October 31, 2021
When do your obligations under a contract end?
Most contracts provide a specific date as a deadline for performance. Others end when the outcome – the service or delivery of goods – is finished. Occasionally, however, we encounter a contract that does not provide clearly for the obligations to end. Over the years, the law as to how courts interpret those contracts has been modified.
Typically the debate is over whether the obligation is perpetual, or whether the contract may be terminated upon reasonable notice. Employment contracts have traditionally been classified as NOT being perpetual, because of the issue that would create in preventing people from changing jobs. This in turn led to courts confusing the issue on commercial contracts generally by saying that “contracts for services” were like employment contracts, and thus could be terminated upon reasonable notice. The difficulty this created for courts, and contracting parties, was to define what agreements are “contracts for services”.
Conseil Scolaire Catholique Franco-Nord v. Nipissing illustrates the problem, but also gave the Ontario Court of Appeal an opportunity to attempt to clarify the law.
In 1988, the school board sold the municipality a former school property, for the price of $1.00. The Township’s offer to purchase included a term providing that the municipality would provide services such as snow clearing and garbage pick up, at another school. The purchased property was intended for community uses. The sale also contained provision that if the municipality sold the land within ten years, it would make an additional payment to the school board, and for twenty years, the school board had a right of first refusal on any proposed sale.
The municipality provided those services until 2017, when, after giving notice, they stopped. It argued:
- The clauses regarding sale indicated that the obligations were not perpetual;
- The obligations were services, and the presumption that contracts for services were not perpetual applied;
- Unlike the contract in Thunder Bay (City) v CN Rail, nothing in this contract contained the word “perpetual”; and
- The value of the services provided over the years has exceeded the value of the property.
The Court of Appeal reviewed the law, and overturned the decision of the application judge who first heard the case.
The historical presumption that perpetuity was intended in a contract that did not specify termination is no longer the law.
Each situation turns on the specific facts of the particular agreement.
As explained in the Thunder Bay case, “the overriding principle is that the meaning of an agreement and the intent of the parties in entering into it must be derived from the words the parties used and the context in which they used those words”.
This inquiry focuses on the specific parties to the specific contract, and must not be based upon what a court thinks are the theoretical intentions of “reasonable people”.
Business contracts must always be interpreted in a business way, to avoid absurdity. If a perpetual obligation would be absurd, then the contract may be terminated on reasonable notice.
Simply characterizing a contract as a “personal service contract” does not automatically imply a right to terminate upon reasonable notice. It all depends upon the context. In any event, the services in this contract were not really “personal services” just because municipal employees perform the work.
In this case, the application judge erred by starting from a presumption that because the contract did not specify that it was perpetual, the school board was required to prove that it was perpetual. The Court of Appeal clarifies that there is no presumption either way.
More importantly, the judge erred in their consideration of the context of the contraction, and its comparison to precedent cases. What made this case different was the transfer for one dollar. As noted by the Court of Appeal: “it would be unusual in this case for the school board to transfer property to the Municipality in return for a nominal sum plus ongoing services if those services could be terminated unilaterally and potentially prematurely. In that regard, it is of particular significance that the school board was transferring real property with enduring value.”
Other cases where a right to terminate was implied involved the need for trust in ongoing co-operation to perform the contract. That was not a factor in this case, where the services were generic and routinely performed by the Municipality on its own properties.
The provisions related to transfer were not determinative, because they only relate to a sale situation, not ongoing ownership. The fact that the services were provided long after both the 10 and 20 year marks is more consistent with a belief that the agreement was perpetual.
The argument about relative value was found to be of no help in determining the intent of the parties at the time the agreement was made. Since no one could know in 1988 how long the other school would operate, the value of the services might well be less than the value of the closed school. In that situation the windfall would favour the municipality. The municipality cannot now complain because the school board gets the windfall. Neither party seemed to consider the windfall issue at the time of the sale, because both are taxpayer funded.
As the Supreme Court of Canada stated in a 2018 case, it is not the court’s role to “save a contracting party from a bargain that proves improvident with hindsight”.
On the specific facts of that case, the contract was found to be perpetual.
The first takeaway from this decision is that it highlights the need on a go forward basis, for parties and lawyers drafting contracts to turn their minds to the issue of termination and specify whether obligations are perpetual, or subject to termination upon reasonable notice.
The second takeaway relates to existing contracts – their interpretation has now been clarified:
- There is no presumption in most commercial contracts as to whether or not they are perpetual.
- The interpretation looks at the terms of the agreement in context, including the relationship of the parties and surrounding circumstances at the time the agreement was made.
- Hindsight will not be applied to rewrite a deal that proves bad over time.