The cleaning contractor keeps missing the night shift. The software vendor has stopped answering support tickets. The equipment lease made sense before you lost your largest customer. Whatever the reason, you have decided that you need out of a commercial contract, and your instinct is to send a short email saying so and stop paying.
That email could be one of the most expensive things you ever send. A party who ends a contract without the right to do so may itself become the party in breach, even if the other side performed poorly, and it may lose the leverage that it had a day earlier. On the other hand, an exit handled in the right order often costs little, and it occasionally costs nothing.
This article is general information about Ontario contract law and not legal advice about your agreement. Outcomes depend heavily on the exact wording and on the facts, including what the parties have said and done since signing. Consumer contracts are governed by different rules and are not covered here.
Stop and Read Before You Do Anything
Find the signed agreement, including every schedule, amendment, renewal, and purchase order. Then find out what you actually have. A surprising number of businesses are working from a draft, or are unaware of a two-page amendment that changed the term.
Look specifically for these items:
- The term, and any automatic renewal, including how much notice is needed to prevent it
- Any right to terminate for convenience, meaning without having to give a reason
- Rights to terminate for cause, with any definitions, notice, and cure periods
- The notice clause: to whom, at which address, and by what method
- Early termination fees, liquidated damages, or acceleration of remaining payments
- Limits on liability, and any shortened time limit for claims
- Dispute resolution, such as mandatory mediation or arbitration
- Obligations that survive the end of the agreement, such as confidentiality or non-solicitation
While you do this, say as little as possible to the other side, and instruct your staff to do the same. Casual remarks like “we’re done with these guys” can later appear in evidence.
Route One: A Termination Clause
Using a contractual right to terminate is the cleanest exit. If the contract lets either party end it on 60 days’ written notice, then you give 60 days’ written notice and you are finished, subject to any amounts owing.
The difficulty lies in the details, and Ontario courts have often required careful compliance with what the parties agreed upon. So if notice must go by registered mail to a head office, an email to your account manager may not be enough. Count the days carefully, and work out whether notice takes effect when sent or when received. Hypothetically, a contract with a renewal date of June 30 and a 90-day notice requirement needs notice to land before April 1, and missing that by a week could bind you for another full term.
A termination for cause clause usually requires a “material breach” and sometimes a written notice describing the problem and giving a period to fix it, often 15 or 30 days. Skipping the cure period can make your termination itself wrongful. Your notice should quote the provision being relied on, describe the breach in specific terms, and state the date.
You must also be honest in how you exercise the right. In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, a case about a winter maintenance contract with a termination clause, the Supreme Court of Canada held that a party breached its duty of honest performance by actively misleading its contractor about the future of the contract, even though it was entitled to terminate on notice. There is no general duty to tell the other side you are thinking about terminating, but you may not knowingly create a false impression. And in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, the Court confirmed that contractual discretion must be exercised in good faith, meaning in a manner connected to the purposes for which it was granted. Neither case stops you from using your rights for your own benefit. Together, they mean that the way you act along the way matters.
Route Two: Repudiation or Fundamental Breach
If the contract has no helpful clause, or if the other side’s conduct is sufficiently serious, the common law may allow you to treat the contract as over. This applies when a party has shown an intention not to be bound any longer, or where a breach deprives the innocent party of substantially the whole benefit of the agreement.
The threshold is high. A late delivery, some invoice errors, or a poor service month will rarely be enough, even if they are frustrating. The usual questions are about how much of the contract remains to be performed, how serious the breach is, and whether it is likely to happen again.
When a true repudiation occurs, you face a choice. You can accept it, ending the contract and suing for damages, or you can affirm the contract and carry on. You cannot do both, and your conduct can make the decision for you. If you keep accepting services for months after a serious breach, without reserving your rights, a court might conclude that you decided to continue. A prompt letter reserving your position will protect you while you take advice.
The risk runs both ways. If you declare a fundamental breach and a court later finds it was not one, your own refusal to perform can be the repudiation. The other party may then be entitled to damages, in addition to whatever you stopped paying.
Route Three: Frustration and Force Majeure
Sometimes a contract becomes impossible to perform, or something radically different from what was agreed, through no fault of either party. Frustration is a narrow doctrine, however. A contract does not become frustrated because it turned out to be unprofitable, or because costs rose sharply, or because a major customer left. The event must be one the parties did not foresee or provide for, and it must radically change what performance means.
