Canada: In Contract Law, They Who Hesitate Are Lost

A November 2014 decision by the British Columbia Court of Appeal serves as a stark reminder about the importance of acting quickly when it comes to breach of contract matters. This is particularly true for an innocent party wanting to terminate a contract. The decision shows that failure to take swift action may result in innocent parties not only losing their ability to get out of a deal, but may even allow the original repudiating party to escape its obligations and the consequences of its earlier breach.

The decision in A & G Investment Inc. v. 0915630 B.C. Ltd. [2014] B.C.J. No. 2701 involved the purchase and sale of building lots to be created by way of subdivision. The contract required the vendor to complete the steps necessary to create the subdivision as a condition of completion. Completion was to occur on the earlier of Dec. 18, 2012, or the 21st day after the vendor delivered written notice that the subdivision condition had been fulfilled. The contract also gave the vendor the option to extend the completion date for up to 270 days, and included an ultimate outside date of Dec. 31, 2013. However, by Dec. 18, 2012, the subdivided lots had not yet been created and the vendor was not in a position to complete the transaction. Instead of acknowledging the failure to tender by Dec. 18, the purchaser continued to act as if the contract was still in existence by continuing its marketing activities to resell the still uncreated lots.

In January 2013, the subdivision plan was registered by the vendor to create the lots. Then, in March and April of 2013, the purchaser attempted to back out of the deal and requested a return of its deposit, alleging among other things that the contract had automatically terminated on Dec. 18, 2012 because the subdivision condition had not been fulfilled. The vendor in turn alleged that the contract remained in full force and effect and that the purchaser's intention not to be bound by the contract amounted to repudiation of the contract such that the vendor was entitled to retain the deposit.

In its ruling, the court agreed with the vendor. It first found that the contract could not be interpreted as automatically ending on Dec. 18, 2012 when the condition precedent remained unfulfilled, because this interpretation would be inconsistent with the outside date of Dec. 31, 2013 also included in the contract.

The court further found the vendor's failure to complete on Dec. 18, 2012 constituted a fundamental breach of contract giving rise to the purchaser's right to either: (1) elect to affirm the contract and hold the vendor to the performance of its obligations; or (2) to elect to terminate the contract and obtain a return of its deposit. However, the court found that the purchaser's four-month delay in properly communicating its decision meant that it had already irrevocably elected to affirm the contract.

The court held that the purchaser was not entitled to adopt a "wait-and-see" approach to fundamental breach since the purchaser's election simultaneously determines the position of the repudiating party. Although the court did not discuss how quickly an innocent party must communicate its election, the Court of Appeal for Ontario in Brown v. Belleville (City) [2013] O.J. No. 1071 had previously said that an election to terminate a contract must be clearly and unequivocally communicated to the repudiating party "within a reasonable time." In A & G Investment, four months was determined to be too long a delay and beyond what could be considered reasonable.

Unfortunately for the innocent purchaser, their delayed response had even further consequences. The court found that they had anticipatorily breached the contract themselves by attempting to back out of the deal and demanding the return of the deposit at the point of time that they did. With the parties' positions effectively reversed and the purchaser now in a fundamental breach, the vendor properly accepted the purchaser's repudiation and elected to treat the contract at an end, entitling the vendor to retain the deposit.

A & G Investment highlights the importance of innocent parties acting promptly in electing whether to affirm a contract or to treat it as at an end. As demonstrated in this case, the consequences for failing to do so may be far wider-reaching than expected. Unless an election to terminate is communicated promptly to the repudiating party within a reasonable time, the innocent party may lose their ability to do so. Further to that, if the innocent party fails to communicate its election to terminate and then tries to do so after the fact, it may find itself in anticipatory breach of the contract. The safest course of action — as A & G Investment demonstrates, is to make the election as soon as possible.

Previously published in The Lawyers Weekly

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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