“Can we terminate our snow removal contractor?” This is a question condo managers and directors hear fairly often from dissatisfied owners. So, what is it? Can you terminate the contract early? The answer is “perhaps”, but have a close look at your contract before you do.
We recently represented a group of condo corporations who were involved in a legal dispute with their snow removal contractor. The contractor sued them for breach of contract after the condos terminated the contract before the end of its term. While the corporations were eventually successful, it was a rough ride for them. This case raises many lessons, not just for condo corporations, but for any contracting party in Ontario.
The facts of the case
In CM Callow Inc. v. Baycrest Gardens, ten condominium corporations retained a contractor to provide ground services for the complex. The corporations entered into two distinct contracts: one contract covered summer maintenance work and the other covered winter maintenance. Both contracts were for a period of two years. The winter contract contained a termination clause allowing the corporations to terminate the contract on 10 days’ notice.
After the first year, the corporations decided to terminate the winter contract because they were dissatisfied with the level of service. While the decision to terminate the contract was made in the spring, they decided not to inform the contractor of their decision right away to avoid jeopardizing completion of the contractor’s summer work. During that summer, the contractor performed extra “freebie” landscaping work, of his own initiative, in the hope that this would act as an incentive for the corporations to renew the contracts when they expired. Some directors were aware that the contractor was performing “freebie” work and knew that the contractor was under the impression that the contracts were likely to be renewed.
At the end of that summer, in September, the corporations advised the contractor that they were exercising the termination clause and terminating the contract, one year early. Upon receiving notice of termination, the contractor sued the ten corporations, their property management company and the designated condo manager for breach of contract.
The decision of the trial judge
The trial judge concluded that the corporations breached their contractual duty of honest performance and that they acted in bad faith by withholding the fact that they intended to terminate the winter contract. The trial judge was of the view that, instead, the corporations should have addressed the performance issues, provided prompt notice or refrained from making any representations in anticipation of the notice period. She ordered the corporations to pay in excess of $80,000 in damages to the contractor. The corporations were also faced with having to pay the contractor’s legal cost.
The decision of the Court of Appeal
The corporations appealed the trial decision and argued that the trial judge erred by improperly expanding the duty of honest performance in a manner that went beyond the terms of the winter contract. The Court of Appeal agreed and reversed the trial decision.
The Court of Appeal found that, by remaining silent when the contractor was doing “freebie” work, their actions did not amount to a breach of contract. The Court of Appeal found that:
- The corporations had the right to terminate the contract;
- The corporations did not have an obligation to communicate their decision to terminate the contract any earlier than what was provided in the contract;
- The trial judge improperly expanded the duty of honest performance in a manner that went beyond the terms of the contract by imposing new contractual obligations to the corporations;
- The decision to delay communicating the decision to terminate and even the decision to accept “freebie” work knowing that the contractor was performing them in the hopes of getting the contracts renewed, did not rise to the high level required to establish a breach of duty of honest performance; and
- The contractor was not entitled to more than what he had bargained for: a 10-day termination clause.
This decision of the Court of Appeal confirms that, subject to the terms of the contract, terminating a contract early, or delaying informing the other contracting party of the decision to terminate it, does not necessarily amount to a breach of contract or to bad faith.
Having said this, before terminating any contract, condo corporations should carefully review the terms of the contract to determine whether there is a provision that allows for an early termination. The contract may impose obligations on the corporation before the termination clause may be exercised. Moreover, the type of contract may have an impact on the parties’ obligations. In the Callow case, the winter contract was a fixed-term contract and different obligations may apply to contracting parties if the contract is for an indefinite duration, or if the contract is an employment contract.
Finally, when dealing with the termination of any contract, we strongly recommend that corporations consult with their legal counsel. If the corporation acts inappropriately during the termination process or does not strictly follow the terms of the contract, it may face dire consequences.