Jan 29, 2018

Introduction

In Canadian contract law, the caselaw governing the status and interpretation of conditions to be performed as prerequisites in a contract remains an unclear and potentially confusing area of law. The purpose of this article is to review recent caselaw that is relevant to the doctrine of “true condition precedent”. The application of the rule has been problematic for several decades, especially with regard to litigation arising from contracts for the sale of real estate or business interests. As a result of the newer precedent of Bhasin v Hrynew, it is suggested that the purpose of the doctrine should be reviewed in light of the Supreme Court's recent endorsement of “good faith” as a primary duty in contract law.

Origin of the Rule

The rule emerged from the case of Turney v Zhilka, as heard before the Supreme Court in 1959.[1] The litigation related to an attempt to enforce an agreement for the sale of land,where the description of the exact property to be conveyed was alleged to be problematically vague. The vendor repudiated the original agreement, on the motive that it was uncertain what extent of property and buildings he was to retain from the sale.[2] After the refusal of the vendor to convey the land subject to the agreement, the purchaser sued to compel specific performance of the contract. The vendor responded in defense that the purchase agreement was unenforceable due to a vagueness in the description of the property to be conveyed, and crucially that a pre-condition that approval for subdivision under the Planning Act from the village council had not been fulfilled by the plaintiff.[3]

On appeal to the Supreme Court, the focus of final ruling was the status of this condition and how it related to the existence of obligations underlying the original contract. As Mr. Justice Judson explained, “the other defence pleaded was that the purchaser failed to comply with the following condition of the contract:‘Providing the property can be annexed to the Village of Streetsville and a plan is approved by the Village Council for subdivision’ …. neither party to the contract undertakes to fulfil this condition, and neither party reserves a power of waiver.” [4]Justice Judson summarized the status of waivers in the law of real estate contracts, ruling that in the case at bar

But here there is no right to be waived. The obligations under the contract, on both sides, depend upon a future uncertain event, the happening of which depends entirely on the will of a third party—the Village council. This is a true condition precedent—an external condition upon which the existence of the obligation depends. Until the event occurs there is no right to performance on either side. The parties have not promised that it will occur. In the absence of such a promise there can be no breach of contract until the event does occur. The purchaser now seeks to make the vendor liable on his promise to convey in spite of the non-performance of the condition and this to suit his own convenience only.[5]

The Court rejected that waiver was available,stating that the position the plaintiff was “an attempt by one party, without the consent of the other, to write a new contract.”[6] Because the condition had not been satisfied,no contract had come into existence in the first place. A waiver would “presuppose the existence of aright to be relinquished”, which could not be accomplished because the contract did not come into effect.[7]

The exact scope of the rule to be applied has remained uncertain and problematic in the five decades since the ruling. Major issues such as the type of condition that would trigger the doctrine, the specific text if any required in the contract to invoke the rule, and how to interpret the default rule of interpretation in the absence of specific party choice were left unaddressed in the original decision and have had to be refined through extensive litigation as time went on. These later cases will now be considered.

Later Development and Application

The Supreme Court attemptedto clarify the basis of the rule in the case of Barnett v Harrison in 1975.[8] In this case, a developer sought to acquire land for the purposes of building an apartment complex. Under the sale agreement, the transaction was set to expire 60 days from officially requesting planning permission and would leave the parties free from the contract. The contract specifically provided for the agreement to come to an end if planning division was not granted, and contained a specific clause granting a waiver power to the purchaser if water and sewage conditions were not met.[9] The developer diligently tried to obtain planning permission but was unable to obtain it within the given period.[10] On the date of expiry of the agreement, the developer as purchaser sought to waive the condition and close the deal, but the vendor refused on the grounds that the conditions were not satisfied.[11]

The Court offered several reasons for why the rule in Turney should be maintained as originally formulated. The Court held that it was capable of distinguishing between a situation in which one party waives performance under the contract owed to themselves by the other part, and an attempt of a contract party to waive their own non-performance owed to someone else or the independent action of a third-party.[12] The Court also focused upon the explicit wording of a clause concerning water and sewage access, which specifically granted the purchaser a power of waiver not present in other parts of the contract. As explained by Mr.Justice Dickson,

…when parties, as here, aided by legal advisors, make a contract subject to explicit conditions precedent and provide therein specifically that in the event of non-compliance with one or more of the conditions, the contract shall be void, the Court runs roughshod over the agreement by introducing an implied provision conceding to the purchaser the right to waive compliance. [13]

As well, it was held that allowing a waiver of the condition would have the effect of granting the equivalent of an option contract to the purchaser without payment to the vendor. The ultimate effect of this case was to begin to classify when and where true condition precedents would be found based upon the specific text of the contract and to affirm a basic policy reason for the rule.

