Navigating the complexities of contract law often hinges on understanding the nuances between repudiation and rescission—two terms frequently confused yet critically distinct. A recent Ontario court decision offers a real-world illustration of these concepts, highlighting their practical implications in a failed real estate transaction.

Case Concerned a Failed Real Estate Transaction

Through its representative, the corporate plaintiff in Reel em Inn and Resort v. RNR Doemel Enterprises et al. agreed to purchase a 19-acre property that included a general store, ice cream parlour, and cabins. The defendants, Richard and Norma Doemel, owned and operated RNR Doemel Enterprises, which operated the store. The store was located near Whitefish Lake in northwestern Ontario.

Before the signing of a standard form Agreement of Purchase and Sale, the plaintiff paid a $50,000 deposit. The sale was to close in April 2020, though it was never completed. Prior to closing, the plaintiff discovered work orders outstanding regarding the removal from the property of an underground fuel tank and the installation of an above-ground tank.

In March 2020, the plaintiff’s representative went to the property and asked one of the defendants to sign a proposed amendment to the Agreement of Purchase and Sale.  This document purported to acknowledge that the defendants would comply with the outstanding work orders by the closing date or alternatively refund the deposit.  The defendant refused to sign.  The plaintiff then removed various tools and supplies from the store it had used to start renovations and did not return.  The defendants also made no further communication with the plaintiff again until after the closing date, when the plaintiff’s lawyer demanded a return of the deposit.

In its claim, the plaintiff sought a declaration that the contract had been rescinded, an order to return the $50,000 deposit and other damages.  The defendant counterclaimed for a finding that the plaintiff had repudiated the contract and forfeiture of the deposit, among other things.

The primary question before the Court was whether the Agreement of Purchase and Sale had been repudiated or should be rescinded.

What is the Difference Between Rescission and Repudiation?

In discussing the difference between these two concepts, the Court reviewed various cases.  Most significantly, it referred to the 1999 decision of the Supreme Court of Canada in Guarantee Co. of North America v. Gordon Capital Corp, which is the leading case.  

At its most basic, rescission refers to the act of treating a contract as though it had never existed or is “void ab initio.”  It is a remedy available to an innocent party where the other party has “made a false or misleading representation” that induced the innocent party to enter into the contract.  If the innocent party refuses to be bound by the contract and expresses this “by word or act in an unequivocal manner,” then that refusal will terminate the contract and effectively put both parties in “the position in which they stood before the contract was entered into.”  

It is important to note that the act of rescission must be based on a “proper vitiating event.”  In other words, there must be actual “misrepresentation (or other essential error)” that legally entitles the innocent party to rescind the contract.  The misrepresentation, fraud or essential error must be “substantial” and go to “the root of the contract.”

Conversely, repudiation refers to the indication by a party that it does not intend to fulfill its contractual obligation.  This intention can be conveyed either through words or conduct.  The repudiation does not terminate the contract (see Brown v. Belleville (City)).  Instead, the innocent party determines what legal effect the repudiation will have.

The innocent party can choose whether to accept or reject the repudiation.  If it accepts it, the contract is terminated.  This is sometimes known as the “disaffirmation” of the contract.  Neither party has any future obligation under the contract (though rights and obligations accrued up to that point are unaffected).  Acceptance “may be oral, written, or inferred from the conduct of the innocent party in the particular circumstances of the case” (see Reel em Inn).

If the innocent party rejects the repudiation, it has no legal effect. This is sometimes referred to as “affirmation” of the contract. The contract will remain in effect, and the innocent party can sue for damages for past or future breaches of contract if they occur. 

Court Finds the Defendants Repudiated the Agreement of Purchase and Sale

The Court in Reel em Inn concluded that it was reasonable for the plaintiff to conclude that the defendant’s refusal to sign the proposed amendment was based upon a refusal or unwillingness to comply with the Orders and meet the terms of the Agreement of Purchase and Sale.  These obligations were “fundamental to the entire contract.”  Accordingly, the plaintiff “appropriately concluded that the Defendants had repudiated the agreement.” 

Similarly, the Court found that the plaintiff’s removal of its renovation tools and supplies from the store constituted acceptance of that repudiation, which effectively terminated the Agreement of Purchase and Sale.  The Court also noted that

“at no time thereafter did the Defendants communicate an intention to return the Agreement into good standing.”

The Court referenced a provision in the Agreement of Purchase and Sale that required the return of the deposit and ordered this accordingly.  It also found that, regardless of this contract term, the defendants would have been “unjustly enriched” by retention of the deposit without any lawful claim to it.

In addition, the Court found that the defendant’s silence as to the outstanding Orders constituted a misrepresentation relied upon by the plaintiff in entering into the Agreement of Purchase and Sale.  As such, the Court indicated it would have granted rescission of the contract.  Ultimately, this was inconsequential since the remedy was the same.

Toronto Contract Disputes Lawyers Helping You Understand Your Contractual Rights

Navigating contract disputes can be complex, especially when dealing with concepts like repudiation and rescission. If you’re facing a contractual challenge, don’t leave your rights to chance. Contact Milosevic & Associates today for a consultation. Our experienced team can help you understand your options and develop a strategic approach to protect your interests. Call us at (416) 916-1387 or online to schedule your confidential consultation.