Contracts of purchase and sale for land are often conditional on obtaining regulatory approval. Such contracts will often include language requiring a party to use "best efforts" or "reasonable commercial efforts" to obtain the required approvals. Courts will apply different standards when assessing a party's efforts, depending on the specific language used in the contract. Parties, and their counsel, therefore, ought to carefully consider the contractual language they choose to describe such obligations.
The need for careful drafting and prompt performance was recently highlighted by the BC Court of Appeal in Sutter Hill Management Corporation v. Mpire Capital Corporation.[1] At issue was the interpretation of a purchaser's contractual obligation to use "commercially reasonable best efforts" to obtain regulatory approvals "as soon as possible". The Court found that, in the context, the purchaser had breached that obligation as a result of a delay of a matter of weeks, attributable to the purchaser's counsel.
Background
Sutter Hill concerned a 2016 agreement for the purchase and sale of a care home in Abbottsford, BC. In July 2017, the parties amended the agreement to require the purchaser, as a condition precedent, to apply for and obtain the necessary approvals from the Fraser Health Authority ("FHA") using "commercially reasonable best efforts" to obtain the approvals "as soon as possible".
After a number of delays on the FHA's part, on November 8, 2017, the FHA forwarded the final three agreements to the purchaser for review and comment. The agreements were to be executed as part of the final approval process. By November 27, the purchaser had yet to comment or return the agreements to the FHA. As a result, the vendors delivered a notice of default to the purchaser stating that the purchaser was in breach of the condition precedent and giving the purchaser until December 12 to cure its default. When the default was not remedied, on December 14, the vendors terminated the agreement and sought payment out of trust of the $300,000 deposit. The purchasers disagreed and the vendors started the proceeding seeking judgment in the amount of the deposit. The purchaser sought dismissal of the action and an order that the deposit be returned to it instead.
The British Columbia Supreme Court held that the purchaser's efforts to obtain the necessary FHA approvals were sufficient to meet the standard of "commercially reasonable best efforts" and ordered that the deposit be returned to the purchaser. The vendor appealed.
Court of Appeal Decision
The meaning of "commercially reasonable best efforts. as soon as possible"
The first issue at the Court of Appeal was the proper interpretation of the standard imposed by the words "commercially reasonable best efforts" to obtain the approval "as soon as possible".
The Court applied the well-established framework for contractual interpretation from Sattva Capital Corp. v. Creston Moly Corp.[2] and stated that the words of the contract must be read "as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract." While courts may look to how other cases have treated similar phrases, ultimately, the interpretation must be consistent with what the parties actually intended in that particular case.[3] The Court noted that the words "commercially reasonable", "best efforts" and "as soon as possible" all had to be considered in context and together.
Applying the Sattva principles, the Court found that the standard was somewhere between "commercially reasonable efforts" and "best efforts", keeping in mind the parties' clear intention that the approval be obtained "as soon as possible". In general, "commercially reasonable efforts" require making choices based on sound judgment with profit being the primary object, and "best efforts" require taking all reasonable steps and "leaving no stone unturned".[4] The Court concluded that the parties intended that the purchaser was required to "do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only such steps as would be commercially unreasonable", recognizing that there may be delay on the part of the regulator that was in neither party's control.[5]
Purchaser responsible for delay attributable to its counsel
The Court of Appeal went on to consider whether the purchaser met this standard, and found that the purchaser had not.
On November 8, the purchaser received the agreements from the FHA, and on November 9, forwarded the agreements to its counsel. Between November 9 and November 20, counsel for the purchaser did nothing, despite the vendors' counsel contacting him and reiterating the urgency of finalizing the agreements so that the approval process could be completed. On November 20, the purchaser's counsel, an Ontario lawyer, notified the purchaser that he did not have the expertise to provide advice in respect of the FHA agreements. While the Ontario lawyer continued to represent the purchaser, the purchaser also retained British Columbian counsel to review the agreements, which led to further delay in locating and instructing local counsel, and further delay in local counsel familiarizing himself with the file. After November 20, there were three more weeks of delay, including two weeks after the vendor gave notice of default. The Court noted that no explanation was given in the evidence for this delay other than the need to retain local counsel.
The Court of Appeal held that the purchaser was responsible for the delay attributable to its lawyer, because a lawyer acts as an agent for their client. The law of agency provides that a principal bears responsibility for all acts of their agent that are done within the authority of the agent.[6] The Court therefore concluded that the purchaser was responsible for five (plus) weeks of delay between the FHA forwarding the final three agreements to the purchaser for review on November 8, 2017, and the vendor terminating the agreement on December 14.
The Court went on to consider whether the purchaser had met the standard required in light of the five week delay. The Court found that the delay was not consistent with the purchaser's obligation "to do everything it reasonably could to obtain the necessary approvals as soon as possible" as required by the agreement.[7] In reaching this conclusion, the Court considered that time was increasingly important during the final stages of the transaction, and while it was commercially reasonable for the purchaser to obtain local counsel, the Court found that there was no explanation for the initial two week delay by Ontario counsel, or the further delay occasioned by the need to retain additional, local counsel when it would have been commercially reasonable to have addressed the problem of counsel's lack of expertise months earlier given the known bi-jurisdictional context.[8]
The Court held that the vendor was entitled to terminate the agreement and ordered that the deposit be paid to the vendors.[9]
Key takeaways
Parties and their counsel should be careful with the language they use in contracts. While courts will ultimately look at the context of the contract as a whole to determine the parties' intention when interpreting the applicable standard, contracting parties should consider that:
- Using the phrase "best efforts" holds a party to a higher standard and may be interpreted to require a party to take all reasonable steps and "leave no stone unturned".
- Using the phrase "reasonable commercial efforts" holds a party to a lower standard and may be subject to considerations of profitability.
- Using the phrase "commercially reasonable best efforts" and "as soon as possible" may be interpreted as imposing a standard somewhere in between, which would require a party to do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only such steps as would be commercially unreasonable.
Parties would be well advised to avoid using language like "commercially reasonable best efforts. as soon as possible", and other ambiguous language which deviates from more standard contract language. Such language has a potential to cause uncertainty and lead to disputes. Terms like "best efforts" and "reasonable commercial efforts" have better established meanings, but are still vague and present a dispute risk. Where possible, parties may be better off going a step further and specifying a time period that they consider to be reasonable.
Where contract language requires action "as soon as possible", parties and counsel should beware of any unexplainable delays, even of a matter of weeks or days depending on the circumstances.
Further, when conducting a transaction in another province, it is advisable to hire local counsel or ensure that counsel is competent to deal with extra-provincial matters from the outset to avoid delays.
Footnotes
1. Sutter Hill Management Corporation v. Mpire Capital Corporation, 2022 BCCA 13 [Sutter Hill BCCA].
2. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 47 [Sattva].
3. Sutter Hill BCCA at paras. 32-34, 36.
4. Sutter Hill Management Corporation v. Mpire Capital Corporation, 2020 BCSC 238 at paras. 54 and 59 [Sutter Hill BCSC];Sutter Hill BCCA at para. 40.
5. Sutter Hill BCCA at paras. 39-41.
6. Sutter Hill BCCA at paras. 90-92, 97.
7. Sutter Hill BCCA at paras. 98-99, 101, 108.
8. Sutter Hill BCCA at paras. 91, 99.
9. Sutter Hill BCCA at paras. 110-113.
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