The post Canada’s Top Court Clarifies ‘Good Faith’ Requirement for Parties Under Contract appeared first on GLG LLP Lawyers - Experienced Toronto-Based Lawyers Providing Client Centred Business, Real Estate and Litigation Services.
]]>In the past several months, the Supreme Court has both expanded upon and placed limitations on this principle, in two significant decisions. Below, we will review the decisions and how they have each affected the doctrine of good faith and its applicability to contract law in Canada.
Under Bhasin, the SCC imposed a general duty of good faith and honesty upon those carrying out duties under a contract. In 2020, a new case placed an additional obligation to the notion of good faith and honesty: correcting false presumptions. In a case called C.M. Callow Inc. v. Zollinger, a group of condominium corporations had a multi-year contract with a service provider for winter maintenance including snow removal, as well as for summer maintenance duties. The contract covered the years 2012 and 2013, but contained a clause whereby the condominium group had the option to terminate the contract early by providing ten days’ notice.
In the spring of 2013, the condominium group made the decision to terminate the contract early but had not yet informed the service provider. Further, a representative of the group had a conversation with a representative of the service provider that led the provider to believe the contract would be renewed beyond the existing term. The service provider went on to provide additional services free of charge throughout the summer of 2013. The condominium group was aware there was a false belief the contract would be renewed but said nothing. At the end of the summer, the condominium group informed the provider that it would be cancelling the remainder of the contract.
The case eventually went before the Supreme Court of Canada, which ultimately found that the condominium group had knowingly misled the service provider for several months. While the group’s silence alone would not necessarily have amounted to a breach of contract, the fact was that the condominium group was aware that the provider had a false impression that the contract would be renewed. By failing to correct that misapprehension, the group had deceived the provider and breached the contract.
In a more recent decision, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the SCC took the opportunity to place limitations on the duty of good faith when it comes to exercising contractual discretion. In this case, a statutory corporation in charge of waste disposal for the Metro Vancouver Regional District (Metro) engaged Wastech, a waste transportation company to transport waste to several facilities. Wastech earned a different rate depending on the distance to the specific facility – the closer the facility, the less profit Wastech earned. The contract between the two parties gave Metro complete discretion to allocate waste to each disposal facility as it saw fit.
At one point during the contract, Metro reallocated waste away from the furthest facility to one that was closer. This caused Wastech’s profits to drop significantly below target. Wastech alleged breach of contract because Metro’s decision prevented Wastech from reaching its target profit for the year.
The SCC found that parties must exercise contractual discretion reasonably and in good faith, in accordance with the purposes for which the discretion was granted. For this reason, the parties to a contract must ensure that the purposes for discretion be clearly spelled out in the terms of a contract. In this case, the Court found that the discretion was granted to allow Metro to make decisions designed to “maximize efficiency and minimize costs of the operation”. The decision to reallocate the waste was in line with this purpose, and therefore the exercise of discretion was reasonable.
Contact GLG LLP in downtown Toronto for assistance with litigation relating to breach of contract or other contract disputes. The firm’s litigators provide efficient and skilled trial advocacy for a range of legal issues and will look to settle your matter quickly and efficiently. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.
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]]>The post Misrepresentation Prompts Court to Rescind Real Estate Agreement appeared first on GLG LLP Lawyers - Experienced Toronto-Based Lawyers Providing Client Centred Business, Real Estate and Litigation Services.
]]>Misrepresentation refers to an untrue statement made by one party, which in turn induces another party to enter into a contract with them. It is important to remember that misrepresentation is not always intentional. There are three types of misrepresentation recognized by Ontario courts:
The remedy for a finding of misrepresentation can vary depending on the circumstances and the type of misrepresentation. For the first two categories above, a claimant can seek damages, rescission of the contract, or both. For innocent misrepresentation, a court is more likely to award damages rather than recession.
