KPA Lawyers – June 10, 2020

When Agreements of Purchase and Sale are breached, it is most often a result of the Purchaser(s) failing to meet a condition in the agreement. It is less common to see a sale fall through as a result of the Vendor’s breach. Despite this, I have worked with Purchasers in transactions where the Vendor has refused to perform under the Agreement. Depending on the circumstances of the situation, Purchasers may have more than one option available to them, but the refusal by the Vendor to act is the first consideration.

When a Vendor is refusing to perform under the Agreement, either by words or by conduct that suggests they are not bound by the Agreement, the Purchaser may have an argument for anticipatory breach.     

                                                                                                                                                                                      As summarized by the Ontario Court of Appeal in Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92 (Ont. C.A.) at para. 37, “an anticipatory breach … occurs when one party, whether by express language or conduct, repudiates [or rejects] the contract or evinces an intention not to be bound by the contract before performance is due.”                                                      A Purchaser may only have an argument for anticipatory breach because it is possible for the Vendor to not be repudiating the contract when they refuse to abide by a term of the agreement. They may simply be neglecting to perform a specific term with no intention of ending the agreement with the Purchaser. That is not to the level of anticipatory breach.

Per the Ontario Court of Appeal in Remedy Drug Store Co. v. Farnham, 2015 ONCA 576 (Ont. C.A.) at paras. 47 and 48, it was aptly stated that “a party can repudiate a contract without subjectively intending to do so.” That Court then went on to quote Angela Swan, Canadian Contract Law, 3d ed. (Markham: LexisNexis Canada, 2012), at p. 618:

“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.”

If the court determines it was not an anticipatory breach and the Purchaser had responded stating that the Agreement had come to an end, the Purchaser would find themselves in an unfortunate situation.

To determine whether a Vendor is repudiating, the court must ask the following questions:

1. Would a reasonable person think that the Vendor no longer intends to be bound by the agreement? and
2. Does that refusal deprive the Purchaser of substantially the whole benefit of the contract?

With regard to the first limb of the above test, something written by the Vendor or Vendor’s lawyer indicating that the Vendor intends to no longer be bound by the entirety of the agreement is infallible evidence that the Vendor is repudiating. If the refusal to act is based on conduct and does seem to indicate that the Vendor no longer intends to fulfil the agreement, the Purchaser moves on to the second limb of the test.

The court in Spirent Communications confirmed the five factors to consider in order to determine if the conduct of the Vendor has deprived the Purchaser of substantially the whole benefit of the agreement:

1. The ratio of the party’s obligations not performed to that party’s obligations as a whole;
2. The seriousness of the breach to the innocent party;
3. The likelihood of repetition of such breach;
4. The seriousness of the consequences of the breach; and
5. The relationship of the part of the obligation performed to the whole obligation.

If the Purchaser decides that the words or conduct of the Vendor does not, in fact, amount to an anticipatory breach or repudiation of the contract, the Purchaser can remind the Vendor of their obligations and proceed with their obligations under the Agreement.

Now if the Purchaser determines that the Vendor has repudiated the agreement, the Purchaser must decide how to proceed and communicate it within a reasonable time period to the Vendor. The Purchaser will have two options:

1. Refuse the repudiation and continue with the performance of the agreement; or
2. Accept the repudiation, which will bring the agreement to an end.

In the event the Purchaser decides to accept the repudiation, they have a right to seek damages for breach of contract. The Purchaser will not however have a right to specific performance, which is the court enforcing the Vendor to fulfil the Agreement.

Should the Purchaser decide to refuse the repudiation and continue with the agreement, they must fulfil all of their obligations under the agreement. The Purchaser also has the option to meet with a lawyer immediately to begin an Application for specific performance or damages in lieu thereof pursuant to Rule 14.05 (3)(d) of the Rules of Civil Procedure R.R.O. 1990 and section 99 of the Courts of Justice Act R.S.O. 1990.

Deciding what action to take when anticipatory breach has occurred is based on the situation of the Purchaser. The first question I would ask my client is whether they want to sue for specific performance. When damages may not be sufficient to remedy the loss, it would be best to continue with the transaction and fulfil the Purchaser’s obligations under the agreement.

Read more about the doctrine of specific performance in an upcoming blog…

Please note that the above information is meant to be information and does not constitute legal advice. If you need advice about your specific circumstances, please contact our offices via telephone.

Sources:

Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92 (Ont. C.A.), at para. 37.                                                                                                                                                          Remedy Drug Store Co. v. Farnham, 2015 ONCA 576 (Ont. C.A.) at paras. 47 and 48. Jedfro Investments (U.S.A.) Ltd. v. Jacyk, 2007 SCC 55 (CanLII), [2007] 3 SCR 679, at para. 21. Barry v. King, 2009 ONCJ 474, at para 39.

Rules of Civil Procedure R.R.O. 1990                                                                                                                    Courts of Justice Act R.S.O. 1990

Contact the author at barbara@kpalawyers.ca