Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc.

88 O.R. (3d) 721

Court of Appeal for Ontario,

O'Connor A.C.J.O., Gillese and Watt JJ.A.

February 12, 2008

Contracts -- Breach of contract -- Fundamental breach -- Plaintiff agreeing to sublease part of office building under construction to defendant -- Anticipated six-week delay in occupancy due to weather and construction mistakes not depriving defendant of substantially whole benefit of agreement -- Delay not constituting fundamental breach of agreement by plaintiff.

The plaintiff entered into an agreement to lease part of an office building that was under construction, and agreed to sublease part of the building to the defendant for three years. June 1, 2001 was the specified occupancy date for both parties. There were construction delays due to weather and construction mistakes, and the defendant learned in April 2001 that occupancy would be delayed until July 15, 2001. It advised the plaintiff that it would not proceed with the sublease agreement. The plaintiff purported to accept the defendant's "repudiation" of the sublease agreement. It subleased the space to another party at a much reduced rate, and sued the defendant for the difference. The defendant counterclaimed for the expenses it had incurred in reliance on the agreement and as a result of the plaintiff's alleged breach and for the return of its deposit. The trial judge dismissed the claim and allowed the counterclaim. He found that there was an anticipatory breach and repudiation of the agreement by the plaintiff in April 2001. He concluded that the anticipated delay in occupancy was a fundamental breach and that the consequences to the defendant were "material", so that the defendant was entitled to treat the agreement as at an end. The plaintiff appealed.

Held, the appeal should be allowed.

Although the trial judge correctly stated that a fundamental breach is one that deprives the innocent party of substantially the whole benefit of the contract, he failed to measure the plaintiff's breach against that standard. A breach which has "material" consequences does not rise to the level of one that has deprived the innocent party of substantially the whole benefit of the contract. Thus, even on the finding of the trial judge, the anticipated delay did not constitute a fundamental breach. The defendant's occupancy was for three years. In the circumstances, a delay in occupancy of six weeks was not so significant that it amounted to deprivation of substantially the whole benefit of the agreement. An anticipatory breach sufficient to justify the termination of a contract occurs when one party, whether by express language or conduct, repudiates the contract or evinces an intention not to be bound by the contract before performance is due. To assess whether the breach has evinced such an intention, the court is to ask whether a reasonable person would conclude that the breaching party no longer intends to be bound by it. A reasonable person would not conclude that the plaintiff evinced an intention to no longer be bound by the provisions of the agreement. The anticipated delay in occupancy was not the result of the plaintiff's actions, and the record demonstrated that the plaintiff very much wanted the agreement to continue. The defendant was not entitled to terminate the agreement or treat it as at an end. It repudiated the agreement.[page722]

APPEAL from the judgment of Panet J., [2006] O.J. No. 2644, 45 R.P.R. (4th) 33 (S.C.J.), dismissing plaintiff's action and allowing the counterclaim.

Cases referred to

1193430 Ontario Inc. v. Boa-Franc Inc. (2005), 2005 CanLII 39862 (ON CA), 78 O.R. (3d) 81, [2005] O.J. No. 4671, 203 O.A.C. 320, 260 D.L.R. (4th) 659, 10 B.L.R. (4th) 1 (C.A.); McCallum v. Zivojinovic (1977), 1977 CanLII 1151 (ON CA), 16 O.R. (2d) 721, [1977] O.J. No. 2341 (C.A.); Place Concorde East Limited Partnership v. Shelter Corp. of Canada Ltd., 2006 CanLII 16346 (ON CA), [2006] O.J. No. 1964, 211 O.A.C. 141, 46 R.P.R. (4th) 1, 18 B.L.R. (4th) 230 (C.A.); Pompeani v. Bonik Inc. (1997), 1997 CanLII 3653 (ON CA), 35 O.R. (3d) 417, [1997] O.J. No. 4174, 13 R.P.R. (3d) 1 (C.A.); Procopio v. D'Abbondanza (1975), 1975 CanLII 458 (ON CA), 8 O.R. (2d) 496, [1975] O.J. No. 2316 (C.A.)

Susan Brown, for appellant. Stephen Victor, Q.C., and David Cutler, for respondent.

