May A Party Terminate A Contract For “Fundamental Breach”?

In the recent decision in R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305, the Alberta Court of Queen’s Bench held that a party to a contract may terminate a contract on the basis of a “fundamental breach” of the contract, in addition to the right to terminate the contract for repudiation. While on the facts of the case the court held that a fundamental breach had not occurred, the decision still raises the question: what is the role of fundamental breach in Canadian contract law?

It is submitted that the Alberta court erred in applying the doctrine of fundamental breach to the termination for breach of contract. If that doctrine exists at all in Canadian law, it applies to exclusion clauses. Canadian courts should apply the doctrine of repudiation, not fundamental breach, to issues relating to the termination of contract for breach.

This decision and this article do not deal with the role of fundamental breach in relation to exclusion clauses. The law on that subject is somewhat tortured. The last word from the Supreme Court of Canada on that subject is probably found in the Tercon case: Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69.

The Background

The Langes engaged the plaintiff, (called “Mission” in the reasons) to build a home near Calgary. Mission did not complete the construction and the Langes hired a new contractor to complete the construction. Mission sued for the amount remaining due on its contract and the Langes counterclaimed for damage.

Each party accused the other of fundamental breach and repudiation of the contract.   The Langes allege that Mission committed fundamental breaches by not complying with the plans and specifications and by abandoning the project. The trial judge found that neither allegation was proven. While there were breaches of the contract, none of them rose to the level of fundamental breach, as they did not deprive the Langes of “substantially the whole benefit of the contract.” As to abandonment, while Mission removed certain property from the job site, that “was done for cost-savings purposes and did not constitute abandonment.” Moreover, Mission demonstrated its continuing intention to complete the project.

As to repudiation, the trial judge found that the Langes had not expressly accused Mission of repudiation, but that abandonment, had it been found, “might well have constituted a repudiation.”

Mission’s claim for fundamental breach was based on unreasonable delay on the part of the Langes, on the basis that “the Langes had an obligation to act in good faith in moving the project forward.” The trial judge dismissed this claim on the ground that “the delays on the part of the Langes did not constitute fundamental breach as they were not sufficient to deprive Mission of the whole benefit of the Construction Agreement.” The trial judge also held that a finding concerning the allegation of fundamental breach was unnecessary “in light of my finding below in respect of Mission’s repudiation allegation.”

The trial judge found that the Langes had repudiated the contract by writing an email stating that ” …we are hereby giving notice of our intent to terminate effective November 8, 2010.” The trial judge said:

“In my view, Mr. Lange’s email would lead a reasonable person in the position of Mission to that conclusion. It is possible that Mr. Lange’s email was merely a tactic intended to force a favourable response from Mission. However, the law is clear that the test is what a reasonable person would conclude, not what was subjectively intended. Therefore, Mr. Lange’s strategy, if that is what it was, is irrelevant to the outcome.”

Accordingly, Mission had the right to accept the Lange`s repudiation and terminate the contract.

The Trial Judge`S Legal Framework

The trial judge held that a party to a contract has two rights to terminate the contract in the event of breach: for “fundamental breach” and for “repudiation”. In the case of fundamental breach, the wrongdoer`s conduct “deprives the non-breaching party of substantially the whole benefit of the agreement”. Repudiation occurs by the wrongdoer`s conduct “by words or conduct evincing an intention not to be bound by the contract”.

In this case, the trial judge conducted an analysis of both types of breach, and concluded that repudiation by the Langes had occurred, but that fundamental breach had not.


This decision raises the question of whether fundamental breach is a separate ground for termination of a contract. Separate, that is, from repudiation.

It is submitted that it is not, and that the trial judge was not required to perform a separate analysis of fundamental breach in this case.

Fundamental breach is a doctrine developed to deal with exclusion clauses, not with the right to terminate the contract. Under the law developed in England, largely by Lord Denning, the idea came into being that if the wrong-doer’s conduct was so egregious that it removed the whole basis of the contract, then an exclusion clause could not be enforced. The law with respect to exclusion clauses – and fundamental breach – has been very contentious, and has largely been eliminated from the Canadian law relating to exclusion clauses. The history of the fundamental breach doctrine as it applies to exclusion clauses can be reviewed in the Tercon case.

In the present decision, the trial judge quoted from the decision of the Supreme Court of Canada in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CarswellOnt 3171, [1999] 3 S.C.R. 423. However, that case was an exclusion clause case. The Supreme Court of Canada analogized a time limitation provision in a bond to an exclusion clause. The Supreme Court held that, under the principles then developed relating to fundamental breach, the time limitation clause was enforceable. But the Guarantee v. Gordon Capital case, on that issue, was not about whether a contract could be terminated for fundamental breach.

