In Sutter Hill Management Corporation v. Mpire Capital Corporation (Sutter), the British Columbia Court of Appeal found that the acquiror of an Abbotsford, B.C. care home had breached the purchase and sale agreement by failing to use "commercially reasonable best efforts" to obtain required regulatory approvals from a healthcare authority "as soon as possible". Because the delay resulted in part from a failure to engage a B.C. lawyer to handle a key regulatory matter until very late in the process, the ruling also has implications for the management of multi-jurisdictional transactions.

Summary

  • Per Sattva Capital Corp. v. Creston Moly Corp. (Sattva), the words in a 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 the formation of the contract."
    Accordingly, phrases like "commercially reasonable", "best efforts" and "as soon as possible" must be considered in their context.
  • To avoid running into disputes about the parties' true intentions, where possible, counsel ought to be careful in the language they use and consider avoiding phrases like "commercially reasonable best efforts" and "as soon as possible". Rather, counsel should strive for precision when drafting and consider clearly specifying what timelines are reasonable.
  • Parties may be held responsible for delays in excess of what such "best efforts" language permits, even where such delays are arguably due to their counsel's inaction.

Background

In January 2016, Mpire Capital Corporation (the Purchaser) agreed to purchase a care home in Abbotsford, B.C. and related assets from Sutter Hill Management Corporation and Sweet Investments Ltd. (the Vendors). The parties agreed that to close the transaction, the Purchaser would need to obtain required approvals and licenses from the Fraser Health Authority (FHA).

In July 2017, the parties amended their purchase and sale agreement to include a condition precedent that the Purchaser "shall use commercially reasonable best efforts" to obtain the necessary approvals from the FHA "as soon as possible".

The Purchaser moved to obtain the necessary approvals from the FHA, and on November 8, 2017, the FHA forwarded to the Purchaser, for review, three agreements (the Agreements) to be executed as part of the final approval process. On November 20, 2017, the Purchaser's Toronto counsel advised that he lacked the expertise to advise on the Agreements, so the Purchaser retained Vancouver counsel to do so. By November 27 the Agreement had yet to be commented on or returned to the FHA. That same day the Vendors delivered a notice of default to the Purchaser claiming that the Purchaser was in breach of the condition precedent. The Purchaser was given until December 12 to "cure its default". When the Agreements had still not been returned to the FHA by December 14, the Vendors took the position that the contract was at an end and demanded payment of the $300,000 deposit paid by the Purchaser. The Vendors commenced an action and applied for judgment against the Purchaser for the deposit. The Purchaser opposed the application and sought dismissal of the action and an order that the deposit be returned to it.

The B.C. Supreme Court Decision

In its ruling, the B.C. Supreme Court interpreted "commercially best efforts" to mean the same as "commercially reasonable efforts" and held that the Purchaser had used both commercially reasonable efforts and its best efforts to obtain the FHA approvals.

The Court ruled that the Purchaser was not responsible for the delays resulting from its lawyer's inability to review the Agreements, and the Vendors were ordered to return the deposit to the Purchaser.

The Vendors appealed to the BCCA, claiming that the Supreme Court had erred in determining that the Purchaser was not responsible for the delays. The Vendors alleged, among other things, that the Court had:

  • incorrectly interpreted "commercially reasonable best efforts" and, consequently, had misconstrued the Purchaser's obligations; and
  • erred in finding that the Purchaser had exercised both commercially reasonable efforts and best efforts.

The B.C. Court of Appeal Decision

The Vendors were successful on appeal. The BCCA held that the Vendors were entitled to terminate the agreement and were entitled to the deposit.

Interpretation of "Commercially Reasonable Best Efforts"

The Court held that the lower court judge erred in his approach in interpreting what obligation "commercially reasonable best efforts" imposed on the Purchaser.

The Court ruled that the lower court judge deviated from the established guidance from Sattva, which requires that a contract must be read:

"as a whole, giving the words their ordinary and grammatically meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract."

The words "commercially reasonable best efforts" and "as soon as possible", therefore, had to be examined in the context of the entire agreement and surrounding circumstances, and not piecemeal as had been done.

According to the surrounding circumstances and evidence before it, the Court held that the parties were concerned that the FHA approval be obtained as soon as possible. The Court held that, in finding that "best" does not add anything significant to the phrase, the lower court missed what the parties intended; the condition to use "commercially reasonable best efforts" meant that the Purchaser would "do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only steps as would be commercially unreasonable". This was always bearing in mind that neither party could control how fast the FHA acted, but could control how fast they acted.

Purchaser had not exercised commercially reasonable best efforts

The Court found that the Purchaser failed to take any action after its lawyer said that it could not review the Agreements, which caused further delay. Moreover, the delay continued even after the Vendors' notice of default gave the Purchaser more than two weeks to rectify the situation, so that matters were no further advanced by December 14, when the Vendors gave notice that they considered the contract to be at an end.

The Court held that this delay "is in law attributable to the Purchaser" and must be taken into account in assessing whether the Purchaser met its obligation to "do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only such steps as would be commercially unreasonable". The Court held that it was not consistent with this obligation 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". The Court also noted that the Purchaser offered no evidence to explain the delay or support a characterization of it as "reasonably necessary", other than attributing the delay to its counsel and arguing that it was not responsible.

Conclusion

One take-away from Sutter is a cautionary reminder to counsel to be careful about the language used in drafting contracts. While expressions like "commercially reasonable best efforts" may sometimes be difficult to avoid, parties ought to consider specifically setting out the timelines that they regard as reasonable. Doing so may help to avoid uncertainty and potential future disputes.

Secondly, the Court of Appeal ruling shows that counsel involved in multi-jurisdictional purchase and sale transactions may be well advised to turn their minds at an early stage to the advisability of approaching local counsel to deal with extra-provincial issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.