We thought it time to explore how many angels can dance on the head of a pin. Put another way, if a condition in an agreement allows a party full discretion to determine its satisfaction regarding an aspect of the property, is the agreement still binding or, because it is so dependent on the party’s subjective state of mind, is it unenforceable? Further, even if the agreement is binding, must, and did, the party act reasonably in determining its “satisfaction?” The trial judge in Hacquard Wolfe Trust v. Richmond Holdings Ltd. 2016 BCSC 2139 had to conduct this exercise.
An agreement for purchase and sale contained a condition that provided for each party to be “completely satisfied in its sole and absolute discretion” with environmental reports as to potential contamination. The purchaser obtained a stage 2 environmental report and a further detailed report and provided them to the vendor. The parties extended the condition while the vendor removed the significantly contaminated soil. The parties obtained a new report, which indicated that the remaining contaminated soil was marginal and manageable.
The purchaser claimed that the environmental state of the property detrimentally affected its financing and therefore refused to waive the condition. The vendor took the position that this was a repudiation of the agreement and claimed the deposit as forfeited.
The judge relied on the 1985 Ontario Court of Appeal decision in Greenberg v. Meffert and the 2002 Ontario Court of Appeal decision in Marshall v. Barnard Place Corp. in his analysis of the condition.
The judge noted that conditions precedent may fall within three categories:
- those that are clear, precise, and objective, leaving no room for interpretation
- those that are partly subjective and partly objective, but still subject to an implied term of reasonable conduct
- those that are so imprecise and dependent on the purchaser’s subjective state of mind that the contract is to be regarded as at the offer stage and not binding
Contracts containing conditions within the first and second categories are enforceable; contracts containing conditions within the third category are not.
The judge noted that the agreement contained a clause stipulating that the agreement was binding on the terms and conditions contained in it. This gave weight to a conclusion that the parties intended the agreement to be enforceable notwithstanding any possible subjective element to the approval of the environmental reports. More importantly, he noted that the environmental condition of the property was capable of being assessed under objective measurements, as set out in the reports, and that the purchaser was obliged to assess those reports rationally and in good faith. Accordingly, the condition fell within the second category of objective categorisation subject to subjective factors, such as the purchaser’s own experience and risk tolerance.
The judge therefore concluded that the agreement was enforceable and continued to the second part of the analysis to determine whether the purchaser had breached its duty to exercise the subjective elements in good faith.
The judge held that the purchaser had not exercised its discretion rationally and in good faith for the following reasons:
- The purchaser provided no evidence that the degree of contamination made the agreement commercially unviable. To the contrary, the purchaser’s consultant had described the contamination as marginal and manageable. The purchaser claimed that a “clean” environmental report was necessary to waive the condition, but the judge noted that a “clean” environmental report was never a term of the agreement. The judge held that the purchaser was obliged to consider, and not unreasonably reject, possible means of addressing the minimal risk that the marginal degree of contamination posed, short of obtaining a clean report.
- The purchaser’s email, in which it refused to waive the condition, blamed financing problems as the reason for its decision. In particular, it stated that the prospective financier viewed the report as having “failed.” However, the purchaser provided no evidence of any such problems; the financier had never indicated that funding was to be approved based on the environmental report.
- The purchaser was not candid in his reasons for termination and its lack of candour raised concerns to the judge as to whether the purchaser had been acting in good faith.
- Even if there were financing problems, the condition made no reference to financing as a consideration.
The purchaser had brought a motion for summary judgment. The judge denied the motion and ordered the matter to proceed to trial.
What if there is a problem and one party, for whatever reason, cannot or will not complete the transaction? The court will then have to interpret the condition to determine whether the agreement is enforceable and, if so, by whom.
Again, although a condition may be anchored by objective measurements, it must be assessed rationally and in good faith. We issue a warning to either the party, or its lawyer, who takes the position that an enforceable condition has not been met. If you state reasons for your position that are not supported by facts, then a judge may determine that the reasons were just a ploy to get out of the transaction and that the party did not exercise its discretion in good faith.
Often purchasers insert a condition that is drafted in such a way as to give the purchaser subjective discretion to do whatever the purchaser wishes to do. If the vendor wishes to accept that type of clause, the vendor must do so with the understanding that, in effect, the vendor is simply giving the purchaser a free look at the property, in essence an option to purchase.
Of course, that type of clause cuts both ways. The purchaser inserts it to ensure that it has the ability to get out of the transaction for any reason and not be held to a good faith accounting. However, the vendor then has the ability to decide that it does not want to close the transaction and, in doing so, relies on a condition that lacks any objectivity such that there is no agreement at all. This could occur if the market is rising, if the vendor receives another, higher offer, or if the vendor has a change of heart and does not want to sell under any circumstances.
What does a lawyer do with an agreement containing clauses that have no objective analysis and are totally subjective? The easy answer to this question is that, until there is a problem with completion, the lawyer completes the transaction in the normal course. After all, if no one is complaining, the parties want the deal to close. However, like any other wrinkle in a deal, the lawyer should discuss the possibilities in advance with the client and let the client decide.
Image courtesy of pippalou.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.