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Legal Eagle: Dealing with contract termination

In a previous issue of Wings, I wrote about contract formation, so I thought it might be interesting to discuss ways contracts may be terminated


September 10, 2012
By Neil MacDonald

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In a previous issue of Wings, I wrote about contract formation, so I thought it might be interesting to discuss ways contracts may be terminated – whether the contract is for an aircraft, aircraft parts, or a training bond.

You may think that once a contract is formed, you must ensure you complete your full obligations under the terms of that contract, but this is not always the case. For example, some contracts are legally flawed from the outset, may be voidable – ab initio – and can be treated as though they did not exist. Others, because of certain internal flaws, may fail by operation of law, and may be rescinded or voided, after formation. 

Finally, it is important to understand that a party to a contract may simply not perform their primary obligations under the contract. This breach usually results in that party paying damages (secondary obligations) to the non-breaching party.  

When a contract is legally (and fatally) flawed ab initio it may have failed because of a missing essential ingredient of contract formation, like lack of consideration, or improper offer and acceptance. It could also mean that there was not a complete consensus of the parties during the formation stage. This could be through the fault of one or both contracting parties, or simply be due to forces outside the knowledge of the parties. There may have been a common mistake as to the quality of the product the parties were contracting for – perhaps the time on an aircraft part was not as low as both parties originally thought. 

A voided contract usually returns parties to the starting point. You are free to renegotiate terms, or walk away – usually without penalty on either side. Partial performance may change that result, and will likely cause an accounting for the time or use of the subject of the contract. 

Contracts that are voidable, or that can be rescinded after formation, fall into another category. You will often see other (possibly negative) forces at play with these voidable contacts. The parties may not be in equal bargaining positions for example. That imbalance may be the root cause of a claim for duress or unconscionability. 

It may also occur because of a situation of operative misrepresentation. One party may have made a statement that fully or partially induced the other party to enter into the contract. The statement may have been made innocently or deliberately, and matters only if it was in regard to a material component of the contract. The innocent party may then elect to continue, or set aside the contract – to undo it – once again returning parties to their original, pre-contract state.

What can you do if the above scenario does apply, yet you do not want to continue with a contract?  Again, regardless of whether it is a contract for an aircraft, aircraft parts, or a training bond, breaking a contract is fairly straightforward. 

You may decide not to perform your obligations under the contract when they are due, or you may decide to inform the other party ahead of time that you do not intend to perform. You have to ask yourself whether it will be more cost-effective to continue with a (bad) contract, or to terminate it and pay damages.

This termination – or repudiation – of the contract may or may not be accepted by the innocent party. If the termination is accepted, the contract terminates, and all obligations under the contract end. If the innocent party refuses to accept repudiation, the contract remains in force. The primary obligations will cease, and the secondary obligations (damages) will arise.
 
This can be done after the fact, through negotiation by the parties, or by the courts. Damages may also have been contemplated within the contract, with an amount agreed to beforehand under a “Liquidated Damages” heading.   

Contract formation and termination rules are applied in the same manner for most private and commercial operations in Canada – both in and out of the aviation industry. The rules have evolved in the courts and many have been codified into the laws of the provinces. 

Several statutes you will see in most provinces will apply, like the Sale of Goods Act and the Frustrated Contract Act, which outlines your obligations and your rights regarding contract formation and termination.

While they are good places to start when analyzing contract status, I would recommend you consult with a lawyer if you, or your party, are contemplating repudiation – or you are the party on the receiving end of a contract termination.


Neil J. MacDonald is a B.C. lawyer. He has flown internationally as an IFR Off-Shore Aircraft Commander, locally as an Air Ambulance captain, and consulted on aviation issues in the Middle East. njm@neiljmacdonald.com This is not a legal opinion. Readers should not act on the basis of this article without first consulting a lawyer for analysis and advice on a specific matter.