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.

Discussion

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

www.heintzmanadr.com

www.constructionlawcanada.com