you think you may need to walk away from a contract, or you think that someone you hired may be abandoning their obligations, contact Ryan Krushelnitzky, lawyer and Partner with Field Law, to discuss your options.