Legal Blog

Good Faith

The concept of good faith (Bhasin v. Hrynew [2014] 3 SCR 494) is a lifeline to litigants whose position is otherwise tenuous. When in doubt, allege that the other party did not act in good faith. We have already commented on the use, usually misuse, of the concept of good faith (see newsletters: June 2018 and February 2017). Purchasers, or their counsel, seem to think that, even when time is of the essence, a vendor must, upon demand, extend the closing time and to do otherwise is bad faith. The courts disagree with this proposition. The latest case is Time Development Group Inc. v. Bitton 2018 ONSC 4384. In accordance with his usual methodology, Justice Paul Perell sets out the facts and then analyses all facets of the law in the area, even those that are not necessarily crucial to the decision. Sometimes, his decisions are the equivalent to written materials submitted in conjunction with a continuing professional development lecture.

Background

The vendor had assembled three contiguous properties. The purchaser wanted to buy those properties and develop them. The parties entered into an agreement of purchase and sale, which was subject to the purchaser successfully obtaining a zoning minor variance and a road allowance. The agreement was amended three times for various reasons. At the end of these amendments, the vendor had agreed to take back a two-year $3 million second mortgage and a six-month $2 million third mortgage and the closing had been extended from October 31, 2016 to July 31, 2017.

The purchaser was unable to close on the extended closing date for a number of reasons, mostly because its financier had withdrawn the mortgage financing.

There was some controversy in the summary judgment motion as to whether the vendor had agreed to give yet another extension of the closing date. Ultimately, the motion judge found, as a fact, that the vendor had not done so.

The purchaser argued that, if vendor were found not to have agreed to a 60-day extension, then the vendor did not act in good faith in refusing the closing extension request and had therefore breached the agreement. The purchaser requested specific performance. Conversely, the vendor alleged that the purchaser breached the agreement and requested an order that the purchaser’s deposit of $200,000 be forfeited.

Lecture

The motion judge set out the applicable law as follows:

1. When time is of the essence and a plaintiff sues for specific performance, the plaintiff must show that it was ready, willing, and able to close on the closing date; that the defendant’s default was not attributable to the plaintiff’s fault; and that the plaintiff continues to be ready, willing, and able to perform the contract.

2. Time must be of the essence for an innocent party to treat the contract at an end for fundamental breach or repudiation. Time may be insisted upon as of the essence only by a litigant who is ready, desirous, prompt, and eager to carry out the agreement; has not been the cause of the delay or default; and who has not subsequently recognised the agreement as still existing.

3. When both contracting parties breach a contract, the contract remains alive with time no longer of the essence. Either party may restore time of the essence by giving reasonable notice to the other of a new date for performance.

4. Tender is the act of offering to perform one’s contractual obligation; it shows readiness and willingness to carry out the contract and that there has been no waiver. By tendering, the innocent party puts itself in the position of relying on time being of the essence.

5. Tender is not a prerequisite to the innocent party enforcing its contractual rights; it is not required when the defaulting party has clearly repudiated the agreement. The law does not require a meaningless or futile gesture.

6. When there has been an anticipatory breach, the innocent party need not wait for the date of performance before commencing proceedings for damages or specific performance. Despite the absence of tender, the court may be satisfied by other evidence that the innocent party is entitled to enforce the contract because time is of the essence and there has been a fundamental breach of the agreement.

7 .There is a risk associated with tender. If the offer of performance is not in perfect accord with the agreement of purchase and sale, the act of tendering may not show that the party is willing and able to perform; rather, it may demonstrate just the opposite.

8. Bhasin held that the common law of contract includes an organising principle based on recognising good faith as an operative principle in the performance of contracts. It includes, as a rule of law, a duty to perform contractual obligations honestly. Good faith is not a rule of law or a general duty applicable to all contracts. It is not a stand-alone duty or rule. It is merely an informing principle. Successful claims of good faith will usually fall within existing doctrines, although that list is not closed. In performing a contract, a contracting party should have appropriate regard to the legitimate contractual interests of the other contracting party, but this does not necessarily require one party to act to serve another’s party’s interests. Although one is not supposed to undermine the other party’s interests, good faith performance does not engage loyalty to the other contracting party or a duty to put the other party’s interests first. Most importantly, “the development of the principle of good faith is not an opportunity for ad hoc judicial moralism or to be used as a pretext for scrutinising the motives of contracting parties.”

Application

After finding, as a fact, that the vendor did not agree to extend the closing of the transaction, the judge held that it was not an act of bad faith in the circumstances for the vendor to insist on the agreed-upon closing date for the transaction. In particular, he noted that “the principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract that generally places great weight on the freedom of contracting parties to pursue their individual self-interest and even cause loss to the other contracting party, even intentionally in the legitimate pursuit of economic self-interest.”

The judge noted that the vendor was not responsible for the withdrawal of the lender’s mortgage commitment and that the vendor did nothing dishonest. The vendor was not required to serve the best interests of the purchaser. Most importantly (at least as far as we are concerned), the judge stated that is not bad faith to insist on a contract being performed in accordance with its terms.

The judge held that the vendor was under no good faith principle or rule that would oblige it to forego its rights under the agreement to insist on the agreed-upon closing date and was therefore entitled to enforce the contract by terminating it and claiming the purchaser’s deposit as forfeited.

The corollary to this decision was the dismissal of the purchaser’s action for specific performance.

Takeaway

On the normal run-of-the-mill real estate transaction, the parties are supposed to do what they have agreed to do at the time by which they have agreed to do it. If the vendor has not done anything wrong, the purchaser should not be whining that the vendor should give the purchaser more time or a second chance.

Image courtesy of arcturusangel.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.