Upholding The End Of The Bargain, And Avoiding Penalty And Unconscionable Claims – Case Comment: Do v. Nichols

On March 18, 2016, the British Columbia Court of Appeal released reasons for judgment in Do v. Nichols, 2016 BCCA 128. This decision provides guidance on how to draft and enforce tough provisions in a contract that can withstand penal and unconscionability claims.

The Court of Appeal disagreed with the Supreme Court's finding that the contractual provisions at issue were penal and unconscionable, and therefore unenforceable. In so doing, the Court of Appeal found Mr. Do's petition for an order nisi of foreclosure on a mortgage to be valid, and declared the mortgage to be in default. It then referred the matter back to the trial court so that the appropriate foreclosure orders could be made.

At issue was the parties' complex purchase and sale contract for a waterfront development property (the "Development Property") owned by the Nichols on Pender Harbour. Pursuant to the agreement, Mr. Do would purchase the Development Property for $1,700,000 and the Nichols would take the necessary steps to have the Development Property subdivided. If and when subdivided, the Nichols had the option of purchasing one of the newly subdivided lots. At issue in this case were the additional terms that $500,000 would become due and owing by the Nichols to Mr. Do if the Nichols were "unable or unwilling to carry out the subdivision." To secure this payment, the Nichols provided Mr. Do with a $500,000 mortgage on their home.

Mr. Do testified that the $500,000 mortgage was to act as a guarantee that the subdivision would take place. Mr. Nichols testified that he had no choice but to agree to the $500,000 mortgage on his home and other related terms as he had to strike a deal or lose the Development Property to a mortgagee who was in the midst of foreclosing on the Development Property.

The Court of Appeal referred to authorities confirming that the doctrine of penalty only arises in the context of a breach of contract, and is not designated to grant relief from a commercially imprudent bargain. The...