Canada: The Second Opinion: Can Inaction Equal Acceptance? The Ontario Court Of Appeal Clarifies The Principles Of Contractual Repudiation

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Does silence and inaction in the face of a contractual breach constitute acceptance of the contractual repudiation?  This is the issue which confronted the Ontario Court of Appeal in its recent decision in Brown v. Belleville (City).

The facts of the decision in Brown are, briefly, as follows. Decades ago, the Township of Thurlow, which subsequently amalgamated with the City of Belleville (the "City"), entered into an agreement with a farmer undertaking to perpetually maintain and repair a storm sewer drainage system on the farmer's land (the "Agreement"). The land in question was sold to third parties called the Pleizers.  The Pleizers attempted in 1980 to enforce the Agreement. The City disavowed any obligations under the Agreement. The Pleizers took no further positive steps to enforce the Agreement against the City.

In 2003, the Pleizers sold the land to the Browns.  The Browns then requested the City in 2004 to honour its obligations under the Agreement.  The City refused to do so. Neither the Pleizers nor the Brown acted in way that was inconsistent with the Agreement.  The Browns ultimately sued the City in 2011 seeking specific performance of the Agreement or damages for its breach.  The City then asserted that the Browns' claim was barred by the expiry of a governing limitation period, arguing that the claim for breach of contract would have crystallized when it first refused to honour the Agreement back in 1983 (or, at the latest, in 2004).

In this context, the Court of Appeal revisited and clarified the governing principles of repudiation. To begin with, the Court stated that "[a] repudiatory breach or an anticipatory repudiation of contract does not, in itself, terminate or discharge a contract."  Rather, the innocent party has an election to make in the face of such a repudiation. It can disaffirm or affirm the contract. "Acceptance" of  the repudiation means that an election has been made to disaffirm the contract. In such a case, the contract is terminated. Rejecting the repudiation, on the other hand, means that the contract continues to subsist.

The Court went on to state that:

"[W]here the innocent party to a repudiatory breach or an anticipatory repudiation wishes to be discharged from the contract, the election to disaffirm the contract must be clearly and unequivocally communicated to the repudiating party within a reasonable time."

The Court did, however, acknowledge that "[c]ommunication of the election to disaffirm or terminate the contract may be accomplished directly, by either oral or written words, or may be inferred from the conduct of the innocent party in the particular circumstances of the case."

Significantly, the Court went on to note that silence or inaction in the face of a repudiation will generally fall short of satisfying the requirement of clear and unequivocal communication to the repudiating party of the adoption of the repudiatory breach.  The Court, in contrast, noted that "overt" actions by an innocent party may in some circumstances constitute acknowledgement that the repudiated contract has been terminated.  Moreover, the Court stated that "the burden to establish the acceptance the repudiation of a contract is on the party asserting acceptance".

Curiously, and somewhat inconsistently, the Court of Appeal went on to indicate that despite the lack of evidence indicating that the repudiation of the Agreement had been accepted, it was nevertheless possible for the City to argue that the Agreement had been mutually abandoned – an argument which was left to be determined for another day.

The decision in Brown nevertheless clarifies that mere inaction in the face of a repudiatory breach of a contract does not amount to acceptance of the repudiation. Although acceptance can be indicated by conduct, the conduct must generally entail positive action which clearly and unequivocally communicates such acceptance.

The Court's ruling in Brown also raises interesting issues regarding privity of contract, which will be addressed in a future post.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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