The judgment of the court was delivered by

GILLESE J.A.: --

Overview

[1] Spirent Communications of Ottawa Limited agreed to lease the majority of an Ottawa office building that was under construction. Quake Technologies (Canada) Inc. agreed with Spirent that it would sublease part of the building for three years. June 1, 2001, was the specified occupancy date for both Spirent and Quake.

[2] Weather and construction mistakes led to delays in the construction of the building.

[3] In April 2001, Quake learned that occupancy would be delayed until July 15, 2001. It advised Spirent that due to a number of shortcomings, including the failure to be able to deliver occupancy on June 1, 2001, it would not proceed with the sublease agreement. Spirent disputed the alleged shortcomings and maintained that the subleased premises would be available on June 1, 2001, as agreed. Nonetheless, in May 2001, Quake subleased space elsewhere at a significantly lower cost.

[4] Spirent then purported to accept Quake's "repudiation" of the sublease agreement.

[5] Spirent was able to sublease the space to third parties but at a much-reduced rate. It sued Quake for the difference between the amount it would have received under the sublease agreement and that which it was actually able to obtain. Quake defended on the basis that Spirent's breaches of the agreement entitled Quake to treat the agreement as at an end. Quake also counterclaimed for the expenses it had incurred in reliance on [page723] the agreement and as a result of Spirent's alleged breach, and for the return of the deposit that it made at the time the agreement was entered into.

[6] By judgment dated June 28, 2006 (the "Judgment"), Panet J. dismissed the claim and gave judgment on the counterclaim.

[7] Spirent appeals.

[8] For the reasons that follow, I would allow the appeal.

Background

[9] In mid-2000, Spirent, a high technology company in Ottawa, was looking for new space to occupy because its then- existing lease was to expire on May 31, 2001. On August 23, 2000, Spirent signed a ten-year offer to lease the majority of the space in an Ottawa office building that was being constructed by Palladium Development Corporation ("Palladium" or the "Landlord"). The building had a scheduled completion date of April 30, 2001. The lease was to begin on June 1, 2001.

[10] Quake was a growing high technology company in Ottawa. As a result of its growth and the approaching end of its existing lease, it too sought new business premises. Quake's then-existing lease was to expire on May 31, 2001.

[11] In an offer to sublease dated October 10, 2000, signed on October 26, 2000, Quake agreed with Spirent that it would sublease approximately 26,000 square feet of the Palladium building (the "Agreement"). The term of the sublease was June 1, 2001 to May 31, 2004. At the time the Agreement was entered into, there was a tremendous demand for space.

[12] The Agreement also required that a written sublease agreement was to be finalized by November 22, 2000. No such further agreement was ever signed.

[13] In the winter of 2000-2001, there were delays in construction due to weather and construction mistakes. Spirent was informed of these delays. On February 19, 2001, Spirent acknowledged to the Landlord that its occupancy date would be changed to June 22, 2001. Quake was generally aware that there were construction delays but was not given specific information on that matter until March 8, 2001. On that date, representatives of Spirent and Quake met to discuss various issues relating to the subleased property including recycling, office cleaning, usable space, security and signage. Also during this meeting, Spirent told Quake that Spirent anticipated taking occupancy on June 22, 2001, and that Quake would have occupancy sometime after that.

[14] In the spring of 2001, as a result of the decline of the high technology sector, the commercial leasing market in Ottawa had changed dramatically and, as compared to the fall [page724] of 2000, more space was available and rental rates had gone down significantly.

[15] On April 9, 2001, Quake was advised by its project manager that the building's general contractor believed that July 15, 2001 was an achievable occupancy date.

[16] Quake sent Spirent a letter dated April 19, 2001, stating that it would not proceed with the Agreement (the "April 19th letter") because of "a cumulative number of shortcomings", including Spirent's failure to be able to deliver the premises by June 1, 2001. The April 19th letter also stated that Quake had attempted to negotiate a short term lease with its existing landlord and that it could stay on for an additional three months, albeit at a higher cost.

[17] Following receipt of the April 19, 2001 letter, Spirent sent Quake a letter dated April 25, 2001, in which it stated that the alleged shortcomings were without foundation, the subleased premises would be delivered on June 1, 2001, and it intended to hold Quake to the terms of the sublease.

