In 2014, the Supreme Court of Canada in Bhasin v. Hrynew formally recognized the “organizing principle of good faith” in Canadian contract law. Since then, many Canadian courts have had occasion to interpret and apply this principle in the context of real estate transactions. A recent decision of the B.C. Supreme Court, Zhang v. Amaral-Gurgel, adds to this line of authority, offering insight into the application of the principle of good faith in the context of lawyer’s approval clauses.
On October 15, 2016, the vendor agreed to sell her West Vancouver home to the purchasers for $5.8 million. A subject clause was included in the contract of purchase and sale that read: “Subject to the Seller’s legal representative/lawyer approving the terms and conditions of the contract on or before October 17, 2016. This condition is for the sole benefit of the Seller.”
On the morning of October 17, before meeting with a lawyer, the vendor was approached by another prospective purchaser, Mr. Wang, and offered a higher price of $5.968 million, a larger deposit, and an earlier closing date. When the vendor met with her lawyer later that day, she showed him both the original contract and the new offer. After having consulted with her lawyer, the vendor sent a counteroffer to Mr. Wang of $5.98 million, which he promptly accepted.
The sale to the purchasers did not complete because the vendor declined to remove or waive the condition embodied in the lawyer’s approval clause. Her refusal to complete prompted the purchasers to bring an action against her seeking specific performance.
B.C. Supreme Court Decision
The B.C. Supreme Court confirmed that when a contract of purchase and sale is subject to the vendor’s obtaining approval from a third party, the vendor is under a duty “to act in good faith and to take all reasonable steps to complete the sale”. Further, it noted, contractual provisions making performance subject to the advice or opinion of a third party are sometimes considered “discretionary” in the sense that they may involve both the advice received and the contracting party’s decision based on that advice. In this context, the question of whether the discretion has been exercised in good faith may be assessed on either a subjective or objective standard, depending on the nature of the condition and the parties’ mutual intention as reflected in the contract. However, the Court emphasized, no contractual discretion is absolute in the sense of authorizing “the capricious or arbitrary exercise of the discretion”.
Turning to the terms of the contract, the Court found that the vendor was entitled to obtain legal advice on “the meaning of that contract, her rights and duties under it, and any legal issues that might arise.” These were the “objective factors” on which her good faith discretion had to be exercised.
The Court found nothing in the lawyer’s advice to the vendor that amounted to an explicit recommendation giving or refusing approval of the contract. He had raised only one objective issue about the contract: it did not give the purchasers’ full first names or residential address, which could cause some difficulty in serving them with legal process in the event they failed to complete. The Court reasoned, however, that this was a matter of “limited significance”, and there was nothing to suggest the purchasers would not complete. The Court also observed that, in any event, the vendor had not suggested that this objective information raised by her lawyer was the basis on which she exercised her discretion.
The Court added that even if the vendor did refuse to complete based on the point raised by her lawyer, this refusal would not have been a reasonable or good faith exercise of her discretion. The Court found that the true reason for her refusal to remove or waive the condition was that she had received a better offer—this was a case of seller’s remorse. The Court concluded:
The intention of the parties, as expressed in their contract, was that the [vendor] would sell the Property to the [purchasers], subject only to her obtaining legal advice on the terms and conditions of that contract. That intention cannot be interpreted to include or extend to the [vendor] seeking advice on or considering the relative merits of another offer that was received only after the contract was signed.
In the result, the Court held that the vendor, in purporting to rely on the lawyer’s approval condition to consider and accept a subsequent competing offer, failed to act in good faith and was in breach of her contract with the purchasers. The Court issued an order for specific performance requiring the vendor to complete that contract.
Zhang clarifies how the principle of good faith operates in the context of lawyer’s approval clauses. The case illustrates that the language of the particular provision plays a central role in determining the scope of factors on which the good faith exercise of discretion must be based. The clause in Zhang, for example, evinced the parties’ intention that the advice would pertain only to “the terms and conditions of the contract”. That intention could not, in the Court’s analysis, be interpreted as extending to advice on the relative merits of a competing offer received after the contract was signed. Furthermore, the decision confirms the basic proposition that a party will not be permitted to rely on a subject clause conditioning the agreement on the advice or opinion of a third party where the true reason for the refusal to complete sits outside the scope of the advice or opinion.