The other case cited by the trial judge was the decision in RIC New Brunswick Inc v Telecommunications Research Laboratories, 2010 ABCA 227, 487 AR 340. In that case, the Alberta Court of Appeal did perform a “fundamental breach” analysis to determine whether a contract could be terminated for breach. It did not perform a repudiation analysis.

In my respectful submission, the doctrine of fundamental breach has no place in the law relating to the termination of a contract due to the breach of the contract. The only doctrine that applies in that situation is repudiation. The wrongdoer`s conduct is either a repudiation of the contract or it is not. In that context, the question of whether the wrongdoer`s conduct amounts to a fundamental breach is irrelevant.

It is also confusing. Two tests cannot work as they will potentially lead to inconsistent results. One test for termination of the contract is sufficient. The repudiation test is well known and has a history of hundreds of years of judicial pronouncements. It is difficult enough to have to advise parties to a contract as to whether there has been a repudiation without having another test riding alongside to create confusion.

It is also duplicative and unnecessary, as the present case demonstrates. The parties argued both tests, although one half-heartedly because it is apparent that both cannot apply. The separate analysis proceeds for no good reason.

The suggestion that a fundamental breach may give rise to a right to terminate a contract appears to have arisen from language used by the Supreme Court of Canada in the Guarantee v. Gordon Capital decision. However, on the relevant point that case was about exclusions clauses, and whether a time limitation clause should be analysed in a fashion similar to exclusion clauses. It was not about whether a fundamental breach gives rise to a right to terminate the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. at chapter 8, section 8.

R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305

Building contracts – termination – repudiation – fundamental breach

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                       June 12, 2017


When Does The Limitation Period Start When A Party Repudiates A Contract?

You might think that there is one answer to this question. But in Pickering Square Inc. v. Trillium College Inc., the Court of Appeal for Ontario recently reminded us that there are two answers, depending on whether the innocent party accepts the repudiation or not. If the repudiation is accepted, then the contract comes to an end and the limitation period starts to run for all claims under the contract. But if the innocent party does not accept the repudiation, then the contract continues and the repudiation may well constitute a continuing breach of contract. If that is so, then for each day of non-performance, the limitation period runs from that day.


Pickering was the lessor and Trillium was the lessee under a lease of space in a shopping centre. In the lease, Trillium agreed to pay rent, to occupy the premises and to continuously operate its business as a vocational college, and to restore the premises at the expiry of the lease. Trillium gave notice to Pickering that it was vacating the premises and did so in December 2007. In June 2008, Pickering sued the appellant for rent arrears and payment under the lease for its failure to occupy the premises and to conduct its business continuously. The suit was settled in August 2008 and Trillium agreed to resume occupation of the leased premises. Trillium paid the rent for the remainder of the lease but it did not re-occupy the premises, did not conduct its business in those premises, and did not restore the premises at the end of the lease ended. After the lease expired, Pickering sued Trillium for breach of the lease.

Trillium brought a motion for summary judgment, arguing that Pickering’s claim was brought outside the two-year limitation period under s. 4 of the Ontario Limitations Act, 2002. The motion judge held that Trillium’s breach of the covenant to occupy the premises and operate its business continuously was of a continuing nature, such that each day of the breach gave rise to a fresh cause of action. As a result, only the claim relating to the breach occurring more than two years prior to commencement of the action ­­was barred by the Limitations Act, 2002.

The motion judge also held that Pickering’s claim for damages for breach of the covenant to restore the premises was not time barred. The obligation to restore arose when the lease expired on May 31, 2011, and Pickering’s action in February 16, 2012 was brought within two years of that date. .

The Appeal

Trillium argued that its breach of the covenant to operate its business continuously was complete on October 1, 2008, the first day it failed to resume occupation of the leased premises and operate its business. It submitted that each subsequent day that it failed to operate its business was not a separate breach and that each day of non-occupation did not give rise to a separate cause of action; rather, each such day constituted an instance of additional damages. Trillium submitted that a continuing breach of contract requires a succession or repetition of separate acts. In this case, it argued, there was a single act with continuing consequences and consequently, Pickering’s claim became statute-barred on October 1, 2010, two years after October 1, 2008 when Trillium failed to resume occupation and conduct its business, and long before Pickering commenced its action in February 2012.

