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Limitation periods for anticipatory breach of contract


An anticipatory breach of contract occurs when one party indicates to the other party that they intend to repudiate or breach the contract between them.

When an anticipatory breach of contract occurs, the innocent party can either: (1) accept the other party’s indication that they will breach the contract and sue right away; or (2) wait for the breach to occur and then sue.

A two-year limitation period applies to either choice. In the first scenario, the limitation clock starts ticking when the innocent party accepts the other party’s intention to breach. In scenario two, the limitation clock starts ticking when the breach occurs.

The two cases below show how courts have dealt with anticipatory contract breaches and limitation periods.

Ali v. O-Two Medical Technologies Inc.

Samir Ali had an agreement with his employer, O-Two Medical Technologies, to sell its products in Iraq for commission. His commission would become payable after the buyer accepted delivery and paid for the products.

Ali negotiated a deal with the Iraqi Ministry of Health. One week later, but several months before Ali’s commission would become due, O-Two informed him that it intended to pay him a lower commission rate than it had already agreed to pay. This was the anticipatory breach of contract.

A motion judge summarily dismissed Ali’s lawsuit. O-Two argued that Ali’s action was statute-barred because it was filed 33 months after O-Two gave Ali notice that it intended to pay him the lower commission rate. As such, the two-year limitation period had expired.

The Court of Appeal reversed the decision. The Court held that Ali had two choices: (1) he could accept O-Two’s intention to breach and sue for damages immediately; or (2) not accept the intention to breach, continue to demand payment and sue after the breach occurred (in other words, when O-Two paid Ali the lower commission rate).

Ali had chosen the second option. The limitation period did not start running until O-Two made the lower commission payment. As a result, Ali’s lawsuit was not statute-barred because it was filed 22 months after he received the lower commission payment, within the two-year limitation period.

Hurst v. Hancock

The Ontario Court of Appeal affirmed that parties have options when an anticipatory breach of contract occurs. The Court agreed with the intervenor’s argument that innocent parties to contract repudiation will be subject to different limitation periods depending on whether: (1) they accept notice from the other party about the intention to breach the contract; or (2) wait until the breach occurs.

Craig Hurst had an agreement with his employer, Darwin Productions, that entitled him to extra salary and an ownership interest in the company. After not being paid, Hurst consulted a law firm. The firm sent Darwin and its principal, James Hancock, a letter demanding payment. Hurst sued more than two years after the law firm’s letter was sent to Darwin.

Hancock brought a motion for summary judgment, arguing that Hurst’s lawsuit was beyond the two-year limitation period. The motion judge agreed and dismissed Hurst’s action. The motion judge reasoned that Hurst knew at the time his lawyer sent the letter to Darwin that it was disputing his salary and ownership interest entitlement.

The law firm appealed the motion judge’s decision. It was allowed to intervene because a failure of Hurst’s action against Darwin and Hancock could result in a negligence claim against the law firm. The law firm argued that the motion judge did not consider the issue of anticipatory breach of contract.

The Court of Appeal agreed that the motions judge had failed to consider anticipatory breach. If an anticipatory breach occurred, the limitation period did not start ticking until Hurst accepted that breach. This was a genuine issue requiring a trial. The appeal was allowed and the summary judgment was set aside.

This case is a reminder that the ball is in the innocent party’s court. Contracting parties have options when an anticipatory breach of contract occurs and those options have different limitation periods.

A warm thank you to our former articling student, Sara Ageorlo, who assisted in writing this blog post.