Contract formationGood faith in negotiating
Is there an obligation to use good faith when negotiating a contract?
With the exception of the Province of Quebec, commercial agreements between businesses in Canada, such as supply contracts for the sale of goods and services, are governed by the common law and provincial, territorial and federal statutes. In Quebec, which is a civil law jurisdiction, the regulation of the sale of goods and commercial contracts is governed primarily by the Civil Code of Quebec. Unless expressly stated otherwise, the discussion below is focused on the common law provinces and commercial contracts for the supply of goods and services; different rules may be applicable to other forms of commercial contracts such as, for example, franchise agreements, mortgages, loans, agreements for the purchase and sale of land, construction contracts, among others. To the extent that readers are engaged, or are planning to engage, in business in or to contract with parties located in Quebec, specific advice from a qualified lawyer in Quebec should be obtained.
Under the common law, absent an express agreement to negotiate in good faith between the parties, there is no obligation for the parties to negotiate in good faith. However, when it comes to contractual performance, the Supreme Court of Canada has affirmed an organising principle of good faith that requires a duty of honesty in the performance of contractual obligations, as discussed in question 9.‘Battle of the forms’ disputes
How are ‘battle of the forms’ disputes resolved in your jurisdiction?
A ‘battle of the forms’ typically arises where a buyer and seller have exchanged terms that conflict but they nonetheless engage in performance of the contract without having formally executed a contract. Canadian common law on this issue is inconsistently applied and is based on the facts and circumstances of the case. Approaches that have been taken by the courts include the ‘last shot’ approach (application of the most recent set of terms sent and not objected to); the ‘first blow’ approach (the first set of terms accepted); the ‘shots fired on all sides’ approach (construing both parties’ terms together); and the application of traditional rules of contracting looking to where offer and acceptance occurred.Language requirements
Is there a legal requirement to draft the contract in the local language?
Most contracts in Canada are concluded in English. With the exception of Quebec, there is no legal requirement to draft a contract in any specific language. In Quebec, which is a French-speaking jurisdiction, contracts that are pre-determined by one party or which contain standard clauses, as well as certain specific types of documents such as order forms, invoices, statements and receipts, must be drawn up in the French language unless the parties expressly agree to have the contract and all associated documents drafted in English. In practice, parties to a negotiated contract in Quebec intending to contract in English will typically also expressly agree to the documents being drafted in English.Online contracts
Is it possible to agree a B2B contract online?
Yes. In Canada, provincial e-commerce legislation supplements the common law and makes it acceptable for commercial contracts between businesses to be entered into electronically at the will of the parties and such contracts will be enforced so long as there has been clear offer and acceptance. Click-to-accept contracts have been held to be enforceable so long as they can be clearly accessed, read and accepted. In addition, a legal requirement that a document be signed is satisfied by an electronic signature, so long as it meets prescribed requirements (eg, reliability, technological standards).
Statutory controls and implied termsControls on freedom to agree terms
Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?
Commercial parties are generally free to agree to terms of their choosing. However, contracts that are prohibited by statute or contrary to public policy may be voided. For example, under provincial Sale of Goods legislation, where there is a contract for the sale of specific goods and the goods, without the knowledge of the seller, have perished at the time the contract is made, the contract is void. Contracts to do anything that amounts to a crime or a tort are considered illegal and void. For example, contracts to charge criminal rates of interest have been held to be void. Under the common law, contracts in restraint of trade have also been held to be contrary to public policy and void unless they are possible of justification on the grounds of reasonableness considering the interests of the parties and the public. It should also be noted that there are statutes that regulate some aspects of contracts, such as provincial arbitration legislation where an arbitration provision is present in an agreement.Standard form contracts
Are standard form contracts treated differently?
Commercial contracts between businesses comprised of standard form terms are treated the same as negotiated contracts.Implied terms
What terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?