In a recent decision before the Ontario Court of Appeal, a homebuyer had brought a claim seeking recession of an agreement of purchase and sale after discovering a significant discrepancy in the square footage of the home from what had been presented initially. The buyer was relatively young and inexperienced in real estate, and this was the first time he had purchased a property. He was looking for a specific amount of space in order to accommodate himself, along with several members of his family.
His real estate agent showed him a home and told the buyer it was approximately 2100 square feet in size. The real estate had relied upon information provided in a previous listing of the property as well as details provided by the homeowner, however, the agent did not conduct a property measurement exercise. The agent agreed he had been negligent in failing to do this.
The buyer visited the property himself twice and inspected each room. On the second visit, he was accompanied by members of his family as well. He signed an agreement of purchase and sale to purchase the house. However, his financial institution required that he have an appraisal done on the home as a condition of the approval of his mortgage. When the appraisal was completed, the size of the home was assessed at 1450 square feet. Given the significance of the difference, the buyer withdrew from the transaction and brought a claim seeking rescission of the agreement and a return of his $50,000 deposit.
The lower court found in favour of the homebuyer and rejected the argument that the buyer’s personal inspection of the home should have been a better determination of his expectations regarding the size of the home than the representations made. The court took the buyer’s age, inexperience with square footage and first-time homebuyer status into account in determining that it was reasonable he had relied on the representations even after seeing the home himself.
The defendant real estate agent appealed the decision, claiming again that once a buyer has inspected a property, the inspection should displace any representations made regarding the size of the home. The Court of Appeal dismissed the appeal, holding that this argument might apply in some cases, whereas in others, such as the case at hand, the constellation of facts would render this finding unfair. The following facts were at the core of the Court’s decision:
Contact GLG LLP in downtown Toronto for assistance with litigation relating to breach of contract, real estate or other civil disputes. The firm’s real estate and litigation lawyers provide efficient and skilled trial advocacy for a range of legal issues and will look to settle your matter quickly and efficiently. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.
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]]>The post Ontario Court Holds Party to Buy/Sell Clause Despite Pandemic Challenges appeared first on GLG LLP Lawyers - Experienced Toronto-Based Lawyers Providing Client Centred Business, Real Estate and Litigation Services.
]]>Shotgun buy/sell clauses are commonly used in business contracts such as shareholder agreements and partnership agreements. When multiple parties will be working together, there is a risk of disagreement on how to proceed which can result in project/business stagnation. If two parties with equal power are unable to agree on how to proceed with a major project or decision, it can be catastrophic for the business itself. Shotgun buy/sell clauses are intended as a means to solve this problem and allow the business to move forward by having one party buy out the other.
The clauses typically operate as follows:
While the process is intended to create a fair deal for both parties, the financial positions of each party may create an imbalance, since one party may have considerably more means than the other.
The case at hand involved two companies that had entered into a limited partnership agreement to rezone a property in Toronto and redevelop it as a luxury condominium. The parties had difficulty working together, and eventually, one party (FSC) opted to invoke the buy/sell clause in the partnership agreement. FSC triggered the clause by proposing a purchase of the other entity (ADI) for a set price. Two weeks later, ADI agreed to purchase FSC’s interest for $12,733,289, with the deal set to close three months later on April 8, 2020.
A few weeks ahead of the scheduled closing, ADI informed FSC it would not be closing as planned, due to the ‘unforeseeable delay’ caused by the COVID-19 pandemic. In response, FSC brought an application seeking the remedy of specific performance, which would require ADI to go through with the agreed-upon purchase under the buy/sell clause.
ADI claimed it had not breached the buy/sell clause, as the contract to purchase FSC’s interest in the project had been frustrated due to the unforeseen problems created by the pandemic. ADI claimed that the market had taken a significant downturn and as a result, ADI was unable to secure the financing necessary to complete the purchase. However, the court rejected this claim.