The most significant modification of the rule appeared in the case of Dynamic Transport v OK Detailing.[14] Under the planned transaction, the vendor sought to divide and sell an undeveloped portion of a lot they occupied for business purposes. In the original agreement of purchase and sale, the transaction was subject to obtaining planning department approval of the division, however the contract was silent as to who was responsible for obtaining this permission. The defendant attempted to avoid liability under the agreement by claiming a true condition precedent arose from the lack of permission in this situation.

Mr. Justice Dickson noted that “in appropriate circumstances the courts will find an implied promise by one party to take steps to bring about the event constituting the condition precedent … there are many cases in which provisions of a contract were subject to the condition precedent of an approval or a licence being obtained, and one party was by inference in the circumstances held to have undertaken to apply for the approval or licence.” Mr.Justice Dickson ultimately ruled that

I cannot accept the proposition that failure to fix responsibility for obtaining planning approval renders a contract unenforceable. The common intention to transfer a parcel of land in the knowledge that a subdivision is required in order to effect such transfer must be taken to include agreement that the vendor will make a proper application for subdivision and use his best efforts to obtain such subdivision. This is the only way in which business efficacy can be given to their agreement.

The Court ruled that the failure of the other party to apply for such permission would constitute a breach of contract and render them liable to damages. This case has become the anchor point for further approaches to the rule and has been referenced in the discussion of the existence of the duty of good faith as discussed below.

A more recent example of the traditional application of the rule can be observed in the case of Hilchie v Waterton Condominiums.[15] The case involved the sale of condominium units before their construction by a developer. The plaintiffs sought specific performance of the agreement on the grounds that the units they contracted to purchase were commercially unique and valuable property. The developer as defendant claimed that failure to register the project under the Condominium Act was a “true condition precedent”under the terms of the agreement that had rendered the contract unenforceable.[16] They were thus not answerable in damages or specific performance to provide the units or their equivalent.

Commenting on the original Turney rule, Chief Justice Michael MacDonald concluded that one should “note then the ingredients and consequences of a true condition precedent: the condition represents a future uncertain event, the occurrence of which is beyond the parties’ control; neither party reserves the right to waive the condition; and there can be no breach of contract should that event not occur.”[17] The Court held that the requirement of registration of the project under the Condominium Act, which was made a term of the agreement, was a true conditional precedent. As the date for registration passed without registration, the agreement was at an end. On this basis the Court overturned the trial level decision as no breachof contract had thus occurred.

The previous discussion has attempted to review the classic formulation and use of the Turney rule. Going forward,this article will attempt to discuss how the rule opens many problems of application,by discussing the most recent example from the New Brunswick Court of Appeal in which the case has been considered.

The Rule in New Brunswick

The rule was most recently considered by the New Brunswick Court of Appeal in the 2008 case of Delphinium Ltée v. 512842N.B. Inc.[18] The plaintiff was a professional fisherman who sought to acquire a crab fishery licence that was offered for possible sale by the defendants. Due to federal fisheries regulations, the licence available was held in the name of a local ship captain as trustee, Mr. Benoit, on behalf of the defendant numbered company as beneficiary. The plaintiff entered into a purchase and sale agreement with the numbered company, wherein the defendant company undertook to obtain the transfer of the licence to the plaintiff with the required cooperation of the trustee.