Provincial Sale of Goods legislation in the common law provinces and territories implies warranties as to quality and fitness. In addition, unless the circumstances of the contract show a different intention, there is an implied condition on the part of the seller that it has the right to sell the goods; an implied warranty that the buyer will have and enjoy quiet possession of the goods; and an implied warranty that the goods will be free from any charge or encumbrance in favour of any third party that is not declared or known to the buyer before or at the time when the contract is made. However, the parties to a commercial contract can expressly exclude these implied terms.
Under the Civil Code of Quebec, there is also a warranty for quality, which requires merchants to warrant that a product is free of latent defects that would render the product unfit for the use for which it was intended, or diminish its usefulness to the point that the buyer would not have bought it or paid had the buyer been aware. In commercial contracts, the parties may add to the obligations of this legal warrant, diminish its effects or exclude it altogether, but under no circumstances may the merchant exempt itself from liability for personal acts or omissions.Vienna Convention
Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?
Yes, Canada is a signatory to the United Nations Convention on Contracts for the International Sale of Goods (CISG). The CISG has been incorporated into provincial and territorial legislation governing the international sale of goods. Parties to international commercial contracts, where one party is in Canada, often expressly exclude the application of the CISG, and prefer instead to rely on either Canadian or the other party’s domestic law.Good faith in entering and peforming
Is there an obligation to use good faith when entering and performing a contract?
As discussed in question 1, in the common law provinces, there is no general duty to negotiate in good faith, absent an express agreement to do so. Under the law of Quebec, there is a broad duty of good faith that extends to formation, performance and termination of a contract. Historically, the law in the remaining common law provinces has been reticent to recognise a duty of good faith in contractual performance. However, in the case of Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada recognised a general organising principle of good faith that requires the parties to perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. However, commercial contracting parties remain free to pursue their own individual economic interests. The duty of honesty in contractual performance requires that the parties not mislead each other about matters directly linked to the performance of the contract. The application of the principles of good faith in contractual performance and what constitutes honest performance will be dependent upon context and the facts and circumstances of the case.
Limiting liabilityProhibition on exclusions and limitations
What liabilities cannot be excluded or limited by a supplier in a contract?
In the common law provinces, limitation and exclusion clauses are enforceable according to their terms unless they are unconscionable or run contrary to public policy; these exceptions are narrow. In commercial contracts, parties should not attempt to limit or exclude liability for their own fraud or dishonesty or wilful misconduct as these exclusions or limitations are not enforceable. While liability for breach of contract itself can be limited via a financial cap, discussed in question 11, a total exclusion of liability for this may not be enforceable as it would leave the other contracting party without a meaningful remedy.
In Quebec, commercial parties generally cannot exclude liability for an intentional or gross fault; punitive or exemplary damages; or bodily or moral damages.Financial caps
Are there any statutory controls on using financial caps to limit liability for breach of contract?
No, there are no statutory controls on using financial caps to limit liability for breach of contract. Commercial contracting parties are free to include financial caps to limit liability in their agreements, subject to the exceptions noted in question 10.Indemnities
Are there any statutory controls on indemnities used to cover liability risks in contracts?
No, there are no statutory controls on indemnities used to cover liability risks in commercial contracts. Indemnification clauses are interpreted under the normal interpretation rules related to contracts and effect is generally given to the parties’ intentions.Liquidated damages
Are liquidated damages clauses enforceable and commonly used in your jurisdiction?
Yes, liquidated damages provisions that operate as a genuine pre-estimate of damages are enforceable and commonly used in Canada. Liquidated damages clauses should not be oppressive, unreasonable or unconscionable or the courts may intervene on equitable grounds. Historically, penalty clauses (ie, stipulated remedy clauses that are not liquidated damages provisions) have been unenforceable in Canada. However, in recent years, there has been waning judicial enthusiasm for striking them down as unenforceable since to do so interferes with parties’ freedom to contract. Penalty clauses may now be enforceable so long as they are not unconscionable. A determination of unconscionability is context-specific, but several factors may be considered by the courts including, but not limited to:
- instances of inequality of bargaining power (generally not applicable in the commercial context);
- a substantially unfair bargain;
- the relative sophistication of the parties;
- the existence of bona fide negotiations;
- the nature of the relationship between the parties;
- the gravity of the breach; and
- the conduct of the parties.
