Case comment: Haus Construction Design Inc. v. Gestion Globale Bourque Inc., 2025 QCCS 1370
The contexte
In a judgment rendered on April 25, 2025, the Superior Court ruled on the validity of a clause allowing the client to unilaterally terminate the contract. This clause provided that, in the event of termination, the client had to pay the contractor a lump-sum indemnity equivalent to 25% of the value of the work remaining to be performed.
A client and a contractor had entered into a construction contract for a six-unit residential building. At one point, the client decided to terminate the contract by sending the contractor a notice of termination relying on a clause in the contract.
Upon receiving this notice, the contractor, referring to the same clause, claimed an amount as additional indemnity. The client challenged this claim. In the client’s view, the clause had no legal effect, as it constituted a penalty clause. Moreover, it was allegedly abusive.
Because the parties were unable to resolve their dispute, the matter was brought before the Superior Court, which had to determine whether the clause in question was truly an additional indemnity clause or rather a penalty clause.
The clause
The disputed clause in the contract reads as follows:
TERMINATION BY THE CLIENT
G 3.2
Unilateral termination
The client may, unilaterally and without cause, terminate this contract by sending the contractor a written notice of termination. When the client exercises this right of unilateral termination, the client must pay the contractor, based on the current prices, the value of the work performed and the value of the materials supplied, all as of the date of termination of the contract.
In addition, the client must pay the contractor an additional indemnity equivalent to twenty-five percent (25%) of the value of the work remaining to be performed as of the termination date, without prejudice to any other damage the contractor may suffer as a penalty. For the purposes hereof, the contract shall be deemed terminated on the date indicated in the notice of termination.
Legal principles
The Superior Court referred to the relevant provisions of the Civil Code of Québec regarding contract interpretation. These provisions teach that one must examine the nature of the contract, the words used and determine the parties’ intention (Arts. 1425 and 1426 C.C.Q.). Regarding the penalty clause (Art. 1622 C.C.Q.), it may be defined as a clause by which the parties predetermine a monetary amount payable when a party fails to fulfil a contractual obligation. Otherwise, the penalty clause must relate to a contractual breach.
In the context of a construction contract, the client may decide to terminate the contract at any time, even if the work has not yet started (Art. 2125 C.C.Q.). This right is discretionary. Indeed, the client does not need to justify or explain the decision, nor demonstrate any breach by the contractor. When the client exercises this right, they must indemnify the contractor by paying the value of the work done, the expenses incurred, and the value of the materials supplied (Art. 2129 C.C.Q.). They must also reimburse the contractor for any advance payments exceeding what is owed.
The Superior Court's analysis
The Superior Court held that the clause must be correctly interpreted by considering the contract as a whole and the parties’ intention. The Court noted the following excerpt from the clause:
“In addition, the client must pay the contractor an additional indemnity equivalent to twenty-five percent (25%) of the value of the work remaining to be performed as a penalty.”
According to the Court, the use of the word “penalty” does not automatically transform the clause into a penalty clause. The context of its use must be examined. The evidence showed that the parties understood the clause. They admitted that the value of the remaining work was $1,300,000. The amount of the additional indemnity was therefore $1,300,000 × 25% = $325,000.
The Superior Court noted that the contractor had committed no contractual fault. The termination resulted solely from the client’s decision to end the contract. In such a context, the contractor could not rely on a penalty clause, because a penalty requires a contractual breach. The Court therefore concluded that the indemnity clause was clearly established as an additional indemnity in the event of termination, consistent with a legitimate contract clause. The parties had negotiated it as part of an indemnity regime for unilateral termination. To determine the true nature of the clause, the Court considered several factors, including:
- the parties’ behaviour
- the clause’s wording as a whole
- the parties’ intentions
- evidence such as the absence of contractual fault by the contractor
- the relevant provisions of the Civil Code of Québec.
The Superior Court judgement
After considering the clause, the evidence, and the legal principles, the Superior Court concluded that the clause is valid and enforceable. It qualifies it as an additional indemnity clause. The evidence shows that the amount of the additional indemnity is $325,000. From this amount, the $50,000 deposit, which the contractor had already received, must be deducted. The Superior Court therefore orders the client to pay the contractor a net amount of $275,000. The client appealed the judgment. The Québec Court of Appeal upheld the Superior Court’s decision in all respects (Gestion Global Bourque Inc. v. Haus Construction Design Inc., 2025 QCCA 1325).
The recommendations
This judgment highlights the importance of understanding the applicable rules for properly qualifying the legal effect of contractual clauses. As a contractor, you must pay particular attention to the drafting of termination clauses in your contracts. The Superior Court’s judgment confirms that you can negotiate and include a reasonable lump-sum indemnity to protect your investments in the event of unilateral termination by the client.
Before signing a contract, we encourage you to consult a professional to ensure that your contractual clauses achieve the intended legal effects in accordance with the requirements of the Civil Code of Québec. A carefully drafted and compliant clause can make all the difference. Legal proceedings may then be avoided.
