Does Inaction Amount To Acceptance Of A Repudiation Of Contract?

Can inaction by a party to a contract amount to an acceptance of the repudiation of the contract by the other party?  That was the issue in the very recent decision of the Ontario Court of Appeal in Brown v. Belleville (City).

This is an important issue in construction law because of the critical effect of the acceptance or non-acceptance of contractual repudiation.  The acceptance of repudiation brings the entire contract to an end.  But if repudiation is not accepted then the contract continues.  So whether there has been an acceptance of repudiation can be of pivotal importance.

If the contract has come to an end by acceptance of repudiation, then contractual performance obligation may terminate, warranty periods and limitation periods may start running, and insurance rights may start or end.  So it is vital for a builder or owner to know whether the contract has been terminated.

Yet, a builder or owner may not have the time or inclination to respond to wrongful conduct by the other side.  But if an owner or contractor doesn’t respond, can they be taken, by inference, to have accepted the wrongful conduct and brought the contract to an end?  Does an owner or contractor in effect have an obligation to respond?  Can they leave matters up in the air without specifically dealing with a repudiation by the other side?  That was the issue in Brown v. Belleville (City).

 The Factual Background

In 1953 a municipality entered into an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands.  Six years later, the municipality stopped maintaining and repairing the drainage system.  The lands affected by the drainage system were sold by the farmer’s heirs to a third party.

In the 1980’s, that third party tried to have the municipality maintain the drainage system.  The municipality refused to do so, clearly repudiating the agreement.  In 2003, the affected lands were sold to the Browns who asked the successor municipality, Belleville, to maintain and repair the drainage system.  Belleville refused to do so and repudiated the agreement.

The Browns then sued Belleville.  Belleville defended the action and one of the positions it asserted was that the Brown’s claim was barred by the limitation period.  Belleville asserted that the repudiation by it and its predecessor municipalities had long ago been accepted by the Browns and their predecessors, in effect by inaction.  Accordingly, Belleville said that the agreement had long since terminated and the limitation period had run.

 The Court of Appeal’s decision

 The Court of Appeal started its analysis by noting that a repudiation of a contract does not, in itself, bring the contract to an end.  Only if the innocent party elects to accept the repudiation does the contract come to an end.  The innocent party is not obliged to accept the repudiation, and if he or she does not so accept then the contract continues in effect.

The Court of Appeal then stated the test to determine whether there has been an acceptance of a repudiation.  The court said that the acceptance:

“must be clearly and unequivocally communicated to the repudiating party within a reasonable time.   Communication of the election to disaffirm or terminate the contract may be accomplished directly, by either oral or written words, or may be inferred from  the  conduct  of  the  innocent  party   in  the  particular  circumstances of  the  case.”(emphasis added)

The Court of Appeal quoted from another decision in which it was said that:

“mere inactivity or acquiescence will generally not be regarded as acceptance for this purpose.  But there may be circumstances in  which  a  continuing  failure  to  perform  will  be  sufficiently unequivocal to constitute acceptance of  a repudiation.”

The Court of Appeal agreed with the trial judge that the third party’s “silence or inaction in the face of [the municipality’s] repudiation of the Agreement falls short of satisfying the requirement of clear and unequivocal communication to the repudiating party of the adoption of a repudiatory breach or anticipatory repudiation of contract.”

The mere fact that the municipality did not exercise its rights did not mean that it could not have done so, nor did it mean that the Browns or their predecessors had precluded the municipality from doing so.  The Court noted:

“the municipality did not seek access to the affected lands to carry out maintenance or repair activities does not mean that such access was unavailable.”

The Court of Appeal stated that the burden of proving an acceptance of repudiation was on the municipality and there was no evidence of such acceptance by the Browns or their predecessors in title.

Comments

This decision is another example of appellate courts in Canada sticking to the fundamental principles of contract law.  The requirement that an acceptance of repudiation must be clearly made and clearly proven means that the wrongful party cannot benefit from its own wrongful conduct and induce a termination by its own repudiation.

It may have taken a fair bit of chutzpah for the municipality to say: “we repudiated the contract, and you accepted it, didn’t you know!”   But that is the situation in which every exasperated contracting party finds itself when stuck with a contract that it has long since repudiated and wants to be rid of.  Unfortunately, it can’t unilaterally get rid of it, and the contract can go on, and on, and on, until the repudiation is accepted by the innocent party, if it ever is.

