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Can I Terminate My Contract?

I dread being asked by a client whether he is able to terminate his contract.  

 

There tends to be little margin for error.  If a contractor acts too conservatively and continues work in the face of a customer's claim for backcharges or set-off, then the contractor risks incurring additional costs to perform work for which he will not be paid without a prolonged legal battle, if at all.  If the contractor acts too aggressively and wrongfully terminates the contract, then he will face a claim for the increased cost incurred by the customer for getting the work done by another contractor on short notice and a claim for delaying the timely completion of the work.  Making the right decision is usually critical. 

 

Yet making the right decision is easier said than done.  Typically there is a preliminary question as to whether the other party has even breached the contract.  The outcome of underlying issues concerning extras, delays, and/or deficiencies is often unpredictable.  Even assuming that the other side has breached of contract, it does not necessarily follow that the innocent party has the right to terminate the contract. 

 

The ability to terminate a contract at common law is more limited than is commonly believed.  Most breaches of contract do not permit the innocent party to terminate the contract.  The usual remedy for a breach of contract is an award of damages sufficient to compensate the innocent party for the consequences of the breach.  In the absence of a termination clause, the innocent party will only have a right of termination where the breach of contract deprives the innocent party of substantially the whole benefit of the contract.   

 

Urbacon Building Groups Corp. v. City of Guelph is a 2014 case that illustrates the principle that a breach of contract does not necessarily entitle the innocent party to terminate the contract.  The contractor to build a civic administration complex for the City.  Substantial performance was to be achieved by August 2008.  In mid-September the contract was still only 95 percent complete.  The reasons for the delay were disputed.  On September 19, 2008, the City terminated the contractor for delay.  The Court concluded that, even if the contractor was responsible for the delay, the City had wrongfully terminated the contract.  The City was not entitled to terminate the contract simply because the City would incur costs as a result of the delay.  The City's expert said that, if the contractor had not been terminated, it may have reached completion in either early or late November.  Far from demonstrating that continuing the contract would be intolerable to the Owner, the Court accepted that the termination of the contractor delayed the substantial completion of the project. 

 

I will leave you with two thoughts.  First, among the many advantages of using CCDC and CCA standard form contracts is that they include default clauses that help clarify the circumstances where a party is entitled to terminate a contract.  Second, a decision to suspend work or terminate a contract is not one that should be made lightly.  You should call your lawyer even though he may prefer that you didn't. 

 

Ted Dreyer is a lawyer and certified construction adjudicator at Madorin, Snyder LLP in Kitchener.  This article was published in Links2Build and is republished with permission.  This article should not be relied on as legal advice. 

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