Sundance Development Corporation v. Islington Chauncery Residences Corp.: The Risks of Accepting an Uncertain “Repudiation” of Contract

In Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239, the Ontario Superior Court of Justice considered repudiation (broadly, the law applicable in cases where a contractual party abandons or refuses to perform its contract) in respect of a construction contract in the context of a troubled townhouse development project. Here, the Court reaffirmed that repudiation is an exceptional remedy and that there is a high bar to proving that a party has repudiated its contract.

As discussed in more detail below, unless there is sufficient evidence to prove repudiation on an objective basis, parties should be cautious when deciding whether to stop work in acceptance of an alleged repudiation. In particular, we consider the case and the implications of failing to prove repudiation in a construction project where so alleged.

Background

Islington Chauncey Residences Corp. (“Islington”) (the developer) hired Sundance Development Corporation (“Sundance”) to act as construction manager for a townhouse development project (the “Project”) under a services agreement (the “Agreement”).

Sundance commenced its work in July 2019; however, the construction phase of the project was delayed (notably related to the early days of the COVID-19 pandemic). By late summer 2020, Islington was pushing for Sundance to complete two model units for the development.

In September 2020, the model units were still not ready, and the overall construction was far from complete. At this time, for extraneous reasons, the site superintendent (a Sundance employee) advised of his intention to leave the job at the end of October 2020. Although Sundance proposed that Sue Capobianco, another one of its personnel, be the replacement site superintendent, Sundance did not have the unilateral right to appoint the site superintendent and Islington did not agree with Sundance’s recommendation. No other proposals were made, and the replacement site superintendent was not agreed to or appointed.

Sometime after the site superintendent’s announcement, Islington’s principal engaged a project manager, Tony Murdocca (who himself was recommended by the father of the Islington principal), to help assist in getting the Project finished. Mr. Murdocca arrived on site on October 15, 2020, and began directly coordinating with trades to complete the model units.

In a telephone conversation on October 15, 2020, representatives from Islington and Sundance discussed the possibility of terminating the Agreement. By the end of the call, the parties had agreed to try to work out an agreement to end their contractual relationship effective October 31, 2020.

In the last two weeks of October 2020, the parties made efforts to negotiate the terms of the termination/settlement agreement. While the concept of a mutual agreement was agreed to in principle and most terms were agreeable to both parties, no mutual termination agreement was ultimately reached as a result of an inability to agree on the scope of the release (specifically, Islington would not agree to release Sundance from future claims). Throughout this period, Mr. Murdocca took the lead on coordinating the finishing of the two model units.

On October 30, 2020, and absent an executed termination/settlement agreement, Islington sent a memorandum to Sundance which provided a list of alleged damages arising from Sundance’s mismanagement and project delays and noted their position that Sundance had breached the Agreement. The memorandum confirmed that Islington “agreed in principle with terminating the contract, but would not agree to releasing Sundance from future claims” and that Islington intended to back charge Sundance for “costs incurred from delays and Sundance’s alleged ‘negligent mismanagement.’”

In response to the memorandum, Sundance sent a letter on the same day, taking the position that Islington had repudiated the Agreement, and that Sundance therefore accepted that repudiation. The letter included a demand for payment of three invoices (which were attached to the letter) as a precondition for delivering remaining materials and accounting records in Sundance’s possession. Sundance alleged that Islington’s collective conduct repudiated the contract and specifically referred to Islington’s decision to use Islington personnel (including Mr. Murdocca) to take over Sundance’s construction management function on the project and Islington’s conduct during the termination agreement negotiations.

Sundance withdrew from site on the next day October 31, 2020, and ceased supplying all services to the Project. After Sundance ceased services, and given that Islington did not believe that Sundance had earned the fees and had claims against them in negligence and for failing to complete the work under the Agreement, Islington made no further payments to Sundance.

The Superior Court’s Decision

Although the Court had four issues before it, for the purposes of this article we will only be focusing on the first issue: “Was Sundance justified in ceasing all services effective October 31, 2020? Specifically:

• Did Islington, by its conduct, evince an intention not continue with the [Agreement], and, in so doing, repudiate it?
• If the [Agreement] was not repudiated, was Sundance entitled to withdraw its services?”

Did Islington repudiate the contract?

Broadly speaking, in Canadian Law repudiation means: “the conduct of one of the parties to a contract which demonstrates to the other that it will not fulfill the terms of the contract.”[1] Repudiation “entitles the other party not to perform its obligations under the contract and claim damages.”[2]

Looking at the totality of the evidence, the Court held that Islington did not repudiate the Agreement. The Court found that Islington’s conduct was not repudiatory for three main reasons: (i) Islington had a contractual right to direct Sundance to cooperate or coordinate with it in supervising and managing the construction; (ii) Sundance was never excluded from full and free access to the site or materially impeded in its role as construction manager (including with respect to the hiring of Mr. Murdocca); and (iii) Islington’s “hard bargaining” with Sundance in respect of the termination/settlement agreement did not rise to the level of repudiatory conduct.

