Good Faith in Real Estate Deals is Not New
It’s been the law for years.
Well, at least going back to June 1958.
On 26 June 1958, the Supreme Court of Canada decided that there was indeed an obligation of good faith and that a party could not simply weasel out of a deal. Over time, those who drafted real estate contracts came up with clauses which stated “…in the sole and absolute and unfettered discretion…”. This was fine to a certain extent, but some people took it a little too seriously.
So, in Bhasin v. Hrynew, the Supreme Court of Canada readdressed the issue and made a point of confirming that they were “changing the common law”. So, just in case there was any doubt, the Supreme Court confirmed the good faith doctrine on 13 November 2014.
The earlier case was Mason v. Freedman, a decision of the Supreme Court of Canada released on 26 June 1958. Sidney Freedman bought a farm in Scarborough from Frank Mason for $136,000.00 with $20,000 down and a $116,000.00 vendor take back mortgage. This was a lot of money at the time. Obviously, Freedman was a developer and Mason was a farmer. The vendor take back mortgage was the way of financing the purchase of developable property. Since the banks have really not stepped forward, it’s much the same today.
Mason immediately had buyer’s remorse and wanted out of the deal. Rather than try to persuade his wife to sign the conveyance so as to bar her dower, he encouraged her to seek independent legal advice. And, to everyone’s surprise the lawyer counseled her not to sign.
Sidney Freedman commenced an action for specific performance associated with an obligation to pay part of the purchase price into Court on behalf of Mrs. Mason’s dower interest in the property.
Let’s look at the statements made by Mr. Justice Judson. Note: The underlining,bold, and comments in Italics are mine for easy reading.
The contract contains the usual clause providing for requisitions on title and for the right of the vendor to declare the contract null and void if requisitions which he is “unable or unwilling” to remove are made within a stated time.
The appeal turns upon the effect that is to be given to this clause, for in its absence there can be no doubt of the purchaser’s right to specific performance with compensation.
A vendor who has contracted to convey the legal title in fee simple cannot excuse himself from performance on the ground of inability to secure a necessary bar of dower from his wife.
The purchaser cannot be forced to take such a title but he has the option of requiring the vendor to convey all the interest that he has without the bar of dower but with an appropriate provision for the payment into court of a sum of money out of the purchase‑price as security against the claim for dower.
The usual clause in an agreement for sale entitling the vendor to treat the contract as null and void if the purchaser makes any valid objection to title “which the Vendor shall be unable or unwilling to remove and which the Purchaser will not waive” does not avail a vendor in such circumstances.
Can the Vendor just weasel out of the deal?
It does not enable a person to repudiate a contract for a cause which he himself has brought about, nor does it enable a vendor to repudiate the contract “at his sweet will”.
This proviso does not apply to enable a person to repudiate a contract for a cause which he himself has brought about;
Are capricious or arbitrary conduct permitted?
Nor does it justify a capricious or arbitrary repudiation.
I am content to adopt the words of Middleton J. in Hurley v. Roy, that the provision “was not intended to make the contract one which the vendor can repudiate at his sweet will”.
Contractual obligations arise
By signing this contract the vendor undertook to deliver a deed containing a bar of dower.
He tried to excuse himself by pleading inability to obtain such a bar.
Genuine Effort Required
His duty was, at the very least, to make a genuine effort to obtain what was necessary to carry out his contract and there can be no doubt in this case that he made no such effort.
Immediately after the acceptance of the offer by the husband—and the wife was present when he signed—they both regretted the bargain.
Commenting on the evidence, Judson J. said:
The learned Chief Justice concluded that the husband was willing to carry out the contract as far as he could without the concurrence of his wife and that the wife, acting upon independent legal advice, had refused to bar dower as a result of her own conclusion and determination arrived at independently of her husband.
The opinion of the Court of Appeal was that husband and wife were acting in concert to secure better terms or to avoid the contract if they could not get them. It seems to me to make no difference which view of their conduct one takes.
Noting some cases:
The plain uncontradicted fact is that the husband made no genuine attempt to obtain a bar of dower.
He cannot take advantage of his own default and use the clause to escape his obligation.
His duty was, as stated by Esten V.C. in Kendrew v. Shewan, supra, at p. 580, “to ascertain, bona fide, whether his wife was willing to bar her dower, and to induce her by any reasonable sacrifice on his own part to do so”.
I do not intend to review in detail the many cases in which the application of the clause has been discussed. The problem has arisen in a variety of situations.
A deal is still a deal
A vendor contracts to convey in fee simple and
when he has no title to the mineral rights (In re Jackson and Haden’s Contract); or
when he needs the concurrence of his trustee and has contracted without reasonable assurance that it will be forthcoming (In re Des Reaux and Setchfield’s Contract); or
when he is owner in joint tenancy with his wife (Hurley v. Roy, supra; Dubensky et al. v. Labadie); or
when there is a representation of ability to give a non‑existent right of way, as appurtenant to the lands contracted to be sold (Lavine v. Independent Builders Ltd.); or
when the vendor is unable to obtain a bar of dower (Shuter v. Patten); or where there is a deficiency in the land contracted to be sold (Bowes v. Vaux, supra).
In all these cases the purchaser was able to obtain specific performance with compensation.
When a vendor seeks to avoid a contract under this clause, which is obviously introduced for his relief, his conduct and his reasons for seeking to escape his obligations are matters of interest to the Court.
There is a general principle to be deduced from the cases and it is the one I have already stated incidentally.
A vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner.
This measure of his duty is the minimum standard that may be expected of him, and there are cases where a cause which might otherwise be valid as justifying rescission will not be available to him if he has acted recklessly in entering into a contract to convey more than he is able.
I would not characterize the conduct of the vendor in this case in entering into this contract as reckless,
but his attempted rescission was arbitrary and capricious and there was complete and deliberate failure on his part to do what an ordinarily prudent man having regard to his contractual obligations would have done.
I would dismiss the appeal with costs.
It would seem that many participants in the real estate field either forgot about this case or were unaware of its significance. Nevertheless, Bhasin v. Hrynew is now a reminder.
It is noteworthy that John J. Robinette, often referred to as Canada’s greatest lawyer was counsel for the Purchaser Freedman, who was ultimately successful in this case. Good faith was Robinette’s argument and that prevailed.
A contracting party is expected to fulfill their bargain in good faith. So, if there is ever to be a completely arbitrary and capricious doctrine written into a contract, that contract should be written as an “option”, ie. an option to buy or an option to sell. Then, the decision doesn’t fall under question.
Brian Madigan LL.B., Broker