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


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