Legal Blog

Performance #2

The courts have been attempting to bypass the Statute of Frauds for years, actually centuries. The requirement that an agreement for the sale of land be in writing to be effective makes sense – except when it does not – which, it seems, is much of the time. The courts of equity devised a concept to ameliorate the harsh results of the Statute: part performance. In that regard, see our newsletter of August 2007. If the parties have acted in reliance on what seems to be an oral agreement, the courts may enforce the agreement. However, to obtain a finding of part performance, what has to be done and who has to do it? That was the subject of Erie Sand & Gravel Ltd. v. Seres’ Farms Ltd. (2009) CarswellOnt 6035 (Ont. C.A.).

Deal

The purchaser was in the business of supplying stone aggregate, presumably for purposes of construction. The vendor was a farming corporation.

A third party bought a portion of the vendor’s farm in 1996. The 1996 agreement contained a right of first refusal over the south side of the vendor’s remaining property. If the vendor received an arm’s length offer to purchase the south side that the vendor was willing to accept, the vendor was obliged to allow the third party the right to purchase the south side on the same terms.

In 2002, the purchaser bought the north side of the vendor’s remaining property. In 2003, the purchaser and vendor discussed the sale of the south side. Knowing of the third party’s right of first refusal, the purchaser would not give a written offer until the parties had agreed upon the essential terms of the offer. The parties then agreed upon price, the land in issue, and the closing date. Accordingly, the purchaser delivered an offer including the agreed upon terms and a deposit equal to the full purchase price of over $1.1 million.

The vendor forwarded the offer to the third party, who prepared an offer on the same terms except that the closing date was 20 days later and the deposit was only $100,000. The vendor, for whatever reason, accepted the third party’s offer. The purchaser started an action, claimed specific performance, and obtained and registered a certificate of pending litigation. The vendor sold the land to the third party regardless and the third party agreed to contest the action on behalf of the vendor and hold it harmless.

Agreement

The third party made that the vendor and purchaser never had an agreement; it was just an agreement to agree. The court disagreed. It held that the parties had agreed on all essential provisions and intended the oral agreement to be binding. Further, both parties acted on that agreement; the purchaser submitted the written offer and the vendor passed on that offer to the third party as an agreement it was willing to accept.

Part Performance

The third party maintained the following arguments:

1.   The purchaser had not suffered a detriment; accordingly, it would not be unconscionable for the third party to rely on the Statute. After all, the vendor had returned the deposit to the purchaser.

2.   Only acts of the purchaser can be considered when determining whether there are sufficient acts of part performance.

3.   The acts were not unequivocally referable to dealings in land.

As a preamble to its discussion, the court stated, “if one party to an otherwise unenforceable agreement stands by while the other party acts to its detriment by performance of its contractual obligations, the first party will be precluded from relying on the requirements in the Statute of Frauds to excuse its own performance.”

Unconscionable

The court noted that the purchaser carried out its obligations and delivered the written offer. The vendor then took the benefit of that offer and used it to sell the land to the third party. The purchaser did suffer a detriment. It lost the land that it desperately needed for its business and the vendor stood by and allowed that to happen.

The court held that equity would intervene because it would be unconscionable for the third party, who was in no better position than the vendor, to be able to rely on the Statute when the purchaser acted to its detriment, fully carrying out its obligations under the otherwise unenforceable oral agreement.

Acts

The court reviewed prior jurisprudence and concluded that there was no reason to limit acts of part performance to those of the party alleging the agreement. The acts of both parties to an alleged oral agreement ought to be considered in determining sufficient acts of part performance. The court agreed with the trial judge that the various acts of part performance of both the vendor and purchaser were sufficient for equity to intervene.

Nature

The court used a two-step process:

1.   The acts of part performance must be unequivocally connected to the land. Assume that a claimant states that she ran many errands for a person so that ultimately that person would grant land to her in a will. The running of errands is not connected to the land. One can run errands for many reasons. In the Erie case, there was no doubt that the acts related to the south side of the property.

2.   The conduct must, in and of itself, indicate that there had been some dealing with the land. The court reformulated that test as follows: Begin by determining the context (or the “relevant circumstances”…) Then consider the acts of part performance having regard to the way in which reasonable people carry on their affairs. The court noted that a delivery of an offer to purchase land with a deposit would not normally amount to part performance. It happens every day and does not suggest, in itself, an already concluded agreement. However, everyone knew there was a right of first refusal; the offer was not standard given that the deposit equalled the purchase price; and, judged by the standards on which reasonable people act, the trial judge was entitled to conclude that the conduct reflected that there had been “some dealings” in land.

First Right

The third party argued that even had there been part performance, it still had the right to purchase the land due to its right of first refusal. The Court brushed aside that argument, given that the third party had changed the terms of the offer presented to it.

Specific performance

Specific performance is no longer granted automatically just because land is involved. The purchaser must demonstrate that the land is unique.

The purchaser did just that. It showed that its financial existence depended on obtaining a new supply of stone aggregate and that aggregate was in scarce supply in the county. Indeed, 50% of the aggregate in the county happened to be on the land in question. That was enough for the court to find that the land was unique to the purchaser and uphold the trial judge’s order of specific performance.