Contracts sometimes contain condition precedents, which are events or conditions that need to take place before something else will occur. If a party breaches a condition precedent, the other party may suffer loss and a dispute may arise.
This article looks at the recent decision of the Court of Appeal for British Columbia in Sutter Hill Management Corporation v Mpire Capital Corporation, in which the seller of a care home argued that the purchaser had breached its obligation to use “commercially reasonable best efforts” to obtain the necessary regulatory approvals “as soon as possible”.
An Ontario company agreed to purchase certain assets from companies registered in British Columbia, the primary asset being Bevan Village, an intermediate care home in Abbotsford together with its associated real estate. Other things were included, such as funding contracts and related licenses issued by the Fraser Health Authority. They entered a contract in 2016 and the purchaser paid a $300,000 deposit.
The transfer of the funding contracts and licences required the Fraser Health Authority’s approval before the transaction could close. The purchaser entered discussions with the Fraser Health Authority. In July 2017, the parties entered into an amended contract that included a condition precedent stating that the sale was subject to the purchaser obtaining approval from the Fraser Health Authority. The contact said that “the purchaser shall use commercially reasonable best efforts to satisfy the condition precedent … as soon as possible”.
The purchaser continued with its efforts to obtain the necessary approvals from the Fraser Health Authority. By November 2017, the parties were of the view that the end was in sight. The Fraser Health Authority forwarded three agreements to the purchaser for review and comment.
Twelve days later, the purchaser’s solicitor in Toronto told his client that it should retain another lawyer because he lacked the expertise to advise on the agreements. The purchaser retained Vancouver counsel to do this.
A week later, the agreements had yet to be returned to the Fraser Health Authority. The seller delivered a notice of default to the purchaser, arguing that it was in breach of its obligations under the condition precedent clause, and demanding that it submit a complete application to the Fraser Health Authority by December 12.
The purchaser did not meet this deadline, so the seller sought to retain the deposit. Litigation ensued.
Supreme Court interpreted the condition precedent to mean the same as “commercially reasonable efforts”
The judge said that the phrase “commercially reasonable best efforts” appeared “to be a victim of over-drafting” because a previous case had concluded that a standard of reasonable commercial efforts was not the same as best efforts.
His Honour decided that “best” did not add anything significant to the phrase “commercially reasonable best efforts”, finding that an effort was either commercially reasonable or not. The purchaser was required to pursue the approval of the Fraser Health Authority to the point where it became commercially unreasonable to proceed further.
The judge thought the delay arising from the change in lawyer could not be held against the purchaser, and that it was commercially reasonable for the purchaser to wait for its new lawyer to get up to speed.
Furthermore, his Honour considered that even under a best efforts standard, the purchaser met the contractual requirements. His Honour said that it was not clear what else the defendant could have done to obtain the approval of the Fraser Health Authority. The seller appealed.
Justice of Appeal Grauer, writing on behalf of the Court of Appeal, held that the judge erred when interpreting the condition precedent. His Honour explained that it was necessary to consider what the parties intended by taking into account all of the words in the context of the whole agreement and the surrounding circumstances, instead of splitting up the clause into its component phrases.
His Honour looked at a range of surrounding circumstances that supported the conclusion that the parties were concerned that Fraser Health Authority approval be obtained as soon as possible, such as the fact that the sellers were obliged to continue operating the facility in a manner that maintained the status quo, while being subject to the risk of having the transaction rescinded if there was a material adverse change (as provided under another part of the contract).
The Court of Appeal decided that the parties intended that the purchaser would do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only such steps as would be commercially unreasonable.
After analyzing the facts of the case, Justice of Appeal Grauer concluded that the delay by the purchaser constituted a breach of the condition precedent:
It was not consistent with the obligation to do everything it reasonably could to obtain the necessary approvals as soon as possible, for the agreements to sit on a desk for nearly two weeks without any action being taken, leading to the need to retain additional counsel very late in the progress of the transaction, thereby delaying the process even further—for another three weeks and counting.
The Court of Appeal ordered the deposit to be paid to the seller.
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