Legal Blog

Anticipation

A sub is in the midst of a terrible contract with a general. As far as the sub is concerned, the general has been breaching the contract throughout. The sub is slated to start a second contract with the same general. Can it refuse the work on the second contract without being in breach? This scenario arose in The Roofing Systems Inc. v. Atlas Corp., a 2004 Ontario Superior Court of Justice decision.

Miscommunication 

The sub had two roofing contracts with the general, each for $117,000 plus GST. The sub progress billed based on 80% completion for job #1 and the general paid the amount billed. The sub then progress billed for 95% completion.

The architect actually certified and the general was paid 85% for the first draw. The general therefore paid 5% less than the general received.

The general withheld the remaining 20% of the contract because it alleged that there were deficiencies in the sub’s work. Indeed, it seems that the architect reported some deficiencies.

In the meantime, the general instructed the sub to start job # 2. The sub did not want to start because it said that the job was not totally ready for it to start. The general alleged that the job was either completely ready or, if it was not, it was sufficiently ready for the sub to start and proceed without interruption.

The sub did not move quickly to start the job and the general, without further notice, hired another sub to perform the work. This cost the general an additional $17,000.

Ultimately, the general and sub agreed that the sub had completed job #1 without deficiencies and agreed that the general owed the sub $35,069 (i.e. 20% of the contract plus holdback pus GST) on that job. The general then wished to set off the amount of its $17,000 overpayment for job #2 against this amount.

The sub argued that the general’s conduct on job #1 was an anticipatory breach of its contract for job #2 and, accordingly, the sub was released from its obligations under its contract for job #2.

Findings 

The judge found for the sub on all material factual disputes. He held that:

1.   The general was technically in breach of its statutory trust because it did not pay the sub the difference between the 85% that the architect certified as completed and the 80% basis on which it paid the sub.

2.   More importantly, job #2 was not ready for the sub to commence its work.

3.   There were no deficiencies in the sub’s work at job #1 because the architect’s deficiency list was “demonstrably in error.”

4.   The general failed to communicate (shades of Paul Newman) with the sub. The judge did not specify how the general failed to communicate, but we assume that the communication failure related to the general’s failure to give notice that it was going to obtain a replacement sub for job #2.

Breach 

Anticipatory breach occurs when a party, by language, conduct, or implication, repudiates its contractual obligations before they fall due. To establish this breach, the innocent party must show conduct that amounts to a total rejection of the other party’s obligations under the contract and a lack of justification for this conduct.

In light of the judge’s findings of fact, he held that the general had committed an anticipatory breach of contract for job #2, thus freeing the sub from all of its obligations under that contract.

The judge held that the general had to pay the sub the full $35,069 owed on job #1, but held that because the contract stipulated that there would be 0% interest on any outstanding amounts, the sub would receive no interest on the amount owed.

Critique 

The reasons for this decision raise a number of queries and comments:

1.   The general was not in breach of trust when it initially paid a progress amount based only upon 80% completion, after the architect had certified 85%. The sub had only billed for 80% and, therefore, that is all the general was obligated to pay.

2.   Even after the second progress invoice, the general was not necessarily in breach of trust in the face of a deficiency list in which the architect had indicated deficiencies in an amount equal to or greater than 20%. There may ultimately have been a breach of contract, but not a breach of trust. Our guess, however, is that the value of the alleged deficiencies was not 20% or more.

3.   The general wanted to set off the $17,000 from the $35,069 it owed. However, the general did not pay the remaining $18,069, the amount that it did owe and ultimately admitted that it owed. This was just a subtle form of blackmail (i.e. back down on the $17,000 in dispute and we will pay you what we owe you). What is worse, because of an inane contract that stipulated that there would be no interest, the general has no downside for its actions. Normally, a judge awards interest according to a rate set in the contract; however, the judge does have discretion to substitute another rate and, in this case, we feel that the judge should have awarded interest, at least at the minimal pre-judgment interest rate.

4.   Anticipatory breach does not just allow the innocent party to refuse to carry out its end of the bargain, it also allows the innocent party to claim its damages for the breach. We do not know why the sub did not claim for its lost profit for job #2.

5.   We do not agree that a breach of contract for job #1 in itself evidences an intention to breach the contract for job #2. However, the fact that the general contracted with another sub without giving the notice called for in the contract is a prime example of an actual breach. The general could at least have complied with the notice rules set out in its own, we presume, standard form contract.

6.   Were it not for the general shooting itself in the foot with lack of notice, our reaction is that the sub should have failed in its assertion of anticipatory breach. A breach of contact in job #1 is not a “total rejection” of its obligations in job #2. A party should be very leery of playing hardball to this extent; it is dangerous and could easily backfire. Had the sub been unsuccessful in its assertion of anticipatory breach, that assertion would have cost it $17,000 for its breach of the contract for job #2. Indeed, usually the stakes are much higher.

7.   Although the facts related to a sub complaining about the actions of a general, the concepts involved would apply equally well if the facts had been reversed or to a general-owner relationship.