BCSC Considers The Organizing Principle Of Good Faith In The Context Of Lawyer's Approval Clauses

Introduction

In 2014, the Supreme Court of Canada in Bhasin v. Hrynew1 formally recognized the "organizing principle of good faith" in Canadian contract law. Since then, many Canadian courts have had occasion to interpret and apply this principle in the context of real estate transactions. A recent decision of the B.C. Supreme Court, Zhang v. Amaral-Gurgel,2 adds to this line of authority, offering insight into the application of the principle of good faith in the context of lawyer's approval clauses.

Facts

On October 15, 2016, the vendor agreed to sell her West Vancouver home to the purchasers for $5.8 million. A subject clause was included in the contract of purchase and sale that read: "Subject to the Seller's legal representative/lawyer approving the terms and conditions of the contract on or before October 17, 2016. This condition is for the sole benefit of the Seller."

On the morning of October 17, before meeting with a lawyer, the vendor was approached by another prospective purchaser, Mr. Wang, and offered a higher price of $5.968 million, a larger deposit, and an earlier closing date. When the vendor met with her lawyer later that day, she showed him both the original contract and the new offer. After having consulted with her lawyer, the vendor sent a counteroffer to Mr. Wang of $5.98 million, which he promptly accepted.

The sale to the purchasers did not complete because the vendor declined to remove or waive the condition embodied in the lawyer's approval clause. Her refusal to complete prompted the purchasers to bring an action against her seeking specific performance.

B.C. Supreme Court Decision

The B.C. Supreme Court confirmed that when a contract of purchase and sale is subject to the vendor's obtaining approval from a third party, the vendor is under a duty "to act in good faith and to take all reasonable steps to complete the sale".3 Further, it noted, contractual provisions making performance subject to the advice or opinion of a third party are sometimes considered "discretionary" in the sense that they may involve both the advice received and the contracting party's decision based on that advice. In this context, the question of whether the discretion has been exercised in good faith may be assessed on either a subjective or objective standard, depending on the nature of the condition and the parties' mutual intention as reflected in the contract. However, the Court emphasized, no contractual discretion is absolute in...