The Ontario Court of Appeal rejected this submission. In doing so, the court differentiated between a repudiation of a contract which is accepted, in which case the contract comes to an end, and a repudiation of contract which is not accepted, in which case the contract remains in force. In the latter situation, the continuing failure of the repudiating party may amount to a continuing breach of contract. In that latter situation, the limitation period applies to each day of continuing breach. The limitation period expires on a rolling basis, so that once two years passes from a particular day then the limitation period for that day expires, but it has not yet expired for successive days and breaches.

The Ontario Court of Appeal explained the repudiation principle as follows:

“The election to cancel a contract as a result of a serious breach or repudiation brings a contract to an end and relieves the parties of any further obligations under it. The contract is not void ab initio: the innocent party may sue for damages for breach of the contract….By contrast, if the innocent party elects to affirm the contract despite the serious breach or repudiation, the contract remains in effect and the parties are required to perform their obligations under it. The innocent party retains the right to sue for past and future breaches…Pickering elected not to cancel the lease following Trillium’s October 1, 2008 breach. It affirmed the lease and, as a result, the parties were required to perform their obligations under it as they fell due….Trillium could have resumed performance of its obligations at any time prior to the end of the term of the lease by carrying on its business at the leased premises in accordance with the terms of the covenant. Had it done so, Pickering would have been required to accept Trillium’s performance and would have been unable to terminate the lease in the absence of a further serious breach or repudiation. Trillium would have been liable for damages from the date of its October 1, 2008 breach until the date it resumed the performance of its covenant obligations, but would not have incurred liability for breach of the lease beyond that date. Trillium chose not to resume its obligations at any point prior to the expiry of the lease.”

The Ontario Court of Appeal then explained the applicable limitations principle:

“In these circumstances, when did the two-year limitation period begin to run? It is clear that a cause of action accrues once damage has been incurred, even if the nature or the extent of the damages is not known….But accrual of a cause of action is not determinative for limitation purposes in the context of a continuing breach of contract and an election by the innocent party to affirm the contract. The motion judge properly concluded that a fresh cause of action accrued every day that breach continued – every day that Trillium failed to carry on its business in accordance with the covenant……The accrual of fresh causes of action has consequences for the innocent party as well as the party in breach of the contract. It sets the clock running for a new two-year limitation period. Pickering’s election to affirm rather than cancel the lease does not have the effect of postponing the date for discovery of the breach until expiry of the lease…..The limitation period in this case applied on a “rolling” basis……The two-year limitation period commenced each day a fresh cause of action accrued and ran two years from that date. Thus, Pickering was entitled to claim damages for breach of the covenant for the period going back two years from the commencement of its action on February 16, 2012 – the period that ran from February 16, 2010 until the lease expired on May 31, 2011.”

The Court of Appeal also upheld Pickering’s claim for repairs to be done at the end of the lease. Pickering was only claiming for breach of this covenant at the end of the lease, and not before. According, the limitation period for that breach arose in May 2011 when the lease expired, not in October 2008 when Trillium failed to resume occupation.


This decision is a useful reminder of the distinction between an accepted and unaccepted repudiation of contract. The former brings the contract to an end. The latter does not, and as such has been described as something “writ upon water”. The fact that the contract remains in place is obviously important for the ongoing performance of the contract, as the obligation of performance remains in place on both sides of the contract. But as importantly, the limitation period continues to apply, on a rolling basis, to the breaches that occur after the unaccepted repudiation. And the Court of Appeal has held in this case that it does not require separate and positive acts by the defaulting party to occur for there to be continuing breaches of the contract. Rather, the failure to act and the omission of performance amount to continuing breaches of the contract.

There may be other implications of an unaccepted repudiation of the contract. It is not just the obligation of performance that continues. In addition, the parties remain entitled to exercise positive rights under the contract. Also, the performance of contracts with subcontractors and consultants, and the coverage and reporting obligations under insurance contacts and bonds, may be affected.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 8 part 8(b) and chapter 9 part 3.  

Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179

Contracts – repudiation – non-acceptance of repudiation – limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb                                                 April 17, 2016

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.


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


What Amounts to Good Faith Conduct or Repudiation on Construction Projects?

Last week we discussed joint ventures in construction projects.  That issue arose from the important recent decision of the Prince Edward Island Court of Appeal in WCI Waste Conversion Inc. v. ADI International In. 

In this article, we will examine two further issues raised by that decision:

One, the duties of good faith and fiduciary duties in a construction project; and

Two, the degree to which conduct must be wrongful before it will amount to repudiation entitling the other party to terminate a construction contract.