Payment termsStatutory time limits on payments
Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?
Commercial parties are free to agree to the time period for paying invoices. However, provincial Sale of Goods legislation provides that, unless otherwise agreed, delivery of goods and the payment of the price are concurrent conditions (ie, the seller should be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer should be ready and willing to pay the price in exchange for possession of the goods). Actions for breach of contract for failure to pay an invoice are subject to statutory limitations periods, as discussed in question 27, unless the parties have contractually agreed to an alternative limitation period.Late payment interest
Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?
Commercial parties may agree on the rate of interest payable on late payments - however, interest rates may not exceed 60 per cent per annum. Interest rates above 60 per cent per annum are classified as ‘criminal rates’ of interest under the Canadian Criminal Code. Where interest is payable under an agreement but no interest rate is set out, the Canada Interest Act provides that the rate of interest will be 5 per cent per annum.
In addition, under the various provincial court rules, parties that are entitled to an order for the payment of money are entitled to claim, and have included in the order, an award of interest at the pre-judgment interest rate provided for under those rules. For example, in the Province of Ontario, prejudgment interest is calculated from the date the cause of action arose to the date of the order and the prejudgment interest rate is the bank rate established by the Bank of Canada at the end of the first day of the last month of the quarter preceding the quarter in which the proceeding was commenced, rounded to the nearest tenth of a percentage point.Civil penalties
What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?
There are no civil penalties; a party wishing to enforce payment obligations under a commercial contract must bring a proceeding against the delinquent party.
Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?
Commercial parties are free to stipulate the rules applicable to the termination of a supply contract, including any notice requirements. Where there is no notice period set out in an indeterminate term contract, the courts may, in some cases, imply a reasonable notice period unless to do so would be inconsistent with or contrary to the express terms of the agreement, as discussed in question 18.
In addition to any stipulations as to termination that may be contractually agreed between the parties, the common law may allow for termination of a commercial contract where, based on the facts and circumstances of the case, there has been a repudiation of the contract. Repudiation must be more than a mere breach of contract but may occur where one party is substantially deprived of the whole benefit of the contract or where the breaching party indicates an intention to no longer be bound by the contract.
Parties may also be released from their obligations under a contract where the contract has been frustrated. Frustration may occur where there is a supervening event that occurs after contracting through no fault of either party, and which was not foreseeable at the time that the parties entered into the contract, that changes the nature of the parties’ rights and obligations to such a degree that performance is impracticable, impossible or unjust in the circumstances.Notice period
If a contract does not include a notice period to terminate a contract, how is it calculated?
As noted above, where the duration of a commercial agreement is not fixed and where there is no provision for termination without cause, the courts may, in certain circumstances, imply a reasonable notice period to terminate the contract. The analysis will turn on the particular agreement under consideration and the circumstances surrounding it. Courts have held that agreements involving elements of trust, confidence, delegation of authority or personal relations between the parties are more likely to give rise to an implied right to terminate on reasonable notice. However, the courts will not imply a term permitting termination without cause on reasonable notice where to do so would be inconsistent with, or contrary to, the clear meaning of the agreement; if on a proper construction of the agreement a perpetual obligation is intended, it will generally be enforced. In cases where it has been implied, what constitutes reasonable notice is dependent on the facts and circumstances of the parties’ relationship. For example, in distribution agreements, the main factors considered in determining the appropriate notice period include, but are not limited to, the length and nature of the parties’ relationship; the dependency of the distributing party on the terminating party’s products or services; and the level of investment made by the distributing party to distribute the terminating party’s product and the volume of business derived from the sale of the product. Courts may also consider established trade or business practices and lost opportunity. The range of what has constituted ‘reasonable notice’ in these types of agreements under Canadian case law is generally between 30 days and two years.Automatic termination on insolvency
Will a commercial contract terminate automatically on insolvency of the other party?