The defendant numbered company gave various assurances that the trust agreement was enforceable and that the licence was easily transferred to the plaintiff by means of litigation if it were required.[19] However, the ultimate promised transfer of the licence did not occur. The holder of the licence as trustee, Mr. Benoit, raised major objections to the transaction. The defendants thus chose to sell the business outright to Mr. Benoit. The deal ultimately collapsed due to a variety of factors, including uncertainty over the enforceability of the trust agreement in litigation and the status of DFO regulations.[20]

As a result of the defendant’s breach, the plaintiff lost his fishing season having relied upon the expected performance of the defendant in selling and transferring the required licence to the fishery. The plaintiff sued based on the lost business opportunity and reliance placed upon the agreement for sale. In response, the defendant claimed that it owed no binding obligation to the plaintiff. The defendant argued that the requirement of the trustee to voluntarily transfer the license with the permission of the DFO was a “true condition precedent” whose effect was to prevent the formation of a binding agreement as long as the transfer, as a precondition, was not fulfilled. The defendants alternately pleaded the doctrine of frustration under the presumable grounds that even if the agreement was binding, the uncertainty surrounding the status of transfer of the license relieved them from the burden of the contract.

The Court set out the following reasons for upholding the trial level decision.

The trial judge’s reasons on the issue of the condition precedent have already been set out. In essence, she found the“true” condition precedent was the issuance of the snow crab fishing licence by DFO to Mr. Schofield. She made no error in relying upon the principles enunciated in Dynamic Transport.

In the case at hand, as the trial judge mentioned, the agreement specifically provided the numbered company and Roger Landry were to apply for an order compelling Mr. Benoit to do whatever had to be done to ensure the orderly transfer of the snow crab fishing licence to Mr. Schofield. Accordingly, they were clearly in breach of contract in failing to exercise due diligence in seeking fulfillment of the condition precedent when they discontinued the application and sold the licence to Mr. Benoit.

In my view, the trial judge did not err in law in concluding as she did that the numbered company and Roger Landry had a specific obligation to facilitate or cooperate in the fulfillment of the condition precedent and that their failure to do so constituted a breach of contract giving rise to the usual remedies.[21]

The defendants were thus in breach of their agreement to facilitate the transfer of the licence from the trustee as licence-holder, when they by discontinued legal action against the trustee as required, to compel their participation in the transfer of the licence.

Duty of Good Faith?

The existence of the duty of good faith as a general organizing principle of the law of contract was affirmed in the case of Bhasinv Hrynew as heard before the Supreme Court in 2014.[22] As explained by Mr. Justice Cromwell, the case raised fundamental issues - “Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? And, if so, did either of the respondents breach that duty? I would answer both questions in the affirmative. Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result.”[23]The litigation arose out of the loss of an investment dealership specialized in the sale of educational savings plans due to the non-renewal of a dealership contract. The appellant was an enrollment director, engaged in the sale of the plans through dedicated sales force. The respondent parent corporation sold the exclusive territory rights to the appellant by contractual arrangement under a “commercial dealership agreement” which had legal effects similar to a franchise agreement.[24]

The major dispute arose when a competing enrollment director sought to acquire the appellant’s business without payment. He endeavored to achieve this goal by pressuring the parent company through various means such as proposing an unwanted merger and being seeking appointment as auditor of the appellant’s confidential business records.[25] The appellant refused to allow this,eventually leading the parent company to the cancel the appellant’s dealership agreement by exercising a non-renewal clause.[26] The refusal of the parent company to renew the agreement caused the appellant to lose the value of his small business and allowed his competitor to effectively acquire it by subsequently hiring his sales force.[27] The appellant filed suit against the parent company for breach of contract, and against the respondent under the tort of civil conspiracy.[28]

The Court held that the appellant was owed a duty of honest execution of the contract. The Court affirmed the duty of the contracting parties to reasonably collaborate and accomplish reasonable tasks in furtherance of the ultimate object of the contract. The Court explained that “for example, in Dynamic Transport, this Court held that good faith in the context of that contract required a party to take reasonable steps to obtain the planning permission that was a condition precedent to a sale of property. In other cases, the courts have required that discretionary powers not be exercised in a manner that is ‘capricious’ or ‘arbitrary’”.[29] By misleading and misrepresenting its intentions to the appellant regarding the exercise of the renewal clause, the parent company caused the appellant to lose the value of his business by being unable to take steps to mitigate any impending cancellation of which he was unaware. This failure to deal honestly with the plaintiff in their contractual relations was thus a breach of the duty of good faith, and the respondent company was held liable for the loss of the value of the business that could not be saved or salvaged by preventative means. The respondent parent corporation was ultimately held liable in contract for the loss of the value of the appellant’s business, due to their failure to execute the contract with honesty.[30]The action in tort against the competitor was dismissed as his actions were not held to be not ultimately connected to the parent company’s decision to refuse the renewal of the contract.

