The Specific Regime for Termination of a Contract of Enterprise or a Contract for Services: Pros and Cons
A contract of enterprise or a contract for services is an agreement whereby a contractor or service provider undertakes to perform physical or intellectual work or to provide one or more services to the other party to the contract, the “client”, in exchange for remuneration.
This type of contract does not need to be in any particular form to be valid1; only the parties’ free and clear consent to be bound by it is necessary for its valid formation. However, the Civil Code of Québec (the “CCQ”) contains several specific rules that apply to the termination of such a contract, which differ markedly from the rules applicable under the general law of contract.
In what circumstances can one of the parties terminate a contract of enterprise or a contract for services?
The rule of the binding force of contracts pursuant to the general law is to the effect that the parties cannot unilaterally put an end to their obligations2. In order to be able to do so, the other party must have committed a fault, namely failure to perform, or inadequate performance of certain obligations. Thus, the parties are not free to terminate the contract without a valid reason.
Despite this general rule, the legislature has created a simplified regime that is specific to contracts of enterprise or contracts for services. On the one hand, the client can unilaterally terminate a contract that it has freely agreed to, without having to establish that the service provider or contractor committed a fault3. This right is tied to the very nature of the contract, which is predicated on the specific expectations of the client. Nevertheless, the client’s right to unilaterally terminate, created by Article 2125 CCQ, is not of public order, such that the client may waive it or the parties may derogate from it, provided that the waiver or derogation is clear, express and unequivocal.
The contractor or service provider, on the other hand, may also terminate the contract unilaterally, but subject to certain conditions4. It first of all may only do so for a serious reason. Such termination has been allowed on several grounds, including repeated interference in the performance of the contractor’s work5, and unilaterally changing the conditions of the contract6, but it has not been allowed on the basis of an unfounded fear of not being paid7. Even where sufficient grounds exist, the contract cannot be terminated at an inopportune time or in circumstances where the client would suffer undue harm. The contractor or service provider will also be obliged to do whatever is necessary to minimize any damages that the client might sustain. This right, created by Article 2126 CCQ, is also not of public order, so it too may be waived or derogated from, again provided that the waiver or derogation is clear, express and unequivocal.
In the event of unilateral termination of the contract, the legislature has provided, in Article 2129 CCQ, specific rules for determining the indemnification payable to each of the parties. Because the purpose of this provision is to restore the other party to its original position, only expenses reasonably incurred in performing the contract before termination are compensable.
The client, as a general rule, must indemnify the contractor or service provider pro rata to the agreed upon price and the value of the work it has performed. The client must also reimburse the reasonable expenses actually incurred by the contractor or service provider in performing the contract.
The contractor or service provider must repay the amount of any advance it has received that is over and above what it is entitled to for work performed or goods and services provided up to the date of termination.
Contrary to the general law, which provides for compensation for losses incurred and profits unrealized by the contractor or service provider8, the concept of “injury” under Article 2129 CCQ covers only the actual loss sustained, to the exclusion of any eventual loss or unrealized profits on the part of the contractor or service provider. It is thus important to clearly distinguish between indemnification aimed at reducing the harmful effects of termination of the contract, and indemnification as a sanction for non-performance or inadequate performance of the contract. Because Article 2129 CCQ is not of public order, it is possible for the parties to agree on another indemnification arrangement.
In closing, it should be noted that the service provider, the contractor or the client, as the case may be, must choose between termination pursuant to the general law of contract, and the termination regime created by Articles 2125 and 2126 CCQ. As the terminating party is not entitled the benefit of both of these regimes, the termination regime it chooses will have a significant impact on the indemnification that can be claimed.
1 Subject to the rights and obligations of merchants under the Consumer Protection Act.
2 Art. 1439 CCQ
3 Art. 2125 CCQ
4 Art. 2126 CCQ
5 Baralis v. Prekatsounakis Goncalves & Associés, 2010 QCCS 6024
6 Simard-Beaudry Construction Inc. v. Construction Bob-Son Inc., 2012 QCCS 3472, upheld on appeal 2014 QCCA 1182
7 Lamothe v. 4529103 Canada Inc. (MACC Construction), 2015 QCCS 2720
8 Art. 1611 CCQ