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Contracts - Repudiation

Contracts - Anticipatory Breach

Remedy Drug Store Co. Inc. v Farnham (Ont CA, 2015)

In this case the Court of Appeal discusses the law relating to repudiation and anticipatory breach, here in the context of an allegation of breach of a settlement agreement. There is also a discussion of when commencement of litigation itself constitutes repudiation.
i. A Focus on Intention

[42] Repudiation occurs by the words or conduct of one party to a contract that show an intention not to be bound by the contract: Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, at para. 40. Anticipatory repudiation is essentially the same as repudiation simpliciter – the only difference is timing. In her treatise, Canadian Contract Law, 3d ed. (Markham: LexisNexis Canada, 2012), at p. 618, Angela Swan begins her discussion of anticipatory repudiation by helpfully outlining the circumstances in which this issue typically arises:
The phrases “anticipatory breach” or “anticipatory repudiation” refer to the situation created when, before the time of performance has arrived, one party to a contract tells the other, either explicitly or as an inference from something said or done by the party, that, despite having no justification for its position, it is no longer prepared to perform its obligations under the contract. The statement may be made in a letter by one party’s solicitor to the other, by an oral statement by a party himself or herself to the other, or in any form of communication. [Emphasis added. Citations omitted.]
See also John McCamus: The Law of Contracts, 2d ed. (Toronto: Irwin Law Inc., 2012), at p. 689.

[43] Recently, in Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10 (CanLII), 381 D.L.R. (4th) 1, at para. 149, Cromwell J. (concurring) wrote this about anticipatory repudiation: “The focus in such cases is on what the party's words and/or conduct say about future performance of the contract. For example, there will be an anticipatory repudiation if the words and conduct evince an intention to breach a term of the contract which, if actually breached, would constitute repudiation of the contract.”

[44] Accordingly, the same principles guide both anticipatory repudiation and repudiation. Courts often use the terms interchangeably because alleged repudiations frequently occur “before the time of performance has arrived” (to borrow Swan’s phrasing).

ii. The Test is Objective and the Surrounding Circumstances Should be Considered

[45] The test for anticipatory repudiation is an objective one: S.M. Waddams, The Law of Contracts, 6th ed. (Toronto: Canada Law Book, 2010), at para. 620. As Gillese J.A. wrote for this court in Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92 (CanLII), 88 O.R. (3d) 721, at para. 37: “To assess whether the party in breach has evinced such an intention [to repudiate the contract], the court is to ask whether a reasonable person would conclude that the breaching party no longer intends to be bound by it.”

[46] In objectively construing the purported breaching party’s intention, the surrounding circumstances must be considered. In White v. E.B.F. Manufacturing Ltd., 2005 NSCA 167 (CanLII), 239 N.S.R. (2d) 270, Saunders J.A. wrote, at para. 89: “Proof of such an intention requires an investigation into the nature of the contract, the attendant circumstances, and the motives which prompted the breach.” Earlier this year, Cromwell J., in his concurring opinion in Potter, confirmed the importance of considering the surrounding circumstances. At para. 164, Cromwell J. wrote: “As Lord Scarman put it in Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd., [1980] 1 All E.R. 571 (H.L.), at p. 590, the trial judge and the Court of Appeal in this case were ‘concentrating too much attention on one act isolated from its surrounding circumstances and failing to pay proper regard to the impact of the party's conduct on the other party’.”

iii. Subjective Intention Not to Repudiate is Not Determinative

[47] A party can repudiate a contract without subjectively intending to do so. As the Supreme Court wrote in Guarantee Company, at para. 40:
Repudiation, by contrast, occurs "by words or conduct evincing an intention not to be bound by the contract. It was held by the Privy Council in Clausen v. Canada Timber & Lands, Ltd. [[1923] 4 D.L.R. 751], that such an intention may be evinced by a refusal to perform, even though the party mistakenly thinks that he is exercising a contractual right" (S.M. Waddams, The Law of Contracts (4th ed. 1999), at para. 620).42 [Emphasis added.]
[48] Swan confirms this approach at p. 618 of her treatise: “The person (or his or her solicitor) may believe when the statement is made that he or she has an excuse for non-performance and that it is the other party who is in breach of the contract. The characterization of the statement as an “anticipatory breach” [or “repudiation”] will then be made when the dispute goes to trial.”

[49] However, the subjective intentions of the breaching party are of some moment. They may assist in determining what the objective intention was. Justice Cromwell made this point at para. 171 of Potter: “while the breaching party's motives as such are irrelevant, they may throw light on the way the alleged repudiatory conduct would be viewed by a reasonable person.” Thus, the driving factor behind anticipatory repudiation remains the objective intention of the party purportedly about to breach the contract.

iv. The Seriousness of the Conduct

[50] A finding of anticipatory repudiation is reserved for cases in which the conduct at issue can be said to be serious. Before an anticipated breach of contract can be characterized as an anticipatory repudiation, the breach must deprive the innocent party of substantially the whole benefit of the contract: see Swan, at p. 618; Waddams, at ss. 590, 595; McCamus, at pp. 693-694; and Fridman, The Law of Contracts in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 585.