The Background

To refresh our memory from my article last week, in June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  A provision of the August MOU stated that, while ADI would be the prime contractor and WCI the subcontractor, the actual working relationship between them would be based upon the general principles of a joint venture agreement.  The majority of the Court of Appeal held that this provision resulted in the parties being joint venturers, not independent contractors.

Under ADI’s contract with IWMC, ADI was to enter into a five year operating contract with IWMC, and under the MOU, ADI was to enter into a five year subcontract with WCI under which WCI was to be the operator.

In its Substantial Performance letter dated October 7, 2001, IWMC accepted ADI’s application for Substantial Performance effective October 1, 2001.  In accepting Substantial Performance, IWMC stated that its concerns about throughput performance were to be addressed by the date of Total Performance, which was to occur on February 1, 2003.  As a result, both ADI and WCI had until February 1, 2003 to demonstrate throughput performance.  Moreover, the majority of the Court of Appeal concluded that, based upon its conduct leading up to the Substantial Performance letter, ADI effectively viewed WCI’s performance with respect to throughput performance as being a deficiency, and not conduct which repudiated WCI’s obligations under the contract.

On November 26, 2002, ADI gave notice to WCI that it was in default of its obligations and gave a five day “cure” notice to WCI.  By letter dated November 29, 2001, WCI denied that it was in default and restated its commitment to improve the throughput performance of the project.  By letter dated December 4, 2002, ADI terminated the contractual relationship between the parties.

Repudiation and Termination

The trial judge held that, as of the date of ADI’s termination of the contract, WCI had not repudiated the contract, and therefore ADI’s termination was unlawful.  This finding was upheld by the majority of the Court of Appeal.  There are several aspects of its conclusions that are important.

First, the majority of the Court of Appeal held that the “cure” notice could not be given by ADI if WCI was not then in default.  Since WCI had until February 2003 to ensure that throughput performance was met, WCI was not in breach of any obligations as of November 26, 2002 when ADI delivered its “cure” notice, and December 4, 2002 when it terminated the contract. The Court of Appeal stated its affirmation of the trial judge’s conclusion as follows:

“The trial judge was entitled to find, as he did that WCI did not by its words or conduct repudiate; that, in any event, the time for correction of the deficiencies in question was not exhausted; and, in the circumstances of the status of the deficiencies, ADI did not show that WCI was incapable of performing its part of the contract.”

This is a very useful check list for a contractor contemplating termination of a subcontractor, particularly when deciding to give or act upon a “cure” notice.  First, by its words or conduct, has the subcontractor really repudiated its obligations?  Second, has the time for performance of the obligations in question really been exhausted?  And third, is the subcontractor really incapable of performing its contract?   And for good measure, can I prove all these elements at a trial?

The second important aspect of the Court of Appeal’s decision is its affirmation of the principle that “when a contract provides a time within which the contract work must be completed, the contractor is entitled to the whole of that time for doing the work” relying on Goldsmith and Heintzman on Canadian Building Contracts (4th ed) at chapter 5, part 1(d).

Third, the trial judge and majority judgment in the Court of Appeal applied the principle of good faith performance of contractual obligations.  The trial judge held that ADI did not act in good faith in seeking approval of Substantial Completion on the basis of throughput performance being achieved by February 2003 and then turning around and terminating the contract with WCI based upon its deficiencies in relation to throughput performance before February 2003.  The Court of Appeal held that a contract must be performed in good faith, that this obligation involves performance within the reasonable expectations established by the contract, and that the trial judge was entitled to find that ADI’s “tactics and motivations” were inconsistent with a good faith exercise of its obligations and contractual duties to WCI.

Fourth, in examining the conduct and rights of ADI and WCI, the trial judge and Court of Appeal looked to the conduct and rights as between the owner, IWMC, and ADI.  Thus, IWMC had delivered no “cure” notice or termination notice to ADI in relation to throughput performance.  Why was ADI delivering such a notice to WCI?  At ADI’s request, IWMC had agreed that throughput performance would be established by the date of Total Performance.  Why was ADI not agreeing with WCI to the same date for performance?  Clearly, ADI’s inconsistent conduct or attitude was of crucial concern to the trial judge, and the Court of Appeal upheld the trial judge’s findings based on those concerns.

The minority judge agreed with this conclusion but would have directed a new trial related to the entitlement of ADI to terminate the operating contract with WCI at its sole discretion and whether it had done so in good faith.

All the judges of the Court of Appeal were firmly of the view that the issue of whether or not WCI had repudiated the contract and whether or not ADI had the right to terminate the contract based on repudiation, was to be determined on an objective basis.  The majority held that repudiating is “not lightly to be inferred from a party’s conduct”, and that, as the terminating party, ADI had the obligation to prove WCI’s repudiation and its entitlement to terminate.  Accordingly, there was no element of discretion or deference to be accorded to ADI’s decision to terminate.