Besides being favourable to the innocent party, this state of the law protects the inactive party, the party that doesn’t have the time, inclination or resources to take the time to determine if it will accept the repudiation of the wrongful party, or simply doesn’t want to.

So, on a construction project, a serious wrong by one party does not mean that the contract comes to an end.  The law’s choice is that, in those circumstances, it is better that the contract continues and not come to an end.  It only comes to an end if the other party wants it to.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 4(c)

Brown v. Belleville (City), 2013 ONCA 148

Construction Contract  –  Termination  –  Repudiation  –  Acceptance  –  Limitations

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         March 22, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

When Is A Mediation Agreement Enforceable?

One of the most difficult issues in the law of alternative dispute resolution is whether a mediation clause creates an enforceable obligation.  That issue has an impact on related issues and rights.  If a party gets the issue wrong, it may miss a limitation period or affect its right to rely upon an arbitration or exclusive jurisdiction clause.

In recent articles I have discussed two recent decisions of the Ontario Court of Appeal in which that court apparently arrived at conflicting decisions about whether a mediation clause created an enforceable obligation.  The English Court of Appeal considered this issue in its recent decision in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A..

The Sulamerica decision is more famous for its holding that the law applicable to an arbitration clause is the law of the place that the parties designate as the seat of the arbitration, not the law that they designate as the law of the contract.  But hidden in the back of the decision is another important conclusion, namely, that a mediation clause is not valid unless it contains sufficient minimum details to make it enforceable.

In Sulamerica, the enforceability of the mediation clause affected whether the insurer had properly commenced arbitration proceedings. The insurance contract provided that the law applicable to the contract was the law of Brazil and that the courts of Brazil were the exclusive jurisdiction for the proceedings relating to the contract. In addition, the contract contained an arbitration clause, condition 12 of General Conditions of the contract, which stated that the seat of the arbitration was London, U.K..

The insurers gave notice of arbitration, asserting that the insured’s claim was not covered by the contract. The insured commenced an action in Brazil for an order that the insurers were not entitled to submit the dispute to arbitration and obtained an injunction restraining the insurers from commencing an arbitration proceeding. The insurers then applied to the court in the U.K. for an order restraining the insured from continuing with the proceedings in Brazil.

The insured said that the law of Brazil governed the arbitration clause and that by the law of Brazil, its participation in the arbitration was voluntary, not mandatory. The insurers said that the law of England applied to the arbitration clause and that under English law, arbitration was the exclusive remedy to determine the dispute, that the jurisdiction of the arbitral tribunal was mandatory not voluntary, and that the insured would be bound by the decision of the arbitral tribunal.

The English judge of first instance held that English law applied to the arbitration clause and issued an injunction against the further prosecution of the Brazilian action by the insured, and the English Court of Appeal upheld that decision.  In doing so, the Court of Appeal may be seen as resolving a conflict of decisions in the English courts.  The result appears to be that, absent other evidence or factors, then in the face of a contest between the law of the contract and the law of the seat of the arbitration as to which law governs the arbitration clause , the latter will win out.

That part of the Sulamerica decision has been well discussed by the commentators. But there is another part of the decision which could be equally important.

Condition 11 of the insurance contract – the one immediately prior to the arbitration clause- required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, that mediation was a condition precedent to arbitration under that regime and, accordingly, the arbitration proceeding was premature and should be dismissed on that ground alone.

Condition 11 of the contract contained five paragraphs and some 31 lines, so it was not a “bare-bones” provision. It did not prescribe any particular mediation process, but it did clearly state that “the parties undertake that, prior to a reference to arbitration, they will seek to have the dispute resolved amicably by arbitration.” The clause contained an elaborate provision relating to confidentiality, stated the means by which the mediation could be terminated and stipulated a 90 day period for the mediation to be conducted from the date that one party started the mediation. The clause dealt with the sharing of the costs of the mediation. All in all, not a bad mediation clause.

But not good enough to be enforceable, according to the Court of Appeal.  It dismissed the insured’s submission on the ground that the mediation clause was not sufficiently precise to be enforced. It held as follows:

“…condition 11 does not set out any defined mediation process, nor does it refer to the procedure of a specific mediation provider. The first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question.  I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process. The most that might be said is that it imposes on any party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but the content of even such a limited obligation is so uncertain as to render it impossible of enforcement in the absence of some defined mediation process.”