[18] On May 15, 2001, Quake entered into a sublease with a third party. The new sublease provided that Quake would pay rent in the amount of $15.50 per square foot for the first two years and then $16.50 per square foot for the following three years -- rent which was substantially lower than the $20.50 per square foot that Quake was to pay under the Agreement.

[19] On May 15, 2001, Quake also wrote to Spirent stating "Spirent committed a fundamental breach of this Offer to Sublease, and, accordingly, Quake has no further obligations under the Offer to Sublease . . ."

[20] On May 17, 2001, Spirent advised Quake that it was treating Quake's actions as a repudiation of the Agreement and that Quake's deposit was forfeited. Spirent then brought a claim, based on Quake's alleged repudiation of the Agreement, to recover $1,096,793.87, which was the difference between the amount it was entitled to under the Agreement and the income Spirent obtained by subleasing the space to third parties.

[21] Quake defended on the basis that by April 19, 2001, it had become apparent that Spirent was unable to deliver the sublease premises on the occupancy date and that Spirent was in breach of its obligations under the Agreement. Quake also counterclaimed for expenses incurred in reliance on the Agreement and as a result of Spirent's alleged breach of the Agreement ($121,977.42), and for the return of its deposit ($133,250).

The Trial Decision

[22] The trial judge first determined that, pursuant to the Agreement, Quake had the right to complete its tenant fit-ups [page725] prior to June 1, 2001, so that it would be able to take over the premises and "be up and running" by that date. To accomplish that, the Landlord's base building and the demised premises with the suite entry doors were to be provided to Quake prior to June 1, 2001.

[23] Next, the trial judge held that there had been an anticipatory breach and repudiation of the Agreement by Spirent as of April 19, 2001. This conclusion was based on his finding that, in early April 2001, the general contractor advised Quake that July 15, 2001, was "achievable for occupancy".

[24] The trial judge then considered whether on June 1, 2001, Spirent met its obligations under the Agreement. He found that the building was not substantially complete by that date and that the delays in construction were not due to Quake. Consequently, he held that Spirent failed to meet its obligations under the Agreement to provide Quake with occupancy on June 1, 2001.

[25] The trial judge also found that at April 19, 2001, Spirent was in breach of its obligation under the Agreement to deliver a draft sublease (as opposed to an offer to sublease) to Quake by November 22, 2000, or a reasonable period thereafter.

[26] In the circumstances, the trial judge stated, it was reasonable for Quake to conclude that the date of July 15, 2001, although expressed as being "achievable for occupancy" was not a fixed date and further slippage or delay was possible. He concluded that, as a result of the delay in occupancy of six weeks and possibly longer, "Spirent was in breach of a stipulation of major importance to the contract".

[27] Thereafter, the trial judge quoted the following passage from this court's judgment in 1193430 Ontario Inc. v. Boa-Franc Inc. (2005), 2005 CanLII 39862 (ON CA), 78 O.R. (3d) 81, [2005] O.J. No. 4671 (C.A.), at para. 50:

The test for determining whether a breach amounts to a fundamental breach that deprives the innocent party of "substantially the whole benefit of the contract" was recently restated by this court in Shelanu Inc. v. Print 3 Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.). In that case, the court adopted the application of five factors extrapolated by Professor Waddams from the case law to analyze whether there has been a substantial failure of performance amounting to a fundamental breach. They are: (1) the ratio of the party's obligations not performed to the obligation as a whole; (2) the seriousness of the breach to the innocent party; (3) the likelihood of repetition of such breach; (4) the seriousness of the consequences of the breach; and (5) the relationship of the part of the obligation performed to the whole obligation.

[28] The trial judge concluded that the anticipated delay in occupancy was a fundamental breach by Spirent and that the consequences of the breach to Quake were "material". He then held that [page726] since Spirent was "in a position of anticipatory and fundamental breach of its obligations", Quake was entitled to treat the Agreement as at an end. Accordingly, he dismissed Spirent's claim.

[29] The trial judge was satisfied that the costs claimed by Quake as a result of Spirent's failure to meet its obligations were properly incurred. Thus, he gave judgment on the counterclaim.

Analysis

[30] The critical issue on this appeal is whether the trial judge erred in holding that, on April 19, 2001, Quake was entitled to treat the Agreement as at an end. In my view, he did so err.