There is no common law or statutory right to terminate a contract automatically on the insolvency of the other party and the insolvent party is not excused from performing its obligations. Most business contracts include an express term in the agreement under which insolvency gives rise to the right to termination.Termination for financial distress
Are there restrictions on terminating a contract if the other party is in financial distress?
As noted above, a business contract can include the right to terminate in the event that the counterparty is insolvent. However, if proceedings are commenced under Canada’s primary insolvency legislation (the Bankruptcy and Insolvency Act or the Companies Creditors’ Arrangement Act) then this contractual right is not enforceable due to statutory provisions that preclude termination of contracts simply by virtue of the counterparty’s insolvency or bankruptcy.Force majeure
Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?
Yes, force majeure is recognised in Canada. Events of force majeure in commercial contracts generally include, but are not limited to, ‘acts of God’, fires, strikes, lockouts, floods, war, riot and the like. What constitutes a force majeure and the consequences of a force majeure event depend on the particular wording of the clause, however, such clauses generally operate to suspend the performance obligations of the party invoking the clause for the duration of the force majeure event. When drafting a force majeure clause, it is important to consider the context of the agreement and events within that context that may give rise to delay or failure to perform. Some clauses are drafted such that if the force majeure event continues for a specified period of time and cannot be cured, the contract may be terminated.
Subcontracting, assignment and third-party rightsSubcontracting without consent
May a supplier subcontract its obligations under the contract without seeking consent from the other party?
In the absence of any agreement to the contrary, parties to a commercial contract are free to subcontract their obligations without seeking the consent of the other party. However, unless the agreement stipulates otherwise, the original contracting parties remain liable for their performance obligations under the agreement, regardless of whether they have been subcontracted.Statutory rules
Are there any statutory rules that apply to subcontracting in your jurisdiction?
Not with respect to contracts for the supply of goods and services. In these types of commercial contracts, the parties may agree as to whether or not consent is required from the other party to subcontract obligations under their agreement.Assignment of rights and obligations
May a party assign its rights and obligations under the contract without seeking the other party’s consent?
Most commercial contracts in Canada are drafted to require the consent of at least one of the parties for assignment. Under the common law, unless provided for in the agreement, a party may only assign its benefits under a contract without the consent of the other party (or parties, as applicable); assignment of liability and performance obligations are not assignable without consent, with limited exception. These exceptions include performance obligations where the duties do not involve the exercise of skill, knowledge or a personal quality or competence that was relied upon by the other party in entering into the contract. A determination as to whether performance obligations are assignable without consent is context specific and based on the circumstances of the case. Where liabilities or performance obligations are assigned, the result is considered a novation (ie, an agreement to substitute a new contract, terminating the old one).
Aside from contracts with express anti-assignment clauses, there are some types of contracts where rights and obligations are not assignable; however, most supply contracts would not fall into this category (eg, assignments that violate public policy; personal contracts; mere rights in action; contracts that would result in uncontemplated or increased burdens on the non-assigning party; and assignments prohibited by statute).
What statutory controls apply to the assignment of rights or obligations under a supply contract?
All of the common law provinces and territories have legislation that permits the assignment of contract rights where: the assignment is absolute, in writing and signed by the assignor and express notice is given in writing to the non-assigning obligor. Assignment of rights and obligations under a supply contract are generally freely assignable with consent or if provided for in the contract.
Notably, regardless of whether a supply contract contains an anti-assignment provision, personal property and security legislation provides that a party cannot be prevented from granting a security interest in an account. This would include instances where, for example, a vendor uses its receivables as collateral when borrowing money.Enforcement by third party
How may a third party enforce a term of the contract?