The court found that while the pandemic was unprecedented, sharp economic declines are common. There are myriad issues that could affect the price of real property, and it is not unrealistic to expect extreme fluctuations in property values over even relatively short periods of time. Although in this case the uncertainty was largely tied to the pandemic, the cause could have been any number of reasons, which is a risk a developer takes when undertaking such projects.
Secondly, the court found that ADI had been lax in its pursuit of funding. The company had approached only a handful of lenders and had requested much more capital than what was required to complete the purchase from FSC. The court found that ADI could have opted to allow FSC to purchase ADI’s interest, and instead chose to buy out FSC. As a result, the court held ADI to its obligations and ordered specific performance of the contract.
Businesses should exercise due caution when presented with a buy/sell option and undertake due diligence to secure funding prior to agreeing to buy out a former parter’s share of a contract. As demonstrated by the case above, courts are unsympathetic to a business that fails to do so, even in the face of an extraordinary circumstance such as COVID-19.
Our business and commercial real estate lawyers can advise on how best to protect your business and mitigate risk in the challenging financial landscape created by the pandemic. Contact GLG LLP in downtown Toronto for efficient and skilled advice on the management of your business. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.
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]]>The post Breach of Contract due to Coronavirus & Force Majeure Clauses appeared first on GLG LLP Lawyers - Experienced Toronto-Based Lawyers Providing Client Centred Business, Real Estate and Litigation Services.
]]>A force majeure clause, or Act of God clause, considers the obligations of the parties to a contract if a catastrophic event, beyond the parties’ control, were to occur and prevent one or more parties from fulfilling their obligations. In some cases, these clauses will set out specific events that may disrupt the performance of the contract, and in other cases, the clause is more open-ended. In specific clauses, it is unlikely that a pandemic such as COVID-19 would have been contemplated at the time the contract was created, so such a clause would be less likely to apply to the current circumstance. However, in an open-ended force majeure clause, it could be argued that the health crisis is an unforeseen event that created such upheaval, it became impossible to perform all or part of one’s responsibilities.
If successfully argued, a force majeure clause may not necessarily excuse a party from fulfilling ALL duties under a contract. This type of clause is rarely used, and so in cases where it applies, it will likely be given a narrow application. If a portion of the contract can still be carried out, a party would be unlikely to escape liability for that portion.
In order to successfully demonstrate that a party should escape liability for certain responsibilities, they will have to demonstrate that the event (in this case, the coronavirus pandemic) was outside the knowledge and control of both contracting parties at the time the contract was executed. Further, they will need to demonstrate that the circumstances make performance of the contract impossible, and not just more onerous.
For contracts that don’t contain a force majeure clause, there is still a chance that a party can point to the extenuating circumstances of COVID-19 as a way to avoid liability if the circumstances interfere with performance. Like force majeure clauses, the frustration of a contract also requires a party to demonstrate that the situation at hand made it impossible to fulfil their obligations. Similarly, the circumstances must have been beyond the contemplation of the parties when the contract was signed. Timing will play a key role here. If the contract was created after worldwide reports of the virus began, it is unlikely that the pandemic will be considered outside of either party’s contemplation. However, if the contract began six months prior, there is a higher chance of success.
As with a force majeure clause, courts are reluctant to allow a party to repudiate, set aside or completely escape liability under a contract in all but the most extreme circumstances. This is owing to the fact that it can have a major negative impact on the other party involved. The factors will be weighed by the courts on a case-by-case basis, with specific circumstances playing a significant role.
In any case, a party seeking to avoid liability for breach of contract owing to challenges presented by COVID-19 faces a long road ahead of them, but it is likely courts will be seeing a significant increase in this argument over the next several months. We will continue to watch breach of contract actions when the courts resume regular services and update readers on this issue as necessary.
Contact GLG LLP in downtown Toronto for assistance with litigation relating to breach of contract or other contract disputes. The firm’s litigators provide efficient and skilled trial advocacy for a range of legal issues and will look to settle your matter quickly and efficiently. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.
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