[51] In Spirent, Gillese J.A. confirmed an approach that focuses on the importance of the disputed term, saying, at para. 37, “When considering Spirent’s conduct, it was important to keep in mind that what was involved was an anticipatory breach of contract…. [I]n determining whether the party in breach had repudiated or shown an intention not to be bound by the contract before performance is due, the court asks whether the breach deprives the innocent party of substantially the whole benefit of the contract.” See also Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006), 2006 CanLII 16346 (ON CA), 270 D.L.R. (4th) 181 (Ont. C.A.), at para. 51, where this court wrote, “A breach that allows the non-repudiating party to elect to put an end to all unperformed obligations of the parties is an exceptional remedy that is available only in circumstances where the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided”; and Potter, per Cromwell J., at para. 164.

[52] The authorities are therefore clear. The conduct in this case – insistence on a new contractual term – can amount to an anticipatory repudiation, but only if the term is of such importance that the party seeking to rely on the term can be said to have exhibited an intention not to be bound by the contract.

v. Anticipatory Repudiation in the Context of a Settlement Agreement

[53] I agree with the opinion of the British Columbia Court of Appeal in Fieguth v. Acklands Limited (1989), 1989 CanLII 2744 (BC CA), 59 D.L.R. (4th) 114 (B.C.C.A.), at pp. 122-123, that anticipatory repudiation should be considered a particularly exceptional remedy in the context of settlement agreements. The Court explained the rationale for this approach as follows:
It should not be thought that every disagreement over documentation consequent upon a settlement, even if insisted upon, amounts to a repudiation of a settlement. Many such settlements are very complicated, such as structured settlements, and the deal is usually struck before the documentation can be completed. In such cases the settlement will be binding if there is agreement on the essential terms. When disputes arise in this connection the question will seldom be one of repudiation as the test cited above is a strict one, but rather whether a final agreement has been reached which the parties intend to record in formal documentation, or whether the parties have only reached a tentative agreement which will not be binding upon them until the documentation is complete. Generally speaking, litigation is settled on the former rather than on the latter basis and parties who reach a settlement should usually be held to their bargains. Subsequent disputes should be resolved by application to the court or by common sense within the framework of the settlement to which the parties have agreed and in accordance with the common practices which prevail amongst members of the bar. It will be rare for conduct subsequent to a settlement agreement to amount to repudiation. [Emphasis added.]
This passage from Fieguth has been cited with approval by at least three Ontario courts, including this one: see Bogue v. Bogue (1999), 1999 CanLII 3284 (ON CA), 46 O.R. (3d) 1 (C.A.); Cellular Rental Systems Inc. v. Bell Mobility Cellular Inc., [1995] O.J. No. 721 (S.C.), aff’d [1995] O.J. No. 3773 (C.A.); and Whitehall Homes & Construction Ltd. v. Hanson, 2012 ONSC 3307 (CanLII), 23 C.L.R. (4th) 272, at para. 31.

[54] Courts are motivated to enforce settlements for good reason. As Swan puts it at p. 52 of her treatise, “There are strong policy reasons for the court’s attitude to settlements: it is in everyone’s interest that litigation be concluded by the parties’ agreement”.

vi. The Relevance of Commencing Legal Proceedings

[55] Courts have recognized that, in certain circumstances, commencing an action may constitute repudiation of an agreement: see e.g. Suleman v. British Columbia Research Council (1990), 1990 CanLII 746 (BC CA), 52 B.C.L.R. (2d) 138 (C.A.), at p. 142; but see Vrana v. Procor Limited, 2004 ABCA 126 (CanLII), 25 Alta. L.R. (4th) 201, at para. 14. In Suleman, the Court noted that the respondent had repudiated her employment contract by prematurely filing a writ of summons since she failed to establish a case of constructive dismissal: at pp. 142, 144. However, in Vrana, the Court found the employee had not repudiated his employment contract by bringing legal action too early.

[56] Although not perfectly analogous, this court has recognized that a non-repudiating party’s filing of a statement of claim may, but does not automatically, constitute an acceptance of a repudiation. For example, in Domicile Developments Inc. v. MacTavish (1999), 1999 CanLII 3738 (ON CA), 45 O.R. (3d) 302 (C.A.), at pp. 305-6, this court found that a party did not accept a repudiation when it issued a statement of claim seeking specific performance or damages because it made clear, in part through a letter to the repudiating party, that it did not accept the repudiation.

[57] In Place Concorde, LaForme J.A. was prepared to assume that an election to accept a repudiation can be made by commencing an action but held that, in the overall context, the pleading did not constitute an election to treat the agreement as being at an end.

[58] Case law is thus consistent with the principle that commencing legal action can, but does not necessarily, constitute repudiation. The proper inquiry remains focused on whether the party bringing legal action evinces an intention, in all the circumstances, to repudiate the agreement.

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