Canada: Ontario Government Gets Carpet-Burned By Poor Performance, But Recovers

Last Updated: September 23 2015
Article by Noel Courage

Termination is the big hammer to take out when a contract starts to go irretrievably off the rails. However, termination may not be enough when your poorly-performing commercial partner is getting part payment and leaving you to either chase them to get money back or bear the loss yourself. If there has been misconduct or fraud by your commercial partner, then you have an even bigger mess on your hands, and figuring out your damages can be more challenging.

There are clauses that can be inserted up-front in a contract to try to ensure that you get some compensation if your business partner goes rogue. A recent Ontario court case, discussed below, looked at such clauses in the context of an Ontario government housing agency having a massive carpet installation project go wrong. These clauses should be considered for all types of significant agreements, including those involving intellectual property (the author's practice area), such as contract research agreements or technology commercialization agreements.

Typical clauses to provide some additional financial protection upon termination include a penalty clause or a liquidated damages clause. Both types of clauses specify a dollar amount agreed upon at the time the contract is signed.

A penalty clause requires the payment of a specific dollar amount after breach of the contract, irrespective of the actual damages. The amount specified in the liquidated damages clause is a pre-estimate based on estimated damage. (Canadian General Electric Co. v. Canadian Rubber Co., [1915] 52 S.C.R. 349; Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916 ). You can demand the specified amount of liquidated damages without regard to the actual monetary loss (provided that the liquidated damage amount is not actually a penalty – if it is a penalty, only a lesser amount of proven damages should be recoverable).

A recent Ontario Court of Appeal case looked at a lesser known and potentially useful additional approach to deal with poor performance, referred to as a 'stop payment' clause (Ottawa Community Housing Corporation v. Foustanellas (Argos Carpets), 2015 ONCA 276). This case involved a carpet company that overbilled the Ontario government for work done, and also installed lower quality carpet than specified in the agreement. The government was ultimately awarded over $1.5 million.

The contract stated a list of events which, if they occurred, would permit the government to terminate the contract. The list is broadly stated, so you can envision it being useful in other types of purchase and service contracts. To terminate, the government must give notice i) of the specified event, and ii) that the government was taking the remaining work out of the carpet company's hands. The government stopped its contractual obligation to make payments, even payments already due, pending determination of the owner's damages. The stop-payment clause is helpful to override a common type of contract clause that states that specific amounts (obligations) due at the time of contract termination will survive termination. (The relevant clauses of the carpet contract are reproduced at the end of this article.)

The stop-payment clause does not specify a monetary amount so it is not a penalty clause or liquidated damages clause. The idea is that the owner's damages and losses require assessment, and the owner may cease payments to the contractor pending quantification of those damages. The amount of outstanding invoices owed to the contractor may eventually be set off against the quantified amount of the owner's losses and damages.

The stop-payment clause is well-suited to a situation where the amount of damages may vary widely, so a penalty clause or liquidated damages clause is not as practical. The clause should be clear that it does not limit the amount of recovery to the amount of stopped payments. The clause can also be written to reinforce the contractor's liability for an amount equal to the owner's damages caused by poor performance.

This case shows that a stop-payment clause can be a useful tool when enforcing a contract. Consider that type of clause, a penalty clause, or a liquidated damages clause when you have the bargaining leverage to do so.

Carpet Contract Clauses:

An initial clause listed specific situations where work could be taken out of the hands of the Contractor.


.1 If the Contractor:

.1 has delayed in commencing or is in default in the completion of the work or any portion of the work, within the contract commencement and completion dates;

.2 is in default of diligently executing the work or any portion of the work to the satisfaction of the Owner, and the Owner has given notice of the default to the Contractor, and the notice of default has required the Contractor to put an end to the default or delay, and the default or delay continues for past the time specified in [the] notice after the notice was communicated;

.3 fails to comply with any reasonable order he may receive from the Owner or shall persist in any course in violation of any of the provisions of this contract;

.4 has received from the Owner three written notices of default during the term of the contract;

.5 has made an assignment of the Contract without the required consent of the Owner;

.6 shall submit a bid that is subsequently found to contain false or misleading information;

.7 shall become bankrupt or insolvent, or compound with his creditors, or commit any act of insolvency;

.8 has substituted any material or equipment other than specified without the required consent of the Owner;

or for any other reason which the Owner deems proper, then in each and any such case, the Owner has the full right and power to take the whole operation, or any part of the operation out of the hands of the Contractor.

1.6.3 ... where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all the losses and damages incurred by the Owner for the non-completion of the work.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.