The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11.  The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”

This conclusion raises a number of difficulties:

First, mediation is usually considered to be a consensual process requiring no agreement on process. If that is so, it is difficult to see why certainty of process is an essential element for its validity.  In Sulamerica, the English Court of Appeal has applied to the details of the mediation process the certainty requirements found in the law of contract which relate to the making of a contract. Is that necessary or appropriate? If the mediation process is voluntary, why is the agreement to mediate not sufficient?  If a party does not want to mediate, it can immediately state that position and the mediation may be at an end, but why should the parties not be obliged to at least take that step without further agreement on the process?

There is an ongoing debate, at least in North America, about the effort that a party to a mediation agreement must demonstrate before it has complied with a duty to mediate. Some say none; some say that there must be at least some good faith effort to mediate. But the Court of Appeal appears to pre-empt that debate by requiring that the details of the mediation process must be sufficiently clear from the beginning before any obligation to mediate can come into being.

Second, it seems unlikely that most mediation clauses satisfy the “sufficient certainty” requirement established by the Court of Appeal.  In order to do so, it is likely that the mediation agreement will have to refer the mediation to an arbitral or mediation institute. Agreements to engage in ad hoc mediation may, almost by definition, be unenforceable since those sorts of agreements usually leave the parties with the flexibility to choose the mediator and the “style” and procedures adopted by a particular mediator. Even mediation institutions will have to review their rules to ensure that they are “sufficiently certain”.

Third, different courts may have different views on this issue.  Those views may have a dramatic impact on limitation periods.  If an obligation to mediate arises, then the limitation period may well be extended.

As I noted in my article dated July 17, 2011 the Ontario Court of Appeal held in L-3 Communication Spar Aerospace Limited v. CAE Inc that an enforceable obligation to mediate had arisen in that case and accordingly the cause of action did not accrue and the limitation period did not start to run until the mediation was over.

In L-3 Communications, the agreement in question contained no details about the mediation process.  It simply stated that when the parties “had not agreed” then they could proceed to arbitration.  The Ontario Court of Appeal found that was sufficient to create a duty to mediate so that the cause of action did not accrue and the limitation period did not start to run until that occurred.  Had the Ontario Court of Appeal applied the logic of the English Court of Appeal in Sulamerica, presumably it would have concluded that there was no enforceable mediation clause, and the plaintiff’s cause of action accrued once the conditions for liability had occurred without any necessity for those conditions to include mediation.

As I noted in my article dated May 5, 2012, in another decision of the Ontario Court of Appeal, Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, that court held in 2012 that wording similar to that considered in the L-3 Communications decision did not give rise to an enforceable obligation to mediate.  The result in Federation Insurance appears to be different than the decision in L-3 Communications and more consistent with the decision in Sulamerica. 

All of the above may leave those drafting agreements wondering about what exactly to put into a mediation agreement to make it binding.  It may leave those suing to enforce rights under those agreements wondering whether to first start an action or mediate.  The decision to sue or mediate first may, like in Sulamerica, simply affect or delay the determination of which tribunal – court or arbitrator – is the proper tribunal. But more troubling is the limitation problem.

Making the decision to mediate, and not to commence the action, may result in the limitation period being missed.  With this risk, a party may be well advised to “sue first and mediate later”, unless the opposing party agrees to extend the limitation period in the meantime.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th edition, Chapter 10, part 6

Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648

Arbitration – Mediation – Enforceable Agreement – Choice of Law – Choice of Forum – Limitations – Insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                       July 5, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

Tercon Contractors? The Latest Chapter

The 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd v. British Columbia (Transportation and Highways) is one of the most important recent Canadian decisions relating to contract law.  It has particular importance to building contracts.  Those interested in construction law are watching to see how Tercon will be applied in subsequent cases.  In the recent decision of the British Columbia Court of Appeal in Roy v. 1216393 Ontario Inc, we now have one of our first indications of where Tercon will go.

The facts behind Roy v. 1216393 Ontario Inc.

In Roy, the plaintiffs entered into an agreement to buy a building lot from the defendants for $184,700 and gave the defendants’ lawyer a deposit of $18,470.   The defendants had previously sold the lot to another party but neither the defendants nor their lawyer told that to the plaintiffs.  The other party sued for specific performance and this precluded the defendants from completing the sale to the plaintiffs.  So the plaintiffs sued the defendants and their lawyer for damages.

The agreement of purchase stated that if the agreement was not completed due to the vendor’s fault, then the sole remedy of the plaintiffs, the purchasers, was the payment to them of the deposit, as liquidated damages.  The Court of Appeal noted, “as the deposit monies came from the purchaser, it has the effect of being an exclusion of liability clause.”