[31] As I explain more fully below, although the trial judge correctly stated that a fundamental breach is one that deprives the innocent party of substantially the whole benefit of the contract, he failed to measure Spirent's breach against that standard. Indeed, even on the finding of the trial judge, the breach did not reach that level. Further, the trial judge identified the five factors that this court has indicated should be considered when determining whether a fundamental breach has occurred, but he failed to consider those factors. A consideration of those factors shows that the anticipated delay in occupancy would not have deprived Quake of substantially the whole benefit of the contract.

[32] At this juncture, a preliminary point needs to be made. It is not entirely clear why the trial judge held that Spirent was in fundamental breach of its obligations on April 19, 2001. On the most obvious reading of the reasons, the trial judge held that the anticipated delay in occupancy was the fundamental breach that gave Quake the right to treat the Agreement as terminated.

[33] On another reading -- that urged by Quake -- the trial judge's finding of a fundamental breach is based on a combination of the anticipated delay in occupancy and Spirent's failure to provide Quake with a written sublease agreement.

[34] The following analysis will focus on the anticipated delay in occupancy, as it is the foundation for the trial judge's determination that Spirent had committed a fundamental breach. Later in my reasons, I discuss the effect of the additional breach, namely Spirent's failure to provide Quake with a final sublease agreement.

Anticipatory and fundamental breaches -- The applicable legal principles

[35] As the trial judge correctly stated: (1) only a fundamental breach by Spirent would have given Quake the right to treat the Agreement as at an end; and, (2) a fundamental breach is one which deprives the innocent party of substantially [page727] the whole benefit of the contract. See, among other cases, Place Concorde East Limited Partnership v. Shelter Corp. of Canada Ltd., 2006 CanLII 16346 (ON CA), [2006] O.J. No. 1964, 211 O.A.C. 141 (C.A.).

[36] As the trial judge also correctly noted, this court has repeatedly stated that there are five factors that can be considered when determining whether conduct has deprived the innocent party of substantially the whole benefit of the contract. The five factors are: (1) the ratio of the party's obligations not performed to that party's obligations as a whole; (2) the seriousness of the breach to the innocent party; (3) the likelihood of repetition of such breach; (4) the seriousness of the consequences of the breach; and (5) the relationship of the part of the obligation performed to the whole obligation. See Place Concorde, supra.

[37] I would add this. When considering Spirent's conduct, it was important to keep in mind that what was involved was an anticipatory breach of contract. An anticipatory breach sufficient to justify the termination of a contract occurs when one party, whether by express language or conduct, repudiates the contract or evinces an intention not to be bound by the contract before performance is due. See Pompeani v. Bonik Inc. (1997), 1997 CanLII 3653 (ON CA), 35 O.R. (3d) 417, [1997] O.J. No. 4174 (C.A.). To assess whether the party in breach has evinced such an intention, the court is to ask whether a reasonable person would conclude that the breaching party no longer intends to be bound by it. See McCallum v. Zivojinovic (1977), 1977 CanLII 1151 (ON CA), 16 O.R. (2d) 721, [1977] O.J. No. 2341 (C.A.). Having said that, when determining whether such an intention has been evinced, the courts rely on much the same analysis as they do in respect of claims of fundamental breach. That is, in determining whether the party in breach had repudiated or shown an intention not to be bound by the contract before performance is due, the court asks whether the breach deprives the innocent party of substantially the whole benefit of the contract.

Did the anticipated delay in occupancy deprive Quake of substantially the whole benefit of the Agreement?

[38] The trial judge concluded that the anticipated delay in occupancy amounted to a fundamental breach because the consequences to Quake were "material". However, as explained above, the legal standard against which the breach is to be measured is not whether the consequences of the breach are material -- there are many breaches that are material but are nonetheless compensable in damages -- but, rather, whether the anticipated delay in occupancy would deprive Quake of substantially the whole benefit of the contract. [page728]

[39] In my view, a breach which has "material" consequences does not rise to the level of one that has deprived the innocent party of substantially the whole benefit of the contract. Thus, even on the finding of the trial judge, the anticipated delay did not constitute a fundamental breach.

