A Payment Plan Does Not Equal a New Contract

When parties enter into a transactional contract, they are free to enter into a payment plan agreement for outstanding debt owed under the contract.  However, the payment plan itself does not necessarily mean that the parties have entered into a new binding contract.

Such was the case in Songbird Life Sciences Inc. v. Connectus Services Ltd. et al, 2023 ONSC 2089.  In December 2020, during the pandemic, Songbird Life Sciences Inc. (“Songbird”) contracted with Connectus Services Ltd. (“Connectus”) to supply COVID-19 testing and monitoring products. Connectus was to use these products under two identical contracts with the National Hockey League and the Winnipeg Jets hockey club. Two contracts were signed between Songbird and Connectus, one for each organization.

The contracts specified that Connectus would pay Songbird’s invoices within 30 days, and any late payments would incur 1.5% monthly interest. Connectus had 15 days to identify any issues with Songbird’s invoices, and if payment was over 90 days late, Songbird could suspend further product delivery and terminate the contracts. Connectus ordered and received products from Songbird, and Songbird invoiced Connectus for over $1.1 million by the end of February 2021. However, Connectus had only paid just over $380,000, leaving an outstanding balance of over $750,000.

After negotiation, the parties agreed to a payment plan in March 2021, where Connectus would pay $25,000 weekly and additional monthly “balloon payments” to clear the arrears by June 2021. Connectus made payments of $25,000 weekly for a period and then defaulted under the payment plan.

When Connectus placed another order, Songbird refused to fill it without full payment of accounts over 90 days old, as it believed Connectus was not paying as promised. The parties tried to negotiate a new arrangement but were unsuccessful, and Songbird commenced a claim in May 2021 for the outstanding balance owing and brought a motion for summary judgment.

Connectus did not contest the debt owing, but it alleged that the payment plan agreed upon in March 2021 formed a new contract between the parties and argued that it was not in breach of that contract.  Connectus also asserted that it suffered damages because Songbird refused to continue supplying products, and those damages should have been offset against the debt owed to Songbird.

The court ruled with Songbird and held that the payment plan was no more than a promise by Connectus to do what it had already promised and failed to do under the contract, and there was no new consideration.  As such, the payment plan could not be deemed a new contract. Therefore, under the December 2020 contracts, Songbird was free to suspend the delivery of any new product and/or terminate the contracts at any time after Connectus breached those contracts.

Connectus also ceased making payments and did not make any further payments (whether weekly or in a lump sum) during the period when the parties were attempting to negotiate a new payment plan or afterward. Therefore, Connectus did not even abide by the agreed-upon payment plan.

It was also held that Connectus did not suffer any damages due to Songbird’s refusal to supply products, as alleged.  Even if such losses were incurred, Songbird was authorized to act as it did under the contracts, rendering any losses suffered by Connectus irrelevant.

Songbird was therefore granted summary judgment and was awarded the total amount owing under the contracts, plus interest at the contractual rate.

This decision serves as a reminder of the responsibility to make payment under the terms of a contract.  If payment is not made in a timely manner, parties are free (and even encouraged) to enter into payment plans to resolve the debt owed.  But the mere existence of a payment plan does not mean that a new binding contract is entered and does not excuse a party from abiding by the terms of the original agreement.

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About the Author:

Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or dwaldman@dickinsonwright.com. To read his full bio, please click here.