June 15, 2010
By Robert Kennaley
McLauchlin & Associates

Robert KennaleyIf you have been working long enough as a construction contractor, you have had an odd client that, if you had to do it all over again, you would have never taken the job in the first place.

Sometimes it is because we underbid the job. Other times, however, it is because the client has become unreasonable, or difficult, making the job almost unbearable. When we encounter such a problem job, it would be all too easy to simply walk away, however, that can involve significant risk.  

The first that should be understood is that without a legal basis to stop work, a contractor can be held liable for damages for delay or wrongful termination of the contract. In some circumstances, these damages can be extensive. An owner who proves such a claim will be entitled to recover whatever it might cost to retain another contractor to complete the work. In addition, the owner can claim for any impacts it might suffer from the delays associated with finishing the work. This may include additional compensation paid to other contractors or suppliers that are held up in completing contracts and damages that are associated with the late completion of the work. This may occur, for example, where the owner’s ability to conduct business is delayed.  

Accordingly, if a contractor feels trapped on a difficult job, then he should consider carefully whether or not there is a legal, contractual right to stop work. If he is not sure whether he can establish that right, he should consider the extent to which the owner might be able to establish damages. In addition, the contractor should consider whether or not the client may commence legal proceedings regardless (as, unfortunately, some are more litigious than others).  

Of course, it will assist the contractor greatly if the contract establishes a right to stop work in the circumstances. First the contract should provide that the contractor is entitled to stop work if the contractor has not been paid in accordance with its terms. In that case, the contractor will generally be required to return to the project should the owner correct the default within a reasonable period of time. It will further assist the contractor if the contract provides that he may either stop work or consider the contract terminated in the event that the owner defaults in his obligations thereunder. In such a situation, the contract will generally require the contractor to put the owner on notice of the default and of the contractor’s intention to either stop work, or consider the contract as at an end. Generally the contract will specify the amount of notice required.
Contractors should ensure that they fully comply with such notice provisions, ensuring that the form and delivery of the notice are in accordance with the contractual requirements. Where no notice clause exists under the contract, contractors will generally be well advised to provide such anyway, in order to avoid the argument that an implied obligation to do so should be read into the contract.

Contractors finding themselves embroiled in a contract they wish to terminate, might also wish to use the remedy of ‘repudiation,’ if it is available. This can be particularly helpful where a right to terminate is not spelled out in the contract. A repudiation of the contract by the owner may exist, depending on the circumstances. This may occur where the owner, either expressly or by conduct, indicates that he no longer wishes to be bound by his obligations under the contract. Repudiation, of course, may occur when the owner refuses to pay amounts owing. It may also occur if the owner refuses access he is obligated to provide, or refuses to supply required materials or, without excuse, hires another to perform a portion of the contractor’s work.

In such cases, the contractor may elect to accept or reject the repudiation. If the repudiation is not accepted, the contract continues and both parties are required to meet their obligations. If the contractor accepts the repudiation, however, the contract may be treated as though it has been terminated, and the innocent party may immediately bring a suit for damages.  

In determining whether there has been a repudiation, the parties’ conduct and the circumstances must be considered as a whole. Where there has not been an express and absolute refusal by one party to perform its obligations under the contract, the test is to determine whether the defaulting party’s actions could lead a reasonable person to conclude that he no longer intends to be bound. The determination will be easier, if the owner’s obligations are set out in detail in the contract. Delay, however, does not in and of itself give rise to repudiation. A delay in performing obligations, of course, is something less than a refusal to perform obligations.

Contractors should also be careful not to waive their rights to insist on the owner’s performance of the contract. This can occur where the owner had previously acted in a similar manner and the contractor did not object. Waiver, it has been said, will generally be found only where the evidence demonstrates that the party waiving had full knowledge of his rights to insist on performance and unequivocally and consciously intended to abandon them.

The repudiation of a contract does not in and of itself end the contract. The cases establish that the innocent party must accept the other party’s breach and communicate his election to end the contract on the basis of that breach to the other party. It is critical for the innocent party to communicate his acceptance of the repudiation in order for the contract to be ended.

Repudiation can be a complicated legal doctrine and should not be acted on without legal advice. That having been said, it might provide contractors with a reasonable remedy when working with an owner who refuses to perform as he had agreed. Although we have been discussing the owner/contractor relationship, it should be kept in mind that the doctrine of repudiation applies equally to the relationship between contractors and subcontractors.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America.  He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.