[40] Quake argues that the anticipated delay was of fundamental importance to it because the consequence of not taking occupancy on June 1, 2001, was that it would have been "out on the street". I do not accept this submission for two reasons.

[41] First, the record does not support Quake's contention. There was no evidence at trial that Quake made any efforts to obtain more "swing space" before it made its decision to terminate the Agreement. In fact, the evidence is to the contrary. In the April 19th letter, Quake stated that its existing landlord was willing to provide it with a three-month extension. The relevant part of the April 19th letter reads as follows:

[O]ur business plan calls for the accelerated hiring bring [sic] headcount to 59 by June 1, 2001, and 73 by August 1, 2001 and in our current space there is no more room for them to work -- we need the sublease space for June 1, 2001 to have those people working to meet out deadlines[.]

We have tried to negotiate a short term lease with the current landlord and they will allow us to stay for three extra months in exchange for paying for seven months rent -- given the current financing environment it's an inefficient use of our resources to be spending it on rent at more than twice the market rate, furthermore, the space is inadequate to meet our needs[.]

[42] By its own admission, therefore, although Quake would have incurred additional costs by maintaining its then-existing lease, it would have had space for at least three months after June 1, 2001. Had it elected to stay in its then-existing space, it would have been entitled to look to Spirent for compensation for those additional costs. See Procopio v. D'Abbondanza (1975), 1975 CanLII 458 (ON CA), 8 O.R. (2d) 496, [1975] O.J. No. 2316 (C.A.).

[43] I recognise that the April 19th letter suggests that the inadequacy of Quake's then-existing space made an extension of its lease unworkable. However, the record shows that on April 19, 2001, Quake signed a terms sheet with investors for US$30 million. It then sent Spirent the April 19th letter and contacted a real estate agent to find alternative space. It was not until after it received the US$30 million investment in May 2001 that Quake revised its business plan and accelerated its rate of hiring.

[44] Second, the record shows that Quake did not apply for a building permit until March 2001. While this timing may be explained by other delays, if the June 1, 2001 occupancy date was of such importance to Quake, one would have thought Quake would have applied for its building permit well before March 2001. [page729] Further, one would have thought that at the meeting on March 8th, when told of the anticipated delay to June 22, Quake would have protested or, at a minimum, reiterated the importance of the June 1st occupancy date. However, there is no evidence that was done at the meeting or at any point thereafter prior to the sending of the April 19th letter. Moreover, while Spirent did not inform Quake of the delay until the meeting on March 8, 2001, Quake was aware of that possibility as early as January 2001 and had been told in November 2000 that June was a "difficult time frame". In the circumstances, it is telling that Quake never directly asked Spirent about the extent of any possible delay. All of these matters speak to the seriousness of the breach and its consequences to Quake. They do not support a conclusion that the possible delay in occupancy was so serious that it gave Quake the legal right to treat the Agreement as terminated.

The five factors

[45] The trial judge appears to have focused on the fourth factor -- the seriousness of the breach to the innocent party. For the reasons already given, I do not accept that the anticipated delay in occupancy had sufficiently serious consequences to Quake that it would have deprived Quake of substantially the whole benefit of the Agreement. This conclusion is reinforced by considering the first and fifth factors, that is, by considering the breach in the context of Spirent's overall obligation under the Agreement. Spirent's obligation under the Agreement was to provide Quake with occupancy by June 1, 2001. Quake's occupancy was to last for three years. In the circumstances, a delay in occupancy of six weeks is not so significant that it amounts to deprivation of substantially the whole benefit of the Agreement.

Did Spirent evince an intention not to be bound by the Agreement?

[46] Would a reasonable person conclude that Spirent evinced an intention to no longer be bound by the provisions of the Agreement? No. To conclude otherwise would be to fail to recognise that the anticipated delay in occupancy was the result not of Spirent's actions but, rather, of the weather and mistakes of third parties.