In general, pursuant to the common law doctrine of privity, only parties to a contract have rights and obligations under it, including the right of enforcement. There are some exceptions to this doctrine, including agency (where the contracting party is an agent for the third party), trust (where the third party is a beneficiary of a trust) and a ‘principled exception’. The principled exception, where the courts may relax the doctrine or privity, considers whether the parties to the contract intended to extend a specific benefit to a third party seeking to rely on the contract and whether the activities performed by that third party come within the scope of the contract in general, or the provision in particular, again taking into consideration the intention of the parties. The principled exception will not apply where the parties expressly state that they do not intend to benefit third parties.
Similar to results that may be obtained using the common law principled exception to the doctrine of privity, in Quebec, the Civil Code of Quebec provides that contracting parties may provide for third-party beneficiaries and sets out circumstances in which contracting parties may revoke the benefit.
What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?
Limitation periods in Canada are governed by provincial and territorial limitations legislation. There are some exceptions where a limitation period is dealt with specifically in another piece of legislation. Limitation periods for breach of contract claims vary by province and territory, but range from two to six years. In most provinces, the limitation period is two years (in Quebec it is three years) and will begin to run from the date the cause of action arose, or in some cases, the date the cause of action was discovered.Choice-of-law clauses
Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?
Yes, in commercial contracts between businesses, with limited exception that may depend on the facts and circumstances of the case, Canadian courts will generally recognise and respect choice-of-law clauses stipulating foreign law. However, in the context of a dispute, in order to invoke the foreign law, it must be pleaded and if the dispute takes place in a Canadian court, expert evidence will be required to prove the foreign law.
Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?
A forum selection clause will generally be recognised by Canadian courts in commercial contracts as long as it is valid, clear, enforceable and applies to the cause of action before the court. Such clauses are encouraged by the courts as between commercial parties as they create certainty, order and fairness in transactions. However, the courts have discretion not to enforce a forum selection clause where the party attempting to avoid it can show ‘strong cause’ as to why enforcement of the clause would not be reasonable or just in the circumstances. In considering whether there is ‘strong cause’ not to enforce a forum-selection agreement between the parties, the courts take into account all of the circumstances of the particular case, including convenience and fairness between the parties, the interests of justice and, in some cases, public policy concerns. The burden of demonstrating strong cause is a heavy one and it is in rare circumstances that the courts will not enforce a forum-selection clause between commercial parties.Efficiency of local legal system
How efficient and cost-effective is the local legal system in dealing with commercial disputes?
The Canadian legal system is not particularly cost-effective or efficient. In most cases, discovery obligations are onerous and several motions may be brought prior to any final resolution, particularly in commercial disputes. Despite good intentions, including some specialised courts and rules in some jurisdictions to simplify procedures, there is a backlog of cases in many courts and, as a result, there are often delays. The resolution of disputes, especially commercial disputes, can take many years and can be very expensive as most lawyers charge hourly rates. For most types of disputes and in most of its jurisdictions, Canada has a ‘loser pays’ rule, which results in the prevailing party being able to recover some of its reasonable costs, but the amount of costs potentially recoverable also varies by jurisdiction and, in some provinces, is quite low.
For commercial disputes, arbitration is becoming increasingly popular as an option because it is private and efficient; parties are usually in control of the timing and discovery obligations are often reduced. However, it can be just as costly and also requires the parties to pay the arbitrator’s or arbitrators’ fees.New York Convention
Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?
Yes, Canada is a signatory to the New York Convention. The provinces and territories have arbitration legislation that governs both domestic disputes (ie, both parties are in Canada and Canadian law is applicable) and international commercial disputes (ie, where Canadian law applies and the parties’ places of business are in different states). A popular choice for applicable arbitration rules are those of the International Centre for Dispute Resolution.
What remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?
In the absence of a specific agreement between the parties limiting any particular remedy, courts and other adjudicators may grant any remedies available under the law. The most common remedy for breach of contract is monetary damages; however, declaratory judgments, specific performance and injunctive relief may also be granted. Punitive damages can be awarded for a breach of contract claim in Canada, but rarely are. In general, punitive damages are reserved for exceptional cases where extremely egregious conduct has occurred.
Update and trendsRecent developments
Are there any other current developments or emerging trends that should be noted?No updates at this time.