A recent BC Supreme Court decision provides guidance on the interpretation of oral contracts when credibility is in issue, and continues the trend toward granting specific performance for breach of contract in the commercial property context.
Overview
On October 7, 2024, the BC Supreme Court issued reasons for judgment in Qi v Qin, 2024 BCSC 1830. Singleton Reynolds represented the successful Plaintiffs at trial.
This case provides guidance on the formation and interpretation of written and oral contracts, particularly when witness testimony may suffer issues of credibility and reliability. Further, the reasons for judgment clarify when BC courts can issue specific performance as a remedy for breach of contract regarding commercial property.
Facts
The dispute centred around the interpretation of two contracts relating to a development property in Duncan BC, held by the corporate defendant, Lightray Development Corporation Ltd. ("Lightray"), and the respective shareholdings in Lightray as between the Plaintiffs and personal defendant, Mr. "George" Qin.
In the summer of 2016, George approached Mr. Qi with an opportunity to invest in a 130-acre residential development property in Duncan, BC (the "Property"). In August of 2016, the pair agreed to purchase the Property, provided that Mr. Qi would contribute 70% of the purchase price for a 70% interest in the Property, and George would contribute 30% of the purchase price for a 30% interest (the "August Agreement"). George incorporated Lightray Development Corporation to hold legal title to the Property.
When it came time for the Property purchase to close, George did not have the funds for his contribution, so Mr. Qi paid the full purchase price with the understanding that George would contribute his 30% stake at a later date. By November 2016, it became clear that George could not meet his investment obligation, and the parties agreed that George would sell his 30% interest in the Property to the Plaintiffs for approximately $700,000 (the "November Agreement"). Mr. Qi paid George the equivalent of $700,000 in a combination of CAD and Chinese Yuan, but George never transferred his shares to the Plaintiffs, breaching the November Agreement.
Mr. Qi brought a claim for specific performance of the November Agreement, whereby George would transfer his 30% in Lightray to the Plaintiffs.
Over the course of the Action, and up until the trial, George advanced the defence that Mr. Qi did not purchase George's shares in Lightray, rather, that the $700,000 payment was made to George as a "finder's fee" for locating the development opportunity for Mr. Qi.
The Trial
In George's opening statement at the outset of the trial, he abandoned his "finder's fee" theory, and proposed a new theory of defence - that the August Agreement was a loan agreement, and the November Agreement amounted to Mr. Qi buying his 70% interest in Lightray for $700,000 after conducting alleged due diligence.
Following a 24-day trial, the Court found the November Agreement was a valid and binding agreement whereby George agreed to sell his 30% interest in Lightray to Mr. Qi for $700,000. The Court ordered George to transfer his shares to Mr. Qi in specific performance of the November Agreement.
Credibility and reliability
Over the course of the trial, Justice Hughes took issue with the credibility and reliability of both parties' witnesses. The Court's task in assessing witness credibility and reliability was complicated by the fact that most of the witnesses testified in Mandarin, through an interpreter. Mandarin is a highly nuanced and context-dependent language, that can be susceptible to different reasonable interpretations.1
In making credibility findings, Justice Hughes commented that the correct approach for analyzing credibility is to first analyze the testimony to determine whether it is inherently believable in the context of the facts of the entire case, then evaluate it based on its consistency with the evidence of other witnesses, prior sworn testimony, and the documentary evidence.
Where Justice Hughes found there was no documentary evidence to anchor a party's testimony, she made her findings relying on the undisputed facts, the absence of contradictory evidence, independent evidence, common sense, commercial reasonableness, and her own assessment of the probabilities affecting the case as a whole.
Interpreting oral agreements
The interpretation of the August Agreement was one of the central issues at trial, as the terms of the August Agreement formed part of the surrounding circumstances within which the November Agreement had been made.
Witness credibility is a significant factor in interpreting oral agreements. The Court confirmed the objective test used to interpret oral agreements, citing Berthin v Berthin, 2016 BCCA 104. The test requires an objective assessment of the surrounding circumstances at the time the alleged agreement was formed from the perspective of a reasonable bystander, to determine the parties' intentions. Ultimately the Court preferred the Plaintiffs' evidence about the August Agreement because it was more consistent with the preponderance of probabilities and commercial reasonableness, including the parties' subsequent conduct.
Interpretation of Written Agreements
In interpreting the November Agreement, the Court set out the legal framework for contractual interpretation: the contract must be read as a whole, giving the words their ordinary and grammatical meaning, and consistent with the surrounding circumstances known to the parties at the time the contract was formed. The central question in the interpretation of written agreements is what the parties' mutual and objective intentions were as expressed by the words of the contract.
Other factors can also be considered when interpreting written agreements. While evidence of the surrounding circumstances can be considered, it must not be allowed to overwhelm the words of the contract. The Court clarified, however, that the surrounding circumstances do not include the parties' subsequent conduct. Contract interpretation relies on the objective evidence of the background facts at the time the contract was formed. In the context of commercial contracts, weighing the commercial reasonableness and efficacy of competing interpretations, as well as the commercial purpose of the contract, are useful and relevant considerations.
In this case, the Court concluded that the Plaintiffs' interpretation of the November Agreement, which contemplates Mr. Qi purchasing George's 30% shares, was most harmonious with the preponderance of the evidence and surrounding circumstances. This interpretation is also consistent with sound commercial principles and good business sense, and avoids a commercially absurd interpretation. As a result, the Court found that George had breached the November Agreement by failing to transfer his shares to the Plaintiffs.
Specific Performance
The Plaintiffs sought specific performance of the November Agreement on the basis that the Property was too unique to be substituted by an award for damages. While George argued that the Property was not sufficiently unique to warrant an order for specific performance, the Court rejected this argument, as George had previously testified in the trial as to the Property's unique features: that it was permitted to be a residential development located near Duncan, BC; government approvals had been obtained; zoning had been approved; the infrastructure was already in place; and the land could be developed immediately.
This case exemplifies a recent trend toward unlocking awards for specific performance for commercial property contracts in which the subject property has unique features.
Footnotes
1 Para 36, citing Ai Kang Yi Yuan Enterprises Corp. v. 1098586 B.C. Ltd., 2022 BCSC 1416 [Ai Kang] at paras. 23-24
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