The Court began its analysis by reviewing the relevant law of repudiation. The Court noted that repudiation is assessed on an objective standard, and that the court must ask “whether a reasonable person would conclude that the breaching party no longer intends to be bound by the contract, which requires considering the surrounding circumstances”. To establish repudiation, more than an ordinary, non-repudiatory breach of the contract is required. The breach must be serious and “[i]t must deprive the innocent party of substantially the whole benefit of the contract.” In this regard, the Court had to consider whether Islington breached the Agreement and whether such breach was serious and deprived Sundance of substantially the whole benefit of the Agreement.

The Court considered the Agreement and found that Islington had a “contractual right to deploy its own forces and … to require that Sundance cooperate and coordinate with those forces in supervising and managing the construction.” Pursuant to Section 3.1 of the Agreement specifically, “Sundance expressly agreed ‘to do all such acts and things as [Islington] considers necessary or desirable, whether independently or in cooperation or coordination with [Islington], to supervise and manage the accounting, financing and construction […] of the Units’”. In addition, Section 3.1 specifically enumerated several matters which captured the scope of work performed by Mr. Murdocca.

By utilizing this contractual right, Sundance argued that “Islington obstructed its free and full access to the model units by taking over the coordination of their construction”. On that point, Sundance referred to Section 7.1(d) of the Agreement, which entitled Sundance to “full and free access” to all units.

The Court found that “the fact that Islington assigned personnel to take a primary role in directing construction of the model units did not result in Sundance being excluded from ‘full and free access’ to the units to complete its work.” First, although there was a trade meeting invitation without Sundance’s inclusion, the Court found that there was no evidence supporting that “trade contractors were directed to or did cease communicating with Sundance or were directed to coordinate with Tony Murdocca to the exclusion of Sundance.” Second, the only Sundance personnel with a regular on-site presence, Ms. Capobianco, was not impeded in executing her duties. While she subjectively felt that she was being excluded from site operations, objectively there was no convincing evidence to show that Sundance’s on-site work was materially impeded. Ms. Capobianco continued to have involvement with the model units and continued to perform the same kinds of things she had done for the prior Sundance site superintendent that was leaving. Third, the site superintendent and Ms. Capobianco continued to have the controlling access to the site. Mr. Murdocca did not have the keys or codes for the electronic locks to the site, and had to be let in by either Sundance’s site superintendent or Ms. Capobianco.

On a balance of probabilities, the Court therefore found that Islington did not breach the Agreement by deploying personnel to site as the evidence did not support “that Sundance’s construction management function was genuinely impeded or superseded by the presence of Tony Murdocca or other Islington personnel.” In any event, managing the construction work was only one of Sundance’s many duties, and having its full and free access impeded would not be sufficient in itself to ground repudiation of the entire contract.

Lastly, the Court found that “what transpired in late October was hard bargaining, not repudiatory conduct.” When the parties could not agree to the terms of termination, Islington eventually offered an ultimatum: “agree to the release being proposed or face back charges for all the costs that Islington said were incurred solely by Sundance’s mismanagement of the project.” There was no language in Islington’s memorandum that treated the Agreement as being at an end. In addition, the Court found that “nothing in the evidence support[ed] a finding that, objectively, Sundance had any genuine intention or willingness to take steps to investigate and respond to the alleged breaches of contract.”

In this regard, the court found that there was no breach of the Agreement, let alone a repudiatory breach.

If the contract was not repudiated, was Sundance entitled to withdraw its services?

The Court held that Sundance was not entitled to withdraw its services, and therefore breached the Agreement by doing so.

The relevant law states that if “an owner ceases to make payments under the contract or by other conduct makes it impossible for the contractor to complete, the contractor is justified in abandoning the work and may enforce a claim in quantum meruit to the extent of the actual value of the work performed and material supplied to that time”.[3] The Court also noted that “a party cannot rely on its own breach of contract to be relieved of its contractual obligations”.

Sundance argued that because Islington was in breach of the Agreement, it was entitled to cease work. In its response letter to Islington, Sundance demanded payment of accounts and ceding control of the model units to Sundance’s forces as pre-conditions for its return. The Court ultimately held that those demands were unsupported by the terms of the Agreement, and that there was no opportunity provided to Islington to remedy the alleged defaults as Sundance walked off the job the next day.

The Court found that Sundance lacked a contractual basis to demand that Islington cede control of the model units. First, pursuant to Section 3.1, Islington was entitled to take over primary responsibility for coordinating and construction of the model units and Sundance was required to cooperate or coordinate with Islington on the construction of the units. Therefore, Islington deploying its own forces (i.e., Mr. Murdocca) was not a breach of contract under the Agreement. Second, as Sundance was factually not obstructed from “full and free access” to the units, there was no breach of Section 7.1(d) of the Agreement.

