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The Ontario Court of Appeal's recent decision in Icetrading Inc v Trayanov identifies some of the limits to good faith in contractual performance. When an agreement for the sale of an interest in land is conditional on municipal approval, a vendor may have an obligation to seek approval diligently. However, good faith does not expand that obligation to other means of achieving a sale, and it does not necessitate compensating the counterparty based on the "equities" if approval is denied.
Factual background
The case involved an agreement to sell a future unit in an intended condominium industrial park. The vendor promised to "proceed expeditiously with an application to convert the property into a Condominium," and the sale was conditional on achieving that result within two years. The purchaser occupied and improved the property meanwhile. But the agreement specified that should the application fail, the purchaser would only receive a refund of certain amounts paid toward the purchase price, and no compensation for any improvements.
The vendor promptly submitted its application. However, due to many problems with the proposal, the municipality recommended that the vendor proceed with a plan of subdivision instead. The vendor persisted with the original plan and abandoned it only after being sued.
The Superior Court of Justice awarded the purchaser damages for breach of a "duty to act in good faith and take all reasonable steps to complete the sale." It held the vendor had not taken "all reasonable steps" because the suggestion of proceeding by subdivision was never considered. It also held the vendor breached its duty of good faith by continuing to suggest the condominium proposal would succeed while the purchaser invested in the property.
The Court of Appeal's decision
The Court of Appeal reversed. Although it accepted an obligation to take "all reasonable steps" might be implied where a party promises to seek a required approval, that depends on the agreement. The promise made by the vendor was limited to applying for conversion into a condominium. It could not be expanded into something else acknowledged to be very different in scope. That would rewrite the parties' bargain.
The Court of Appeal cautioned against applying the good faith doctrine in the abstract. It is a "general organizing principle" for the law of contract, but it is not a free-standing rule. Good faith does not open the door to deciding a dispute based on perceived equities generally. Instead, courts must identify a specific legal rule that applies in the circumstances.
The only rule that might apply was the duty to act honestly in the performance of contractual obligations. However, the vendor was not dishonest by continuing to suggest a condominium conversion could succeed, as there was no evidence the vendor knew the application was doomed to fail. The vendor's lack of sophistication, the "amateurish" character of its proposal, and its continuing to pursue the proposal well after the two-year deadline, all suggested otherwise. Those efforts do not become bad faith just because some might have perceived success was unlikely.
Commentary
The Court of Appeal's decision is a useful reminder that liability for breach of contract must be grounded in the contract's terms. As the Supreme Court of Canada said in Bhasin v Hrynew, good faith merely requires that a party not seek to undermine the other's legitimate contractual interests in bad faith. It is not an opening for "ad hoc judicial moralism or 'palm tree' justice." Good faith did not generate liability for the unfortunate loss of the purchaser's investment in Icetrading because the parties had already agreed on the consequences of the outcome that occurred, and the vendor was not dishonest in getting there.
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