“Anticipatory breach” of contract: When does the limitations clock start?
Court of Appeal decides that an employee is not obliged to sue immediately upon notice of the employer’s “anticipatory breach” of the employment contract
A recent decision of the Ontario Court of Appeal, Ali v. O-Two Medical Technologies Inc., clarified when the limitations clock starts ticking in respect of an employee’s claim for unpaid commissions after an employer has unilaterally transformed the commissions structure.
In addition to working as a mechanical engineer for O-Two Medical Technologies Inc., the plaintiff, Samir Ali, had a side arrangement with the employer to sell its products in Iraq for commission. His commission would become payable after the buyer had accepted delivery and paid for the products. A week after Ali negotiated the terms of a deal with the Iraqi Ministry of Health, but several months before his commission would become due, the employer informed him that it intended to pay him a lower rate of commission than it had previously agreed to pay.
In the months following the notice of this unilateral change to his commissions structure, Ali consistently demanded that he be paid the higher rate.
Ali sued the employer approximately 33 months after receiving notice of the employer’s intention to pay him less, but only 22 months after he received payment at the lower rate of commission. The employer argued that Ali had not filed the lawsuit within the applicable statutory two-year limitation period, which it claimed had started to run when it gave him notice of the change to the commission structure.
A motion judge granted the employer’s motion to summarily dismiss the case, on the basis that Ali had failed to commence his action within 2 years of receiving notice of the change to the commission agreement.
However, the Court of Appeal reversed the decision, concluding that the doctrine of “anticipatory breach” was relevant to the analysis.
The Court of Appeal held that by unilaterally changing the Ali’s commissions entitlement, the employer had given notice that it would not abide by the contract several months before it was contractually obliged to pay Ali his commission. Doing so was an anticipatory breach of the contract. Ali then had a choice – he could accept the employer’s repudiation and sue for damages immediately or not accept the repudiation, continue to demand payment according to the contract and sue after the employer actually breached the contract by failing to pay the full rate of commission.
The Court concluded that Ali had clearly elected the second option, which meant that the limitations period did not start from the anticipatory breach but from the date the employer paid him at the lower rate. “Because he did not accept the repudiation, he did not know he would suffer ‘damage’ within the meaning of [the Limitations Act] until the payment of his commissions fell due… and O-Two did not make full payment.” As a result, the action was not barred by the Limitations Act.
Ali v. O-Two makes it clear that the ball is in the “innocent party’s” court when faced with an anticipatory breach of contract.