How to repudiate a contract and end up ahead…

Repudiation

In contract law, the concept of Repudiation was developed where one of the parties to a contract by actions, words, or inaction expresses to the other party its intention to no longer be bound by the contract to which they are a party.

A repudiation of a contract is a form of termination of the contract, however, it goes further in that a party that repudiates the agreement is signaling to the innocent party their intention to no longer be bound by the contract and to no longer perform.

The innocent party faced with a repudiation, can demand continued performance and then bring a court claim for damages or specific performance (ie. compelling the offending party to do the things they promised to do in the contract) if performance does not follow, or they can accept the repudiation, at which point all parties are relieved of further performance, however rights accruing under the contract prior to the repudiation remain.

Recently however, the Ontario Court of Appeal ruled in a way that would appear to be rewarding a repudiating party (in this case a law firm).  In the case of Miller, Canfield, Paddock and Stone, LLP v. BDO Dunwoody LLP, the Court of Appeal considered a contingency fee retainer agreement contract (the “Agreement”) between a law firm (MCPS) and the client (BDO).  The Agreement would call for BDO to pay an agreed percentage of funds recovered in a matter to MCPS as fees.  If MCPS was unsuccessful in recovering funds, there would typically be reduced or no fees at all.  The Agreement in this case contained an early termination clause requiring BDO to pay certain fees to MCPS in the event BDO were to terminate MCPS’s services prior to completion of the matter or recovery of funds by MCPS.

An early termination provision is common in contingency fee matters as it acts as a disincentive for clients to switch law firms prior to recovery of funds, and ensures that the law firm recovers some of its costs incurred in representation to the date of an early termination.

In this case, MCPS declined to retain (and pay) a third party appeal counsel to conduct an appeal of the matter.  BDO took the position that this refusal was in fact a repudiation of the Agreement by MCPS and BDO then accepted the repudiation which ended the relationship.

At the lower level court, the court found that BDO was entitled to accept the repudiation of the Agreement by MCPS and was relieved from further performance under the Agreement, and particularly the early termination provision requiring BDO to pay MCPS fees to the date of termination.

The Court of Appeal however went a very different direction and determined that while MCPS may have repudiated the Agreement, and BDO was entitled to accept the repudiation, BDO would still have to pay fees to MCPS to the date of acceptance of the MCPS’s repudiation because the act of accepting the repudiation was in fact a termination of the Agreement as contemplated by the early termination provision in the Agreement.

The way I see it (and I am no doubt swimming against the tide of old contract law on this one), is that if MCPS repudiates the Agreement, and the repudiation is accepted by BDO, the Agreement is being terminated by MCPS, not BDO.  Accordingly, the early termination provision that acts to compensate MCPS if BDO terminates early, ought not to be applied.  Essentially, MCPS as the breaching party ought not to be able to enforce a termination provision of the very Agreement they declined to abide by (in effect they terminated first).

It seems to be a very odd result that the offending party MCPS ought to be able to repudiate its own Agreement (that they likely drafted), refuse to perform, and effectively terminate the Agreement, and then in the result find an entitlement to fees from the innocent party for purporting to trigger a termination.

While I understand basic contract law concepts, I sometimes find myself in situations like this on the sidelines scratching my head at how a repudiating party ended up ahead on this.  While the result may be legally correct, it leaves something to be desired in the justice department.

Published by D. Jared Brown – Lead Counsel – Brown Litigation

I Don’t Want to Close My Real Estate Deal – Second Thoughts…

A real estate purchase and sale is one of the most significant decisions and transactions undertaken by the average individual in their everyday life. Typically the financial implications of the transaction are significant and accordingly the decision-making process can be fraught with stress and anxiety.

In some situations, the result is a sudden desire on the part of either the purchaser or seller to not close the transaction for which they have already signed a binding agreement of purchase and sale.

We have received inquiry from parties who are the subject of binding agreements of purchase and sale seeking to explore their options to avoid closing the transaction in question.  In the course of these conversations, we are generally asked about the effect if conditions contained in the agreement (i.e. home inspection) are not waived or satisfied, and the opportunity that may provide for the transaction to be avoided.

The short answer is that a party cannot utilize or rely upon the failure to satisfy a condition as justification to avoid the closing of a real estate transaction if the reliance is done in bad faith. In the Supreme Court of Canada case of Dynamic Transport v. OK Detailing, the court implied that each party is under an obligation to do all that is necessary on their part to secure performance of the contract.

Essentially a condition precedent to the closing of a real estate transaction can only be relied upon by a party acting in good faith. In cases involving conditions precedent, a party cannot take advantage of the condition unless is it acting in good faith and has made reasonable efforts to satisfy the condition. Focal Properties Limited. v. George Wimpy (Canada) Ltd. Marlo v. Savage.

Further, conditions such as a home inspection may not rise to the level of a condition precedent, and accordingly may not be relied upon even in good faith to avoid closing a transaction unless the outcome of the inspections reveals fundamental, significant, and unforeseen issues going to the heart of the deal.