If frustration does apply, the parties are released from future obligations. Ontario’s Frustrated Contracts Act then deals with the fallout. In general, money paid before the frustrating event can be recovered and money payable ceases to be payable, but a court may allow a party to keep or recover some of it to cover its expenses, and may award a just sum for any valuable benefit received.
A force majeure clause is contractual and depends on its wording. Read the list of events, and check whether it merely suspends performance or allows termination, whether an event must make performance impossible rather than merely harder, and how soon notice has to be given. Those clauses tend to be read closely, and a general economic downturn is rarely covered.
Route Four: Misrepresentation
If you were persuaded to sign by a false statement of fact, you may be able to set aside the contract altogether through rescission. Examples may include a vendor who claimed that its software integrated with your accounting system, when it never did. Fraud supports stronger remedies, while innocent misrepresentation is more limited. Delay can be fatal to the remedy, and continuing to use the product after finding out the truth can also undermine it. Entire agreement clauses can also make such a claim harder, although they will not generally protect a party from its own fraud.
Route Five: Negotiate
For most businesses, this is the most practical route, and it is too often the last one tried. A negotiated exit gives certainty. It has the further advantage of letting you avoid a dispute over who breached first.
Your leverage may be better than you think. The other party has its own costs, its own reputation, and its own duty to mitigate if it sues you. Offering a modest payment, a phased transition, or a referral can buy a full release. If they are also in default of something, a mutual walk-away may be realistic. Be careful about how you write to them, though: a settlement letter should be clearly marked “without prejudice,” although that label does not protect every communication.
Put the result in a signed termination and release agreement that states:
- The end date and any transition services
- What is paid, by when, and on what conditions
- A mutual release of all claims, carefully worded
- Return of equipment, data, and confidential information
- Which obligations survive
- Discharge of any registrations under the Personal Property Security Act
Do not treat a friendly phone call as the end of the matter. Without paper, a change of management at the other company may bring the dispute straight back.
What a Wrongful Exit Can Cost
If you end a contract without the right to do so, the other side can generally claim the amount needed to put it in the position it would have been in had you performed. Usually, this means lost profit for the remaining term, less the costs it saved, rather than the full contract price. It must take reasonable steps to mitigate, such as finding a replacement customer, and any amount it should have saved through mitigation comes off the claim.
An early termination fee or liquidated damages clause may set the number instead. Courts may decline to enforce a clause that is a penalty out of proportion to any genuine loss, although businesses that negotiated such terms face an uphill argument. Equipment leases frequently contain an acceleration clause, which means the rest of the payments can come due at once, along with repossession rights. Those may be subject to the PPSA and to specific notice requirements. Note also that personal guarantees may keep you exposed even when the company stops trading. Legal fees may be recoverable under the contract too, and those amounts are sometimes substantial.
The general limitation period in Ontario is two years from when a claim was or should have been discovered, but it can be varied by a business agreement. So the fact that nothing happens for a few months does not mean the matter is over.
A Good Exit Plan
Assuming you have decided to end it, a sound process looks something like this:
- Gather the contract, all amendments, and a timeline of what has gone wrong
- Collect the evidence quietly: emails, service logs, invoices, and photographs
- Have someone identify the available route and its risks
- Line up your replacement vendor or customer before you give notice, where you can do that without creating a conflict
- Send a precise notice that complies with the contract in form and timing
- Keep paying amounts that are clearly owed, and do not hold back undisputed sums without advice
- Continue to perform any remaining obligations during the notice period
- Document the handover, and retain records until the risk of a claim has passed
If it does end in a claim, smaller amounts may fit within the monetary limit of Small Claims Court, and larger ones go to the Superior Court of Justice. Brampton’s courthouse at 7755 Hurontario Street is a common local venue for a Peel dispute, unless the contract requires arbitration or names another forum.
When to Get Advice
A short legal review before you send a notice is generally inexpensive compared to fixing a bad one. Bring the contract, the amendments, your timeline, and the outcome you would accept. A lawyer can then give you a view of your real rights and draft the termination letter or release. If the other side is already threatening a claim, our business litigation page describes how those disputes are handled, and you can contact Sawan Law House LLP to arrange a time.