With anticipatory breaches, timing is everything, The Lawyers Weekly, Focus Labour & Employment (May 23, 2014, p.13)

With anticipatory breaches, timing is everything, The Lawyers Weekly, Focus Labour & Employment (May 23, 2014, p.13)

By Nikolay Y. Chsherbinin

An anticipatory breach occurs when a party declares an intention to repudiate their contractual obligations before they fall due. Such declaration only becomes a wrongful act if the innocent party elects to treat it as such. Until that party accepts the repudiation, the contract continues in full force and effect. Obvious as it may seem, the doctrine of anticipatory breach is full of pitfalls for the unwary and has been the subject of judicial controversy. The question that continues to vex concerns the concept of when a “claim” is “discovered” within the meaning of the Limitations Act, 2002.

In Ali v. O-Two Medical Technologies Inc. [2013] O.J. No. 5547, the Court of Appeal for Ontario considered the question of when the limitation clock begins to run for the employee’s claim for unpaid commissions in a situation where the employer has unilaterally changed the commission formula. Having reconciled conflicting jurisprudence, the court resolved that the limitation clock does not begin to tick from the anticipatory breach, but from the time a deficient commission is tendered.

In Ali, mechanical engineer Samir Ali had a side agreement with his O-Two Medical Technologies employer to sell its products in Iraq on a commission basis. In December 2006, Ali negotiated a large sale to the Iraqi Ministry of Health. Once the buyer accepted delivery and paid for the products, he would be entitled to the contractual commission. One week after Ali negotiated the Iraqi sale, O-Two purported to unilaterally change the commission agreement and informed him that it would pay him a lower rate of commission.

The sale went through and in November 2007, O-Two tendered payment of Ali’s commission at the lower rate. Twenty-two months later, on Sept. 16, 2009, Ali sued O-Two for damages for commissions due and owing. In response, O-Two obtained summary judgment on the basis that Ali’s alleged claims arose outside the two-year limitation period. Having reviewed the factual background, the motion judge stated the outcome of the motion turned on when “damage” to Ali occurred. She mistakenly concluded that there was no doubt that damage had occurred when O-Two gave Ali the revised commission formula on Dec. 12, 2006. She rejected Ali’s argument that the doctrine of anticipatory breach applied because he was handed the revised commission formula on Dec. 12, 2006, which O-Two honoured on Nov. 23, 2007. Ultimately, the motion judge determined Ali failed to commence his lawsuit within the two-year period and dismissed his claim.

Ali appealed.

In the Court of Appeal, he argued the motion judge erred in concluding that a breach of contract occurred before the commission were due in November 2007. Instead, Ali submitted all that O-Two did on Dec. 12, 2006 is gave notice of its intention to breach the commission contract in the future, which was an anticipatory breach. As the innocent party to the anticipatory breach Ali refused to accept the repudiation, affirmed the contract and continued to press for its full performance. By choosing this option, the breach of his commission agreement did not occur until O-Two tendered a deficient payment on Nov. 23, 2007. Hence, he did not suffer “damage” under the Limitations Act until that date.

Relying on, and reconciling, its previous judgment in Wadsworth v. RBC Dominion Securities Inc. [2007] O.J. No. 1739, a case similar on its facts to Ali, the court agreed. It explained that O-Two’s unilateral change in Ali’s commission structure on Dec. 12, 2006 was a repudiation of its contractual obligations before it became obligated to pay commissions in November 2007, and as such the doctrine of anticipatory breach was relevant to the timing of the breach.

By purporting to apply a new agreement, O-Two could hardly have made its intention to repudiate the prior commission agreement clearer. Consequently, the court rejected O-Two’s argument that Ali suffered “damage” more than two year prior to initiating his claim.

In the court’s view, Ali could not have “discovered” his claim for purposes of section 5(1)(a) of the Limitations Act until Nov. 23, 2007, because “that is the day on which he first knew damaged had occurred.”

Ali re-affirms that once the counterparty declares an intention not to be bound by a contract, the innocent party has a choice. It may accept the breach and elect to sue immediately for damages, or treat the contract as subsisting and continue to press for performance, and sue only when the promised performance fails to materialize. In this case, Ali chose the latter. Because he did not accept O-Two’s repudiation, he did not know he would suffer “damage” until he received deficient commissions in November 2007, at which point in time he “discovered” his claim.

The divisional court’s decision in Saltsov v. Rolnick [2010] O.J. No. 1632, is yet another example of the interplay between the doctrine of anticipatory breach and the limitation clock in the employment context. There, the court had to decide when the cause of action of constructive dismissal arises for the purpose of the limitation period. It held that a claim for constructive dismissal is not “discovered” when an employer acts unilaterally in a manner that gives rise to the right of an employee to involuntary resign, but the employee does not resign. Instead, it is discovered when the employee accepts the employer’s repudiation of the contract and elects to resign from his employment.

Ali and Saltsov clarify and make it safe for the innocent party to assume that the limitation period would not begin to run from the anticipatory breach. Instead, it will commence its run when the innocent party either accepts the repudiation or the counterparty actually breaches his contractual obligations when they fall due.

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