Accordingly if you have entered into a binding agreement of purchase and sale that includes conditions that must be satisfied or waived by the closing, you are  under an obligation to act in good faith to take reasonable steps to ensure that those conditions are satisfied.  Any indication that a party is not acting in good faith resulting in a failure to satisfy or waive a condition could be grounds for a claim for breach of contract seeking full performance and closing of the transaction in question, or alternatively a claim for damages arising from the failure to close including forfeiture of deposits.

Posted by D. Jared Brown – Team Lead

Employee Non-Competition and Non-Solicitation Covenants: Where are we at?

The departure of an employee from a business can result in harm to the business when that former employee begins to either compete and/or approach the customers and contacts of the business with an eye to securing the business relationships for themselves.

Many employers have developed contracts which contain post employment covenants on the part of the employee, whereby the employer attempts to secure the employees agreement to refrain from competing against and/or soliciting the employer’s customers for a period of time post-departure.

The Canadian courts have repeatedly held that restrictive covenants in the nature of non-competition are considered a restraint of trade and accordingly are contrary to public policy and generally not enforceable.

However, there are some circumstances in which these covenants may be enforced, but those situations are few and far between.

In the Court of Appeal case of Mason v. Chem-Trend Limited, the court of appeal summarized the principles that will be utilized when determining whether to enforce the restrictive covenants in a written employment contract.

These principles are:

1.         To be enforceable the clause must be reasonable as between the parties and with reference to the public interest;

2.         The clause must balance the general public policy in favour of open competition, with the right of the employer to the protection of trade secrets, confidential information and trade protections; and,

3.         The court must engage in a review of the surrounding circumstances when analyzing the reasonableness and enforceability of the restrictive covenant in question.

The court then went on to identify the 3 main areas of consideration in determining when to enforce restrictive covenants.

A.        Did the employer have a proprietary interest entitled to protection?

B.        Are the temporal (time) or spatial limits (geographic distance) to broad?

C.        Is the covenant overly broad in the activity it prohibits because it prohibits competition generally and not the solicitation of the employer’s customers specifically?

In Mason v. Chem-Trend Limited the court of appeal made particular note of the fact that the employee in question was not a senior level employee or officer, but rather part of the sales force operating within a small sales territory.  The contract in question went beyond prohibiting the solicitation of former customers but also prohibited the employee from dealing with any of them in competition with Chem-Trend.  Further, the court noted the contract attempted to prohibit the employee from doing business with potential customers of Chem-Trend, something that would be very difficult if not impossible for the employee in question to know when they had run afoul of the prohibition period.  As a result of the foregoing analysis the court of appeal concluded that the restrictive covenant was unreasonable and unenforceable.

The prevailing case law which trends against the enforcement of restrictive covenants means employers and employees are best advised to seek out proper legal advice prior to drafting and entering into agreements that contain restrictive covenants. While it is entirely possible to craft a fully enforceable restrictive covenant that protects the legitimate proprietary interests of the employer these types of covenants and contracts must be carefully scrutinized to ensure that the result in Mason v. Chem-Trend Limited does not occur.

Posted by D. Jared Brown – Team Lead

The Aggressive Commercial Landlord

The relationship between a tenant and a landlord is typically the most important relationship for any commercial tenant.  Preserving a positive relationship with the commercial landlord is not only of utmost importance to the tenant’s business but should be a primary priority.  Failure to maintain a positive relationship exposes the tenant’s business to the frailties and nuance of commercial landlord and tenant law in the Commercial Tenancies Act R.S.O. 1990.  This area of law entails much risk and potential for harm to all parties.

We regularly receive contact from businesses that are on the receiving end of an overly aggressive landlord. Typically the aggressive landlord arises from a general breakdown in the relationship between the tenant business and the landlord.  When the relationship is strained, the landlord’s primary motivation aside from collecting rent and enforcement of other covenants is typically a desire to see an end to the tenancy at whatever cost. These objectives on the part of the landlord can manifest themselves in many ways, however, we primarily observe interference with the tenant’s business or the tenancy generally.

When these actions on part of the landlord rise above mere nuisance to a level that actually causes harm and material interference with the tenant’s business, the tenant is afforded very few options to prevent further harm and to realize any damages suffered.  In these situations it is possible for a commercial tenant to explore obtaining a civil restraining order.  Civil restraining orders are very similar to their criminal cousins in that they are judicial declarations meant to restrain or prohibit behavior on the part of one party which is deemed to be offensive to the court, and the potential to cause irreparable harm to another party.

We have been successful in protecting tenant business by obtaining civil restraining orders as against aggressive commercial landlords in situations where a landlord is acting in bad faith, and resulting in a breach of the tenant’s right to quiet enjoyment of the leased property.  While a civil restraining order is not ideal in all situations and in fact should be explored only as an option of last resort, it can have the effect of preserving the battle lines in place, preventing further irreparable harm while the parties explore their objectives moving forward.

Posted by D. Jared Brown – Lead Counsel