In all respects, this decision of the PEI Court of Appeal provides a very useful survey of the issues which must be addressed by contractors and subcontractors when termination for repudiation is contemplated under a construction contract, particularly when a “cure” notice is involved.

Good Faith and Fiduciary Duties

The trial judge concluded that, by reason of the joint venture between them, the parties owed fiduciary duties to each other.  Both the majority and the minority of the Court of Appeal disagreed.  The majority held that a joint venture, unlike a partnership, does not necessarily give rise to fiduciary duties.  Without deciding if fiduciary duties did arise in this joint venture, the majority held that the material findings of the trial judge about the conduct of the parties and the legal consequences of that conduct could be supported without reference to fiduciary duties.

The minority judge found that it was unlikely that, in the circumstances of this case, fiduciary duties would arise.  The minority judge then considered whether the parties had an obligation to exercise their rights under the contract in good faith.  He concluded that there was no such obligation in relation to any of the provisions of the contract which did not involve discretion, and that there was in relation to those provisions that did involve discretion.  He then concluded that under the “cure notice” provision of the MOU, if AWI properly followed the notice provisions and WCI did not cure, then the MOU could be terminated without regard to issues of good faith.  However, he held that AWI’s right to terminate the operating agreement was unilateral and could be exercised “in its sole discretion”, provided it gave the required notice and paid the required termination fees.  In this circumstance, the minority judge concluded that AWI was required to act in good faith in giving a notice to terminate the operating agreement.

The concepts of a fiduciary duty and a duty of good faith are very different.  A fiduciary duty is a duty to act in the utmost good faith and in the other party’s best interest.  An obligation of good faith is not a fiduciary duty.  It is not the obligation to act in the utmost good faith and in other party’s best interest.  It is the obligation to act in accordance with the purpose of the contract and not to undermine its performance.

It is highly doubtful that a true fiduciary duty will arise during a construction project unless the parties call themselves partners.  The commercial setting for the project is not consistent with such an obligation.

On the other hand, it is hard to see why an obligation to act in good faith should not arise.  After all, that obligation simply requires a party not to act in bad faith, not to act for an ulterior motive, that is, a motive which is outside the purpose of the contract.

Making an obligation of good faith dependent upon the existence of discretion, as the minority judge did, is highly problematic.  The element of discretion is usually relevant to determining whether the duty is a fiduciary duty, not whether a duty of good faith exists.  If a cure notice is given properly on its face, but is given for an ulterior motive having nothing to do with the proper completion of the construction project, why should that sort of conduct be valid?  Why is the right to terminate the operating contract any more “unilateral” than the right to give a cure notice?  And if a party has a right to terminate “in its sole discretion”, then surely the real issue is whether that right is exercised for bona fide reasons consistent with the purpose of the contract.

In all these circumstances, good faith appears to be applicable to most of the obligations on a construction project.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed, Chapter 7, part 1.

Building Contracts   –   Good Faith   –   Fiduciary Duties   –   Repudiation  –  Cure Notice

WCI v. ADI, 2011 PECA 14 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                          January 10, 2012                                                                              

When and How is a Subcontractor Bound by its Tender in a Bid Depository System?

The process by which subcontractors’ tenders are accepted in a bid depository is fundamental to the efficacy of that system.  If that process does not effectively bind the subcontractors, then the subcontractors will be able to unilaterally withdraw their bids later.  The British Columbia Supreme Court addressed this issue in its recent decision in Civil Construction Co Ltd v. Advance Steel Structure Inc.

This case required the court to unscramble the “Contract A – Contract B” legal structure created by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111 and apply it to the relationship between a contractor and subcontractor.  In Ron Engineering, a distinctly Canadian legal structure was created for contracts between the owner and the contractor in a bid depository system.  Under that structure, there are two contracts which are potentially formed in such a bidding system. The first contract, Contract A, is the contract formed by the submission of a bid. That contract is a judge-made creation arising from the wording of a bid depository system. It is based upon and regulates the bid system itself and requires the bidding contractor to leave its price in place for the duration of the bid and requires the owner to award the contract only to a compliant bidder. The second contract, Contract B, is the ultimate construction contract which may be entered into if the bidder is successful.

That process is workable at the owner-contractor level but becomes more difficult to apply at the contractor-subcontractor level.  Nevertheless, in Naylor Group Inc. v. Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court held that the same structure applies to the relationship between a contractor and subcontractor when the subcontractor files a bid in a bid depository system and the contractor carries that bid in its bid to the owner.