As a general principle, the Court concluded that the duty of good faith was an organizing principle of contract law, with the duty to honestly perform the contract and not mislead other parties as a minimal addition to this area of law.[31] The Court specifically highlighted the case of Dynamic Transport and the academic arguments of Prof. McCamus to the effect that one component of this duty also includes the duty of the parties to cooperate with each other in order to accomplish the end goal of the contract.[32] It is suggested that this specific idea should be read into the existing doctrine of true condition precedent, in order to avoid situations where contracts may be unnecessarily frustrated by judicial intervention when this was not the reasonable intention of the parties for business efficacy.

An example of how this modified approach to contract interpretation might be applied can be seen in the case of Swan Group v Bishop, as heard before the Alberta Court of Appeal.[33] The litigation arose out of a contract for the sale of a condo development, where the defendant counter-claimed for the return of his deposit after failing to close the deal upon the vendor’s request. After refusing to close the deal, the defendant argued that he was entitled to the return of his deposit because the agreement for sale was void “ab initio” due to the non-fulfillment of registration of the condo with the regulatory board as a condition precedent to its validity.

The Court reviewed the applicable case law, and held that the default rule of interpretation should avoid implying a true conditions precedent that would void the contracts unless there was a clear indication by the parties that this was their intention. As stated by the Court,

…we do not see in the law of real estate sales agreements a broad hospitality to the idea that default of a condition which relates to a step in an ongoing construction project should automatically void the agreement ab initio. Doing so deprives the parties of the certainty in their relationship, which is perhaps the single most important purpose of a contract. We were not pointed to a case making a clause like this a true condition precedent per se when it was not so designated by the parties in the agreement. The law should attempt to assist parties to carry out their original intentions and agreements, not to bust them.[34]

The approach suggested by the Court would tend to not find the presence of a true condition precedent due to the tendency to render contracts void which might normally have been relied upon, thus undermining certainty in this area. The Court appears to reject this approach when there is neither specific wording in the agreement to indicate this result, and to hold this as a default rule would render the enforcement of contracts uncertain.

Conclusion

The result of Bhasin and other recent appeals cases suggest that the doctrine of true condition precedent ought to be considered to have numerous limits on its scope and effects based upon the finding of the duty of good faith in contract law and other parallel issues. The duty of honest execution of the contract as specifically found in the case, as well as the proposed duty to collaborate to achieve the objective of the contract as proposed by Professor McCamus in academic commentary, both suggest that that any potential “true condition precedent” should be limited by implied duties of honest conduct. As well, the effect of Swan Group suggests that true conditions precedent should not be implied as a default rule in contract interpretation, unless there is specific text or other evidence that the parties intended to have this effect, as applying the doctrine would run counter to the certainty and enforceability of commercial contracts as a general proposition.


[1][1959] SCR 578

[2]Turney at p. 580

[3] at p.582.

[4] Ibid.

[5] [1959]SCR 578 at 584

[6] At p.584.

[7] Ibid.

[8] [1976] 2SCR 531

[9] At p.553.

[10] At p.555.

[11] At p.550.

[12]Barnett at p. 558.

[13]Barnett at p. 558.

[14] [1978]2 SCR 1072

[15]2012 NSCA 16

[16]Hilchie at para. 3-4.

[17] Atpara. 31.

[18]2008 NBCA 56

[19] Atpara. 8.

[20] Atpara. 11.

[21]Delphinium at para. 29.

[22] 2014SCC 71

[23] Bhasin at para. 1.

[24] Bhasin at para. 4-5.

[25] Atpara. 9-11.

[26] At para12.

[27] Atpara. 13.

[28] Atpara. 14-16.

[29]At para. 89.

[30] Atpara. 94.

[31] Atpara. 74-77.

[32] Bhasin at para. 47 – 49.

[33]2013 ABCA 29

[34] Atpara. 19.