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Appellate, Civil Litigation

Principle of good faith key in commercial contracts: Cormier

Companies that make an honest effort to fulfil the terms of a contract cannot be held liable if outside factors prevent the work from being done, Toronto trial and appellate lawyer Joel Cormier tells AdvocateDaily.com.

Cormier, associate with Will Davidson LLP, successfully represented a developer and builder who sold prebuilt homes to five buyers in a recent case before the Ontario Superior Court of Justice.

He says the homes were to be erected on a vacant field that was surrounded by land owned by others.

Since the development of the lots depended on the co-operation of those landowners and the municipality, a clause was put into the Agreement of Purchase and Sale stipulating it could be terminated if that co-operation was not obtained by a certain date, Cormier says.

“This is standard wording when you’re dealing with a property that is landlocked to protect developers and builders in cases where they are not able to complete the work for reasons beyond their control,” he says.

Following numerous attempts, the developer was unable to obtain the agreements it needed to allow work to go ahead on services such as roads and sewers, Cormier says.

In February 2017, he says the five purchasers were notified that the developer was terminating the agreement and refunding all the deposits.

The buyers launched a lawsuit, “making a variety of allegations and demanding damages,” and pointing out that the deadline for the developer to reach an agreement with neighbouring landowners and the municipality was still approximately nine months in the future, he says.

“Our client didn’t wait until that date before it terminated the contract because it was evident that the necessary agreements would not achievable by the specified date,” Cormier says.

He brought a summary judgement motion, asking that the case not proceed to trial since his client had acted in good faith but was unable to complete the work by the specified date.

That motion was granted by the court, with the judge relying on a body of case law and a seminal 2014 Supreme Court case, which defined good faith in contracts as “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily,” he says.

Cormier says the judge agreed that the developer and the builder made a sincere effort to fulfil the contract.

“You can’t hold people to a standard of perfection, but only to a standard of commercial reasonableness,” he says.

Cormier says the court essentially determined that regardless of whether his clients acted in good faith, there were no damages from the early termination since it would be inevitable in any event.

“The court said it doesn't matter that they walked away early because it's quite clear that the neighbouring landowners and the town were not co-operating and our client would never be able to meet the deadline,” he says.

In making that decision, he says the judge relied on a 1970 English Court of Appeal decision.

In that case, the court ruled, “no loss was suffered by an early repudiation of a shipping contract since it would not have been possible to fulfil the contract as the ship would not have been ready to load and the defendants would have terminated in any event on the date the option was contracted to be exercised.”

Cormier says summary judgment was granted in favour of his clients, as the court agreed there was no genuine issue in this case that required a trial.

“It's an interesting decision because it just basically follows and expands upon the principles of good faith in contracts, principles of reasonableness and what constitutes good commercial sense,” he says. “If it's inevitable that the contract is going to terminate in any event, it doesn't make sense to wait until that date to walk away.”

Cormier says that most people would probably want to find out as soon as possible that the home they put a down payment on was not going to be built.

“You probably want that money back earlier, rather than the developer hanging onto it for another six months,” he says.

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