What Binds a Subcontractor to a Bid?

In Naylor v. Ellis-Don, it was the contractor, Ellis-Don, which refused to award the subcontract to the subcontractor, Naylor, whose bid it carried in its bid to the owner.  So the dispute dealt with whether the contractor was in breach of its obligations, not whether the subcontractor was.  The Supreme Court held that, by carrying the subcontractor’s bid in its own bid, a Contract A was created between the parties which “required the successful prime contractor to subcontract to the firms carried in the absence of a reasonable objection.”  (My emphasis added).

In the Ontario Court of Appeal, the result was stated somewhat differently.  There the Court of Appeal said: “Thus, unless the successful prime contractor has a reasonable objection to the subcontractor it has proposed, the prime contractor must communicate its acceptance of the subcontractor’s bid.” (Again, my emphasis added, for comparison purposes).

In Civil Construction v. Advanced Steel, it was the subcontractor that refused to adhere to its bid.  And it said that its bid had not been accepted by the contractor.  In these uncharted waters, what is the right result under the Ron Engineering structure, or is the structure being bent so out of shape that it cannot apply?  What event binds the subcontractor to its bid, a communicated acceptance or the filing of the contractor’s bid?

Civil Construction was a bidder as the general contractor in a tender by the City of Richmond, British Columbia for the construction of a drainage pump station upgrade.  Advanced submitted an unsolicited bid dated June 10, 2009 to Civil Construction for the structural steel subcontract work.  In its bid, Advanced stated that its bid was “valid for acceptance for the next 30 days and valid for delivery within 90 days after acceptance”.  Civil incorporated Advanced’s bid into its own bid dated June 10, 2009 to the City of Richmond.

On July 10, 2009, Civil was advised by the City that it was the successful bidder.  Civil’s project manager testified that, on that same day, he called each of the subcontractors, including Advanced, to advise them that they were named as sub trades in its tender submission.  On July 13, 2009, the City wrote to Civil to formally award the general contract on the project to Civil, and Civil wrote to Advanced on the same day to award it the structural steel subcontract.

Advanced refused to enter into the subcontract for two reasons:

First, it said that Civil’s acceptance on July 13, 2009 of Advanced’s bid of June 10, 2009 was outside the 30 days stipulated in that bid.

Second, it said that Civil’s acceptance of its bid contained conditions not set forth in its bid, and therefore amounted to a counter-offer, which Advanced refused to accept.

Civil proceeded to hire another structural steel subcontractor and sued Advanced for the extra cost of that subcontract.

The Court rejected both of Advanced’s arguments

First, it held that the relevant acceptance by Civil of Advanced’s bid occurred on June 10, 2009. That acceptance occurred by reason of Civil including Advanced’s bid in Civil’s own bid to the owner.  By doing so, Civil created the Contract A with Advanced under the bid depository system.

Under that system, the B.C. Court held that Advanced’s bid was accepted by Civil under Contract A once that bid was submitted by Civil as part of its bid to the owner.  Relying on previous decisions in the Supreme Court of Canada and Alberta, the Court held as follows:

“[C]ontract A is formed when a subcontractor tenders in response to a general contractor’s invitation and the general contractor incorporates that bid as part of its tender to the owner. Under contract A a subcontractor may not withdraw its tender for a set period and must enter contract B upon acceptance of its bid, which is when the general contractor’s bid with the subcontractor’s tender included is accepted by the owner.

The general contractor’s obligation to a subcontractor under contract A arises once the general contractor chooses to carry the subcontractor’s bid in its tender to the owner.

In return for the subcontractor being bound by its bid, the general contractor, upon acceptance of its bid, which includes the subcontractor’s bid, is obliged to enter into a construction subcontract B with the subcontractor.”

The Court accordingly held that, since Civil had included Advanced’s bid in its own bid on June 10, 2009, the relevant acceptance had occurred within the 30 days set forth in Advanced’s bid.  In effect, the Court interpreted the words “valid for acceptance” in Advances’ bid as meaning “valid for acceptance for Contract A, not Contract B”.  The Court did not refer to any communication of that acceptance by Civil to Advanced, or any necessity for such a communication.

Second the Court also held that Civil’s purported addition of further work in the subcontract was not permissible under the Contract A system.  Therefore, Civil and Advanced were bound to enter into a Contract B that conformed to the bid, and the additional work specified by Civil was ineffective and Advanced was bound by a subcontract which did not include that additional work.  Accordingly, Advanced was liable in damages to Civil based upon that subcontact.

