Leaving A Contract In Limbo: The Unintended Consequences Of Abandoned Agreements

The Ontario Superior Court of Justice recently confronted a situation familiar to many commercial actors: one party falls into a contractual default, the other threatens termination if the default is not cured, the dispute fizzles out unresolved only to later rear its ugly head.

The Court's decision in Caivan (Creekside) Limited Partnership v. Logoteta, 2025 ONSC 1875, presents a cautionary tale of an innocent non-breaching party becoming liable to the breaching party by failing to bring the contract to a certain end. By leaving the status of an agreement in limbo, a non-breaching party may inadvertently keep the contract alive, and thus expose itself to liability for non-performance of its own contractual obligations.

Although this case arose from an abandoned real estate transaction, the reasoning has much broader application. Similar issues can arise in a wide variety of commercial contexts, including supply and distribution, manufacturing, commercial leasing, among other settings.

The Facts

The dispute arose from an agreement of purchase and sale for a $3.3 million Oakville townhouse under construction. After paying the first $100,000 in deposits, the purchasers failed to make two further installments totalling $262,000. The vendor extended the payment deadline to November 10, 2022. When the purchasers said they still would not be able to pay, the vendor wrote on November 8 that if payment was not made by the deadline it "will move to terminate" the agreement and that all deposits would be forfeited. The vendor added, however, that "We trust this will not be necessary and we look forward to receiving the funds as required."

The payment was never made. The vendor sent no further notice, but four months later it sold the property to a new buyer. A short while later, the purchasers sought to proceed with the original transaction. When they learned of the sale to another buyer, the purchasers claimed the vendor's action constituted a fundamental breach entitling them to the return of their $100,000 deposit and damages. The vendor argued that its November 8 letter had already affected a termination of the agreement on November 10 following the purchasers' failure to pay the outstanding deposit on that date.

The Decision

The Court found that the agreement between the vendor and purchasers was still alive, and that the vendors had breached that agreement by selling the subject property to another buyer.

The Court accepted that the purchasers' refusal to make the required payments on November 10, 2022, amounted to a repudiation of the agreement but emphasized that a repudiation does not end a contract automatically. It falls to the innocent party to make an election to either: (a) accept the repudiation and terminate; or (b) treat the agreement as continuing.

Here, the vendor's November 8 letter was ambiguous. While the letter warned of termination, it nonetheless urged the purchasers to continue to perform the agreement by making timely payment of the outstanding deposits. As such, the Court found that the vendor's threat of termination was, in law, an affirmation that the agreement continued.

The Court found support by the fact that the vendor had previously granted extensions to the purchasers following earlier defaults. Having done so, the vendor had created a pattern of leniency from which the Court inferred that further indulgence might again be forthcoming. Against that history, any communication intended to bring the contract to an end required extreme clarity.

The problem for the vendor was further compounded by the inclusion of boilerplate language within the November 8 letter that reserved all of the vendors' potential rights and remedies. Rather than strengthening the vendor's flexibility, the Court held that the broad reservations undermined the requisite clarity needed for the letter to establish a termination. For instance, the Court noted that the all-encompassing reservation or rights could be interpreted to include the vendor's right to treat the agreement as ongoing.

Having failed to affect a termination of the agreement, the vendor's decisive misstep came when it sold the property to a new buyer. Because the original agreement remained alive, the resale rendered the vendor unable to perform its end of the bargain when the purchasers sought to revive the transaction. As such, the tables had turned between the parties and the vendor had become liable to the purchasers notwithstanding the purchasers' earlier repudiation.

Key Lessons for Businesses

This decision underscores that clarity in both language and conduct is critical once a counterparty defaults or repudiates an agreement. Key lessons arising from this decision include:

• Where a party intends to terminate, it must say so plainly. Conditional phrasing reserving a right to terminate later, or warnings of termination designed primarily to pressure compliance, invite ambiguity. Far from facilitating a termination, such communications can affirm that the agreement continues.
• A history of leniency can colour the interpretation of communications respecting default and termination. If a party has granted indulgences in the past, the Court may presume further indulgence will follow. Communications meant to end the relationship after such a history must therefore be extraordinarily clear and unequivocal.
• Boilerplate reservation of rights language can backfire when used in termination notices. While such language is often used to preserve flexibility for the non-breaching party, it can introduce uncertainty that weakens the clarity required to communicate a termination.
• Timing and sequencing matters. Terminations must be clearly communicated before a non-breaching party takes any steps that are inconsistent with their own performance of the agreement.

Many businesses hesitate to exercise termination rights, preferring to preserve a relationship or salvage a deal. As a result, they often issue threats of termination to pressure a counterparty to perform. Caivan v. Logoteta is a blunt reminder that this approach can be dangerous if the threats are not followed up by a clear and timely termination. Moreover, in the face of a default, communications intended to motivate performance can, in law, amount to an affirmation of a repudiated contract. Once that happens, steps such as contracting with another party may transform an innocent party into a breaching party.

Given the potential consequences of leaving an agreement in limbo after a default, businesses should seek legal advice early to develop a coherent default and termination strategy that balances commercial objectives with the need for precision, clarity and enforceability.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025