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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions