The Supreme Court of Canada recently released a ground-breaking decision, Bhasin v. Hrynew, which articulates newly clarified duties on how the parties to a contract must behave towards each other. The decision has important implications for real estate contracts and the industry in general.
In particular, the decision addresses the question of how good faith and honesty come into play, in terms of each party’s contractual performance.
The court concluded that in Canada there is an “organizing principle” of good faith, which dictates that each party to a contract must generally perform his or her end of the bargain in an honest manner. Each must act reasonably and not in a capricious or arbitrary manner. This concept extends to imposing a duty on each party to remain mindful of the legitimate contractual interests of the other. The extent of that mindfulness will depend on the particular context of the contractual relationship.
This individual duty is not unlimited in scope, however. The court emphasized that it is to be balanced against Canadian law’s “fundamental commitments” to allow each party to a contract to pursue his or her individual self-interest. The court also clarified that this contract-based good faith duty stops short of being a fiduciary duty (which involves a duty of loyalty between contracting parties) and does not require either party to put the interests of the other party ahead of his or her own.
What is perhaps also important to note about the Bhasin decision, is that while the court recognized a good faith and honesty component to real estate contracts, it did not inject these requirements into the negotiation process. This means that – technically speaking – until a contract is in place, the duties of good faith and honesty are not imposed on the potential contracting parties. This does not mean that negotiating parties are free to use deception or to negotiate in bad-faith manner: such conduct can give rise to claims of negligent or fraudulent misrepresentation, which in turn will spark a legal claim by the injured party for damages, among other things.
But once a contract is in place, these clear duties are woven through the parties’ obligations toward each other, including the manner in which they each perform their respective part of the contract, and the nature and extent of the information they provide to each other. In the real estate context, these duties arise in every kind of agreement that may be reached in connection with the sale of or dealing with land, including Listing Agreements, Commission Agreements, Buyer Representation Agreements, Agreements of Purchase and Sale and leases, to name just a few.
As just one real-estate-based example of the many “evils” that the Supreme Court of Canada decision was intended to address, the decision in 888394 Ontario Inc. v. Cornwall Centre Road Properties Inc. is illustrative.
There, the seller agreed to sell a strip mall to the buyer for $500,000, with the closing to be no later than 6 pm on Fri., Nov. 30. However – and this is an important detail – the Registry Office in which the deal was to be registered actually closed at 5 pm, to the knowledge of the parties. The 6 pm deadline appeared on the pre-printed standard-form OREA Agreement of Purchase and Sale, and the parties did not bother to change it.
In the days leading up to the closing, the seller became disgruntled after realizing there was still a live dispute over whether the buyer had verbally agreed to pay certain rent arrears owed by existing mall tenants. As the court put it, the seller’s resulting resentment may have “prompted him to retaliate when the opportunity presented itself.”
When the Friday closing date rolled around, the seller had his lawyer take the closing documents to the buyer’s lawyer, who was to take them to the Registry Office to hold in escrow pending closing of the transaction. At 4:53 pm – which was seven minutes before the Registry Office would close for the weekend – the seller cleared it for the buyer’s lawyer to register, but not before causing delay by insisting last-minute that he be provided with certain title documents. As it turned out, the Registry Office closed before the documents could actually be registered.
The deal was therefore up in the air. The seller, who refused to extend the closing date or give permission to have the documents registered on the following Monday, claimed that he considered the transaction to be at an end. The buyer, who very much wanted to proceed, still held the needed documents (through his lawyer) and refused to give them back. Instead, the buyer had his lawyer attend at the Registry Office to successfully register the transfer on the Monday, which was the next business day.
The seller then sued to set that transfer registration aside and to have the strip mall re-conveyed back to him.
One of the issues for the court to consider was whether the seller had acted in good faith, and whether he was being unreasonable by first blindsiding the buyer with last-minute document requests, and then by refusing to allow the registration to take place on the Monday. To resolve the matter, the court looked at their agreement, pointing out that “[w]hen there is a need to complete the transaction which is of no interest to one party and great interest to another, we must interpret the contract to give effect to the parties’ reasonable expectations.”
Here, as irregular as it was in some ways, the closing had been completed in accordance with the agreement, and all that remained to be done was to formally register. But nothing in its wording required the agreement to be registered and stamped by the Registry Office; while that final step would have been good evidence of the transfer, it was not necessary to the legal validity of the deal itself.
In short: there was no valid legal objection for the seller’s refusal to close, and he had acted in bad faith by not accommodating the Monday closing in the circumstances. On this and other grounds, the deal was upheld and the transfer to the buyer was declared valid.
Although the court in 888394 Ontario Inc. v. Cornwall Centre Road Properties Inc. did consider briefly the nature of the duty to act in good faith in completing the contract, it would have been greatly assisted in its assessment by the more fulsome analysis and the clearly stated benchmarks provided by the Supreme Court of Canada in Bhasin v. Hrynew.
It is not an understatement to say that the decision affects all Canadian contracts everywhere: the Supreme Court of Canada has taken a purposive and important step to confirm and refine some clearly defined legal duties of good faith and honesty that were ill-defined and speculative in the law before. Going forward, everyone who signs a contract (of whatever type) should be aware of those obligations and must conduct him or herself accordingly.