A recent ruling of the British Columbia Court of Appeal, A & G Investments Inc. v. 0915630 B.C. Ltd., 2014 BCCA 425, provides a useful primer on the available mechanisms for bringing a contract to an end.  These include:

  1. the committing of a fundamental breach (leading to termination of the agreement if the breach is acted upon by the innocent party);
  2. the triggering of an express termination provision; and
  3. the acceptance by the innocent party of a repudiation (thereby causing the agreement to be rescinded).

The case also usefully reminds us that a party confronted by a fundamental breach must act quickly if it wishes to use that breach to justify terminating the agreement.

The case involved an agreement to purchase real property, with the deal to close on December 18, 2012.  The vendor was required to take certain steps (including the obtaining of subdivision approval) as a precondition to closing.

The contract specified that “time was of the essence.”  The inclusion of such a provision indicates that a failure of timely performance will be considered a fundamental breach of the contract, permitting termination by the innocent party.  This power must be expressly exercised by the innocent party, however.  A failure by the innocent party to act on the fundamental breach may be treated as an election to affirm the contract’s continuing existence.  Such an affirmation limits the innocent party’s remedies to a claim for damages.

Despite reasonable efforts, the vendor was not able to satisfy the necessary preconditions  by December 18, 2012.  As such, the deal did not close.  Rather than acting immediately on this failure by the vendor, the purchaser allowed the deadline to go by without taking any steps.  Indeed, for several more months, both parties continued to act as if the contract remained in full force.

The innocent purchaser waited until April 23, 2013 to send a letter stating that it was treating the contract as terminated, and demanding the return of its deposit.

The BCCA ruled that — because of the innocent party’s four-month delay in acting — it had effectively affirmed the contract, despite the fundamental breach, and had thereby lost its right to terminate.  As the Court explained:

[38]         An election between inconsistent rights must…be made promptly and communicated to the other side. Parties cannot adopt a “wait-and-see” approach to fundamental breach, as their election simultaneously determines the position of the counterparty to the contract. Either the contract is not repudiated and the rights and obligations under it still exist, or the contract is rescinded because of an accepted repudiation and then very different rights come into being in respect of a cause of action. In either case, parties must have prompt notice of their position. …

….

[40]      April 23, 2013 was much too late to put the Contract to an end for a failure to complete on December 18, 2012. An election must be made promptly. In this case it was not. By April 23, 2013 the Purchaser could no longer rely on the Seller’s December 18, 2012 breach as a fundamental breach of contract.

Making matters worse for the innocent purchaser, its April letter purporting to terminate the contract — at a time when it had no such right to terminate, owing to its own delay — itself constituted an anticipatory breach of the contract.  More specifically, by stating that it no longer intended to be bound by the contract, the purchaser’s April 23, 2013 letter constituted a repudiation of the agreement.

Ironically, the vendor — the original breaching party — was thereby able to “seize the high ground.”  It accepted the purchaser’s repudiation, and rescinded the agreement.  Because the termination was the fault of the (previously innocent) purchaser, the vendor was able to retain the purchaser’s deposit.

(The agreement of purchase and sale also included a provision causing the agreement to terminate automatically in certain circumstances.  However, the Court concluded that that provision had not been triggered on the facts of the case.)

The moral of the story is clear — a party confronted by a fundamental breach (or a repudiation) must act in a timely manner if they wish to take advantage of the other side’s action by terminating the agreement.  Delay may well be treated as an affirmation of the agreement, thereby causing the right to terminate (or rescind) to disappear.