With respect to payment of accounts, the Court found that “Sundance had not met its burden of proving that Islington was in breach of the Agreement when Sundance advised it would be withdrawing all services and made demand for payment.” On the contrary, the Court found that there was no contractual basis for the three invoices that Sundance had attached (the invoices were for fees not yet due or payable or for its own materials that it left on site), and stated that “[d]emanding payment to which a contractor is not entitled or refusing to proceed unless paid is a breach of contract”.

As Islington had not repudiated the Agreement nor ceased to make payments to which Sundance was entitled, the Court found that “Sundance breached the contract by demobilizing from site with no legitimate basis and by making demand for payment of amounts to which it was not contractually entitled at the time of the demand.”

The Court ultimately ordered that Sundance repay Islington for the partial costs of the replacement construction management and the costs of extra work and work redone.

Analysis

The Court in Sundance has reaffirmed the high bar for repudiation, and that courts are reluctant to grant it as an exceptional remedy. As stated by the Court, repudiation is “only available in circumstances where the entire foundation of the contract has been undermined, namely where the very thing bargained for has not been provided”.[4]

Further, this decision confirms just how necessary objective evidence is when showing repudiation. Although a party may feel impeded or that the other party intends to not be bound by the contract, those subjective impressions are not relevant to the analysis. A party proving that there was repudiation must, on an objective basis, establish that: (1) there was a breach of the contract; (2) the breach deprived it of substantially the whole benefit of the contract; and (3) the other party evinced an intention to no longer be bound by the contract.

When considering repudiation as a remedy, it is crucial that a party carefully reread its contract with a neutral lens and ensure that there is sufficient factual evidence to prove repudiation on an objective basis, before acting on the alleged repudiation. Given the drastic outcome of such a scenario, due diligence is therefore imperative. Caution is particularly warranted given a failed repudiation allegation likely, as was the case here, gives rise to a breach of contract by the alleging party – which can result in damages being awarded against the claimant.

Sundance also raises an interesting question as to whether there is a material distinction between the legal concepts of repudiation and fundamental breach, notwithstanding some case law suggesting they are two separate things.[5] Whereas proving fundamental breach ostensibly requires only that the non-breaching party is deprived of substantially the whole benefit of the agreement, repudiation also requires proving that, by words or conduct, a party has evinced an intention not to be bound by the contract. While proving intent might arguably constitute a higher evidentiary threshold, the Court’s observation that “intent” is measured on an objective standard – in other words, a party can repudiate a contract without subjectively intending to do so – suggests that the reference to intent may be somewhat illusory.

In any event, this case also demonstrates the importance of providing contractual counterparties sufficient time to respond to allegations of breaches of contract. The Court noted at a few points in its analysis that no objections had been raised by Sundance during the time when Mr. Murdocca took over the management and coordination of the model units until after negotiations had failed and Islington provided its memorandum regarding expected costs. In addition, the Court found that Sundance breached the Agreement later when it accepted the alleged repudiation and immediately demobilized from the site. If a party does not raise issues while they are occurring and does not give the other party an opportunity to resolve those issues, this could be a breach of the contract in and of itself and/or negatively affect any legal argument it may later want to raise regarding the other party’s breach of contract.

Indeed, readers will recognize this exact rationale as the underlying principle of contractual notice provisions, breach of which is often fatal to a claiming party’s position.

To conclude, we note that construction parties specifically should consider this case to be a cautionary tale. If a party intends to allege repudiation and accept such alleged repudiation, where no repudiation exists, and begins to act as if the contract has been terminated, that party will then be potentially liable for a breach of contract. Such a course of action is, to put it simply, a high-risk maneuver. While the other party on a construction project may take subjectively extreme steps that may harm the parties’ professional and personal relationship, a party should be careful to take note of exactly what obligations and entitlements exist within the contract – indeed, in circumstances where the contractual relationship has become highly acrimonious, parties would be best served by confirming their rights and obligations under the relevant agreement(s) and, if necessary, consulting a lawyer.

[1] Barron’s Canadian Law Dictionary, 6^th ed (Barron’s Educational Series, Inc, 2009), sub verbo “repudiation”.

[2] Ibid.

[3] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 82 citing D&M Steel Ltd. v. 51 Construction Ltd., 2018 ONSC 2171 at para 49, and Summers v. Harrower, 2005 CanLII 50261 (ONSC) at para 13.

[4] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 18 citing Remedy Drug Store Co. Inc. v. Farnham, 2015 ONCA 576 at paras 50-51, and Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 37.

[5] Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc.,  2008 ONCA 92 at para 37.

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