Two Disquieting Features:

While this decision is the common sense result of a bid depository system, it does have two disquieting features.

First, when the contractor includes the subcontractor’s bid in its tender to the owner, should the contractor be obliged to tell the subcontractor, at that time, that the latter’s bid is included in the contractor’s tender?

Normally, an acceptance only occurs when the acceptance is communicated to the offeror.  There could be many subcontractors who tender for the work.  If there is no communication from the contractor to the subcontractor when the contractor submits its bid, should the subcontractor be presumed to know that its bid is the one which has been accepted for inclusion in the general contractor’s bid?

As noted above, in Naylor v. Ellis-Don, the Ontario Court of Appeal said that the contractor “must communicate its acceptance of the subcontractor’s bid” to the subcontractor.  But what if it doesn’t?  Does that let the subcontractor off the hook?  And while the Supreme Court said in that case that Contract A “required the successful contractor to subcontract to the firm carried”, is the subcontractor similarly bound to proceed with the subcontract in the absence of an express and timely acceptance by the contractor?

The courts can, of course, create exceptions to the normal rule that an acceptance occurs when it is communicated to the offeror.  Those exceptions are based upon business efficacy and the presumed intent of the parties.  One such exception is the old rule that a posted acceptance is deemed to occur at the time of posting, not the time of receipt.

The Court Constructed a New Exception for Subcontractors

It appears that in the present case, the court constructed a new exception for subcontractors’ bids in the bid depository system.  According to this decision, the acceptance of a subcontractor’s bid for purposes of Contract A occurs when the contractor includes the subcontractor’s bid in its own bid, even though that is not communicated to the subcontractor.  The real question is whether that is a good rule, and if it is, whether the rule should be specifically set forth in the bid documents. Otherwise, it could be argued that the contractor should be required to notify the specific subcontractor whose bid has been included in the contractor’s bid to the owner, so that the subcontractor knows that its bid has been accepted for the purpose of Contract A.

For the moment, and based on this decision, contractors and subcontractors may proceed on the basis that if a subcontractor states a time for acceptance in its bid, then that statement will be taken to mean the time in which the contractor has to insert that bid into its own bid to the owner, that there is no need for the contractor to advise the subcontractor that that has occurred, and that it is up to the subcontractor to inquire, if it wishes to know, whether its bid has been included in the contractor’s bid.

Warning to Contractors:

The other question which is raised by this decision is whether a subcontractor can avoid this result by a more specific tender. Can the subcontractor specifically state in its bid that its offer of a construction contract (ie:  Contract B) must be accepted within a specific period of time, and a time period shorter than the contractor’s bid period?  In other words, could the subcontractor specifically state that its bid could only result in a construction contract if that construction contract is entered into within a specific period of time which is less than the bidding process allows?

The short answer is that such a bid is non-compliant with the bid depository system and Contract A under the Ron Engineering structure.  This answer follows from the requirement in Contract A that the subcontractor keep its bid open during the bid period and enter into Contract B on the terms set forth in the bid, that is, up to the time the contract is awarded and a reasonable time thereafter.  But if this is the right answer then contractors will have to be alert to ensure that any subcontractors’ bids they receive do not have such a short fuse in them, and if they do, to disqualify them from the bidding process.

Advanced may have intended to raise this question in the present case.  But the court did not answer the question by holding that Advanced’s bid was non-compliant with the terms of the bid.  Rather, it interpreted the word “valid for acceptance” in Advance’s bid to mean “valid for acceptance under Contract A”, and it arrived at that conclusion by reference to the bid depository system and Ron Engineering.  It will require a more specifically drafted subcontractor’s tender to raise the “non-compliant acceptance period” issue.

Construction Law – Subcontractors – Bid Depository System

Civil Construction Co Ltd v. Advance Steel Structure Inc., 2011 BCSC 1341

Thomas G. Heintzman O.C., Q.C.
November 13, 2011

When The Contractor Plays Hard-Ball What Does A Sub-Contractor Do; Peter Kiewit Redux?

An age-old problem arising from a tender on a construction project is:   what does a sub-contractor do when it is the successful bidder but believes that the work is different than shown in the tender documents and the contractor says:  Those are the conditions: Take ‘em or leave ‘em.   But if you back out of your bid, I am going to sue you!

Should the sub-contractor perform the work and sue later, or leave the job?  That is the issue that, once again, the Superior Court of Ontario faced in Asco Construction ltd. v. Epoxy Solutions Inc.

