Given the current state of the economy, businesses are
scrutinizing existing and potential transactions very closely.
Existing or potential contracts, which seemed economic even a few
short months ago, may not seem as valuable now and there is a
reasonable expectation that there will be increased litigation
dealing with termination of contracts especially in the oil and gas
sector. Such decisions can occur in various contexts including with
pending mergers and acquisitions, service agreements and other
existing contracts. Whether a contracting party has the right to
terminate a contract is fact specific and case law varies based on
a number of factors to consider. Some considerations include the
The recent Supreme Court of Canada (SCC) decision in Bhasin v. Hrynew recognized a common
law duty that applies to all contracts to act honestly in the
performance of contractual obligations. The case also held that, in
carrying out the performance of a contract, a contracting party
should have appropriate regard to the legitimate contractual
interests of the opposing party. While that common law duty does
not attract the obligations of a fiduciary nor does it engage
duties of loyalty, the principles enunciated by the court should be
borne in mind in considering the circumstances under which a
termination may occur.
Another recent case by the SCC in Sattva Capital Corp v. Creston Moly
Corp. confirmed that the court can have regard to the
surrounding circumstances or "factual matrix" in
interpreting the terms of a contract, which is nothing particularly
new although the court's recent treatment of that analysis was
instructive. While the SCC held that the factual matrix can be
relied upon in the interpretive process, such surrounding
circumstances cannot be used to deviate from the actual words used
in a contract. The SCC was also clear that its commentary in
allowing the introduction of surrounding circumstances did not
preclude the operation of the parol evidence rule, which prohibits
the admission of evidence outside the words of the written contract
that would add to, subtract from, vary or contradict the terms of a
contract that has been wholly reduced to writing. As a result,
looking at the existing words of a contract may not always provide
a clear picture of when a contract can be terminated and under what
A body of case law has developed concerning the ability of a
party to terminate a contract in the context of a material adverse
change (MAC), which may be defined in different ways in different
contracts. To the extent that a triggering event and processes are
clearly set out in a MAC clause, it is critical to follow that
process precisely, failing which it may create potential defences.
To the extent that such MAC clauses and related triggering events
are not clearly drafted, it may invite the court to examine the
surrounding circumstances involved. That said, the Alberta Court of
Appeal in Vallieres v. Vozniak recently held
that in dealing with a standard form contract, delving into
surrounding circumstances is often not necessary. Accordingly,
whether a contract is a standard form industry agreement may also
have some bearing on termination rights.
The termination of a contract may also depend on whether a
party is ready, willing and able to perform that contract,
particularly when that termination relates to a "time is of
the essence" clause (TIOTE Clause). Generally speaking, a
TIOTE Clause provides that if one party is late in performing its
obligations under the contract, then the other party may terminate
the contract. However, there are defences against such a
termination. Specifically, where the other party is late in its
performance, a party can only terminate a contract if it was ready,
willing and able to perform the contract itself (see Bowlen v. Digger Excavating (1983)
Ltd. at paragraph 13).
Another important risk factor is the prospect of punitive
damages being awarded against parties that intentionally breach
their contracts. There may be situations where parties view the
benefit of terminating a contract as greater than their exposure to
damages for such a breach. Termination in these circumstances may
attract punitive damages against such parties (see Rookes v. Barnard (1964)).
In sum, the termination of a contract can be a complex process
with potentially significant consequences to the parties involved.
In the midst of the current economic landscape, more parties may be
looking to terminate contracts that have depreciated in value.
Nevertheless, it is well-advised to seek legal advice prior to
terminating a contract to ensure that any proposed termination is
conducted properly and that the anticipated legal consequences of
the termination are understood.
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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