[47] In fact, the record demonstrates that Spirent very much wanted the Agreement to continue. Like Quake, Spirent needed to take occupancy of the premises on June 1, 2001. Further, given the change in the rental market, Spirent clearly had a financial incentive to keep the Agreement afoot. And, the correspondence between Spirent and Quake demonstrate that [page730] Spirent was working to complete its obligations under the Agreement. For example, Quake's notes of the meeting of March 8, 2001, show that Spirent was working with Quake to meet Quake's demands. The evidence also shows that, beginning on the day immediately following that meeting, Spirent took steps to further respond to those demands. Even after Spirent received the April 19th letter from Quake, it continued to attempt to meet Quake's concerns and work with it to minimise anticipated delays in occupancy.

[48] In short, Spirent gave no indication, by conduct or language, that it wanted to repudiate the Agreement or that it did not intend to be bound by its provisions. On the contrary, the record shows that until its May 17, 2001 letter, when Spirent accepted Quake's repudiation, Spirent intended to fulfill its contractual obligations.

The additional breach

[49] As previously mentioned, Quake argues that the trial judge relied on Spirent's failure to provide it with a final sublease agreement when concluding that Spirent was in fundamental breach of the Agreement on April 19, 2001. In making this argument, Quake relies on para. 68 of the reasons, where the trial judge states, "this breach by Spirent was an added factor in the consideration by Quake that there had been a fundamental breach".

[50] However, earlier in para. 68 the trial judge states,

I conclude that the failure by Spirent to deliver the Lease did not constitute a fundamental breach of its obligations under the Offer to Sub-Lease. All material provisions with respect to the agreement to lease the premises as between Spirent and Quake were contained in the Offer to Sub-Lease, and both parties treated the Offer to Sub-Lease as a binding agreement between them.

[51] That is, the trial judge held that the failure to provide the final sublease was not a fundamental breach. I agree.

[52] As I have explained, the anticipated delay in occupancy was not a fundamental breach. The failure to deliver the final sublease was a far more minor breach. Suffice to say that the two, in combination, did not deprive Quake of substantially the whole benefit of the Agreement.

The effect of repudiation by Quake

[53] Repudiation does not automatically bring a contract to an end. Rather, it gives the innocent party the right to elect to treat the contract as at an end. If that election is made, the parties are relieved from further performance and the innocent party may sue [page731] for damages. As a general rule, the innocent party must make the election and communicate it to the repudiating party within a reasonable time. See Place Concorde, supra, at p. 155 O.A.C.

[54] As I have explained, on April 19, 2001, Quake was not entitled to terminate the Agreement or to treat it as at an end. Consequently, its letter of April 19, 2001, amounted to repudiation of the Agreement.

[55] After unsuccessfully attempting to resolve things with Quake, Spirent accepted Quake's repudiation and communicated that acceptance by means of its letter to Quake dated May 17, 2001. Consequently, Spirent was relieved of its obligations under the Agreement. Thus, the trial judge's alternate determination that Spirent was in fundamental breach of its obligations on June 1, 2001, because the building was not substantially complete on that date, cannot stand. By June 1, 2001, Quake had repudiated the Agreement and Spirent had accepted that repudiation with the result that the Agreement was ended. Spirent could not be found to be in fundamental breach of an Agreement that was no longer in existence.

[56] Further, it follows that as Quake repudiated the Agreement, it was not entitled to succeed on its counterclaim.

Disposition

[57] Accordingly, I would allow the appeal, set aside the judgment below, grant judgment in favour of Spirent in the amount of $1,096,793.87 and dismiss Quake's counterclaim. The figure of $1,096,793.87 was put forward by Spirent and not challenged by Quake on the appeal. Further, it accords with the figures of the trial judge in paras. 18 and 19 of the reasons. In those paragraphs, the trial judge states that Quake's obligation under the Agreement was $2,669,940 and Spirent mitigated to the extent of $1,644,899. This left a loss of $1,025,041 [See Note 1 below] to which GST of 7 per cent was added to bring the figure to $1,096,793.87.

[58] I would order costs of the trial to Spirent. If the parties are unable to agree on those costs, they shall be assessed. I would order costs of the appeal to Spirent, fixed at $30,000, inclusive of GST and disbursements.

Appeal allowed.

Notes

Note 1: In para. 19, the trial judge erroneously states that the mitigation figure was $1,025,041. However, it is clear from para. 18 and the pleadings that this was a misstatement. That figure is the difference between the amount that Quake was obliged to pay under the Agreement and the amount that Spirent obtained by way of rent from third parties.