Asco was the general contractor and Epoxy was the successful bidder for the concrete floor subcontract on a theatre construction project.  As part of the tender process, the subcontractors were provided with a sketch of the floor levels.  After signing a letter of intent, Epoxy had a surveyor check the elevations on the site and found that the elevations were substantially different than represented in the sketches.

Asco demanded that Epoxy proceed with the job, asserting that Epoxy should have checked the levels before bidding. Epoxy asserted that Asco was in breach of the terms of the tender. In the result, Epoxy refused to sign the formal subcontract or proceed with the job.  Asco retained a new subcontractor and sued Epoxy for the higher cost of that subcontract, and Epoxy counterclaimed for damages for breach of the tender.

The trial judge quoted from the harsh and oft-cited judgment of the Supreme Court of Canada in Peter Kiewit Sons’ Co. v. Eakins Construction Ltd, [1960] S.C.R. 361.  Showing little sympathy for the predicament of the subcontractor in this situation, the Supreme Court said:

“Nothing could be clearer. One party says that it is being told to do more than the contract calls for. The engineer insists that the work is according to contract and no more, and that what is asserted to be extra work is not extra work and will not be paid for.  The main contractor tells the sub-contractor that it will have to follow the orders of the engineer and makes no promise of additional remuneration. In these circumstances the subcontractor continues with the work.  It must be working under the contract. How can this contract be abrogated and another substituted in its place?… Whatever Eakins recovers in this case is under the terms of the original sub-contract and the provisions of the main contract relating to extras.

…The work was not done as an extra and there can be no recovery for it on that basis. When this position became clear, and it became clear before any work was done, the remedy of the Eakins company was to refuse further performance except on its own interpretation of the contract and, if this performance was rejected, to elect to treat the contract as repudiated and to sue for damages.”

Following that approach, the trial judge in the present case held that Epoxy had only two options.

One was to sign the formal contract, and renounce any claim for additional payment or damages.

The other was to renounce its bid and refuse to proceed with the sub-contract.

The trial judge found that the elevation conditions were materially different than represented in the invitation to tender, and therefore the contractor had repudiated Contract A arising from the tender process.  The sub-contractor was entitled to accept that repudiation, terminate that contract and recover damages.

In arriving at that conclusion, the trial judge relied upon Goldsmith & Heintzman on Canadian Building Contract (4thed) at pages 1-60, 4-19 to 21, 5-8 and 7-4.

The decision of the subcontractor to terminate the contract was a gutsy one.  After all, the subcontractor is exposing itself to a claim by the contractor for substantial damages.  But the other choice was to proceed with the sub-contract under apparently changed circumstances, which might have been equally onerous.  Is there no better solution?

Surely there should be a better solution than these two stark alternatives.  One would think that, in the 50 years since the Peter Kiewit decision, Canadian construction law would have come up with one.

At least three solutions are apparent.

One solution would be to permit the subcontractor to deliver a notice stating that it was performing the work under protest, and asserting that the claim for extra payment is to be resolved later.  That notice would contradict the suggestion that the subcontractor was agreeing to perform the work in accordance with the contract.  In other fields of business, performance or acceptance under protest has been held effective to contradict the assertion that the party giving the notice had agreed to perform under or accept the terms of the contract.

But to date, there is no evidence that Canadian courts will give effect to such a notice in the field of construction law.  Some might say that allowing the dispute to remain open under such a notice does not fit in with the need for consensus on the job site during the project. But this objection seems unreasonable since the parties would still accept that the project was proceeding under the terms of the contract, and they would only be reserving their financial position until later.  Moreover, this sort of solution might encourage the parties to settle their differences immediately.

Another solution is to have the parties agree that the subcontractor will proceed with the job on the basis that its claim for further payment will be dealt with later.  This solution could only be implemented with the consent of both parties and would have the same effect as performance under protest in terms of delaying the resolution of the dispute to later.

The third solution is to have the dispute resolved immediately by a process in which the parties have confidence.  It may be unlikely that the parties would have confidence in the consultant chosen by the owner.  But other means of immediate resolution of the dispute are certainly available.  However, parties to most construction projects seem unwilling to put this sort of an interim dispute resolution regime in place during the project.

Whatever the solution, it certainly seems that the hard-ball approach of Peter Kiewit is out of step with the modern approach to dispute resolution and the efficient performance of building contracts.

Building Contract  –  Tender  –  Repudiation  

Asco Construction ltd. v. Epoxy Solutions Inc., 2011 ONSC 2454.

Thomas G. Heintzman, O.C., Q.C.                                                                               September 4, 2011