Contract termination in Canada

Termination

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.

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.

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.

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.

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.