The trial judge refused to apply this clause and awarded the plaintiffs $317,000 in damages against the defendants.  The trial judge held that the clause was unconscionable because “it permitted the vendor to walk away from the contract with no consequence, though the purchasers would face significant consequences on failure to comply with obligations imposed on them.  From the purchaser’s perspective, it would render the purported contract no contract at all.”

Harkening back to Tercon, the B.C. Court of Appeal noted that the dissenting judgment in the Supreme Court established three questions with respect to the enforcement of the exclusion clauses:

1.  Does the clause even apply to the circumstances in issue? If it does:

2.  Was the clause unconscionable at the time of the contract?   If not,

3.  Should enforcement of the exclusion clause be denied on grounds of public policy?

The exemption clause will not be applied if the answer to question (1) is No, or the answer to question (2) or( 3) is Yes.

The trial judge applied the second test and concluded that the clause in question was unconscionable.  But, the Court of Appeal said, the trial judge did not perform the proper analysis of unconscionability.  The Court of Appeal said that there are two elements to unconscionability;  inequality of bargaining power, and substantial unfairness.  The Court of Appeal said that the trial judge had only considered the “substantial unfairness” element, not the inequality of bargaining power element.

The Court of Appeal refused to make its own decision as to whether there was inequality of bargaining power between the parties.  It also refused to consider whether the fraud of the defendant or its lawyer invoked the third (“public policy”) element of the Tercon test or precluded the defendants from relying on the exclusion clause at all.  The Court sent those matters back for a re-hearing.

In the result, we can draw a number of conclusions about how appellate courts in Canada are likely to apply the three-part test developed by the dissenting judgment in Tercon.

First, this dissenting judgment was accepted by the B.C. Court of Appeal as establishing the law with respect to the enforcement of exclusion clauses.  This is so even though the majority judgment in Tercon decided the appeal based on the first issue, namely that the dispute did not fall within the exclusion clause at all.

Second, the B.C. Court of Appeal confirmed that the unconsionability element of this test has two elements:

inequality of bargaining power and substantial unfairness.

In the case of the tendering of building or construction contracts, it may be very difficult, if not impossible, to establish inequality of bargaining power.  As the minority judgment in Tercon said:

“While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look after itself in a commercial context.  It need not bid if it doesn’t like what is proposed.  There was no relevant imbalance in bargaining power.”

The B.C. Court of Appeal did not deal with the third element of the test, namely, whether the exclusion clause should be enforced having regard to public policy.  But the remarks of the minority in Tercon make it difficult to avoid an exclusion clause in the context of a tender of a construction project:

“No statute in British Columbia and no principle of the common law override their ability in this case to agree on a tendering process including a limitation or exclusion of remedies for breach of its rules.  A contractor who does not think it is in its business interest to bid on the terms offered is free to decline to participate.  As Donald J.A. pointed out, if enough contractors refuse to participate, the Ministry would be forced to change its approach.  So long as contractors are willing to bid on such terms, I do not think it is the court’s job to rescue them from the consequences of their decision to do so.”

In the result, the decision of the B.C. Court of Appeal in Roy confirms that a bidder under an invitation to tender a construction contract will have a real challenge in avoiding an exclusion clause in the tender, at least under the second and third elements of the dissenting judgment in Tercon.  The bidder will more likely avoid that clause by showing that it does not apply to the dispute in question at all.  Otherwise the bidder may have to take the whole matter back to the Supreme Court and argue that the three part test was not the rationale of the majority decision in Tercon and not part of Canadian law.

Another way of looking at the decisions in Tercon and Roy is to question whether the invitation to tender creates any enforceable rights at all.  If it contains an exclusion clause that gives no enforceable rights to the bidding contractor, then there may be no consideration for the contractor’s bid, and therefore no Contract A created by the tender.  If that is so, then the contractor’s bid is itself just an invitation to treat.  If the contractors bid is just an invitation to treat, then the owner’s “acceptance” is just an offer and the contractor is not obliged to leave its bid open or accept the owner’s “offer”.  That could be the result of an owner’s invitation to bid containing an exclusion clause which eliminates any risk or obligation of the owner.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed), chapter 1, part 1(f)

Building Contracts   –   Tenders  –   Exclusion Clause

Roy v. 1216393 Ontario Inc, 2011 BCCA 500

Thomas G. Heintzman O.C., Q.C.                                                                                          February 29, 2012

www.heintzmanadr.com
www.constructionlawcanada.com