Lawyer’s Approval: Must be Exercised in “Good Faith”
Legal Terms or Business Terms?
You will often see a clause in an Offer as follows: “subject to lawyer’s approval”.
But, just exactly what does that mean?
The answer, unfortunately is far from clear. That seems to depend upon the particular lawyer. Sometimes, the lawyer reviews far more than just the legal wording and extends into the “business terms”, including the purchase price. And, the part that most real estate agents hate, the lawyer may comment upon the agent’s commission.
However, not in all cases do we have a situation of the lawyer’s intrusive inquiry. In many circumstances, the client himself seeks his lawyer’s professional expertise with respect to the transaction. The client truly believes that if there is an issue (legal wording or otherwise) concerning the transaction, that he will be able have it reviewed by his lawyer and withdraw from the deal should he wish to do so following consultation. Had it not been for the inclusion of such a provision in the first place, he would not have signed the Offer.
Both the “legal terms” and the “business terms” seem to fall within the purview of the lawyer’s review.
The business terms naturally include penalties paid to discharge mortgages early, liabilities to tenants, the obligation to pay municipal taxes, and income taxes, continuing liabilities for environmental issues, the deposit, any vendor take-back mortgage and the purchase price. These matters all effect the bottom line. Some of these matters may have been “unknown” or at least “not discussed”. In that regard, the agreement did not arise with the party’s “informed consent”.
Now, there are several different types of clauses for lawyer’s approval:
2) specific, restrictive, legal terms only,
3) specific, open, legal and business terms.
So, the first decision to make is what type of lawyer’s approval clause do you really want? The general clause is the one in most common usage and it can be adapted for either the buyer or the seller.
One of the principal concerns is the lack of certainty associated with its intended meaning and interpretation, in Ontario. The difficulty here, is that the Ontario Court of Appeal has yet to rule on such a case.
If we were in New Zealand, the law would be quite clear. This type of clause means a review of legal terms alone.
In Reynish v. Joyce (High Court 2008), the agent inserted a Solicitor’s approval clause. Issues arose in respect to the liability for taxes and the possession date.
Consequently, the vendors’ solicitor refused to approve the agreement. The Court confirmed the principle that a solicitor is only entitled to refuse approval of an agreement if there are:
1) genuine legal objections or
2) genuine legal impediments,
to the bargain (eg. validity of title).
This means, of course, means that the lawyer cannot consider the suitability of the agreement and refuse approval because the client made a bad decision. Additionally, the lawyer cannot insert new terms and conditions to rectify the business terms of the agreement, once the bargain between the parties has been struck.
The Alberta Court of Appeal considered a similar case in 2006, Rahall v. Tait and Rizzutto.
In this case, the Rizzutos sold their house and were having a new house constructed at about the same time. The Rahalls as purchasers waived their conditions. The Rizzuttos upon determining that their new hosue would be delayed by three months instructed their solicitor to refuse to approve the agreement.
It was not entirely clear in this particular case whether or not the Rizzuttos actually sought the advice of their solicitor concerning the “approval” of the agreement.
The Court remitted the case for trial and pointed out that there are conflicting legal decisions on point. The Court stated:
“There is appellate authority which suggests that a party cannot rely on a lawyer’s approval condition if the party did not seek a lawyer’s approval: Dartington Properties Ltd. v. Harris,  B.C.J. No. 729 (C.A.) (QL).
But, there is also appellate authority which suggests that a party may be able to rely on a lawyer’s approval condition even though the party did not seek a lawyer’s approval: Megill-Stephenson Co. v. Woo, (1989), 59 D.L.R. (4th) 146, 58 Man. R. (2d) 302 (C.A.).”
In Draper v. Morrow, (2010) a Manitoba Court considered the issue of the interpretation of a solicitor’s approval clause. In this case, the Morrows were selling their farm for $3.2 million. This was their biggest investment and the most important decision that they had faced in their lifetimes. They included a provision which called for their solicitor’s approval.
Following discussion with their solicitor, they declined to proceed. The reasons were clearly “business terms” rather than purely “legal terms”. So, this Court was faced with a decision: what did solicitor’s approval really mean and did it extend to the buisiness terms of the agreement.
In this case, as vendors, the Morrows had entered into an agreement to sell their farm, which was an operating and productive venture to the purchaser. An offer had been presented to them by the purchaser’s agent. They agreed to pay a commission, but were not represented and clearly the loyalty of the agent rested with the purchaser.
The Morrows filed an Affidavit which set out their position and their understanding:
“It was important to us to consider each and every provision of the Offer to Purchase in the context of the concerns that we had. It was also important to us that we obtain professional advice with respect to all of the provisions of a lengthy and complicated Offer to Purchase representing the most significant financial and emotional decision that we had ever made in our lives.”
“It was our understanding that the Vendors’ Condition Precedent protected us and gave us the opportunity to consider the Offer to Purchase without being rushed. It was also our understanding that our lawyer could withhold approval to the Offer to Purchase for reasons unrelated to the wording of the contract.”The real estate agent did not agree, and stated ….. “I indicated to them that this clause is put in order to correct any legal mistakes or omissions on my part.”
The Court in Draper v. Morrow reviewed and important decision of the alberta Court of Appeal in Castledowns Law Office Management Ltd. v. FastTrack Technologies Inc. 2009 ABCA 148.
Reviewed at length were the reasons of Justice Slatter. Since his reasons were not adopted by the Court and he expressed a dissenting opinion on other matters, his reasons are not precedent setting, they can only be used by other courts for guidance.
The FastTrack case involved two offers and two different purchasers. Justice Slatter considered the matter of the meaning of the words “subject to lawyer’s approval and concluded that:
“The vendor’s lawyer’s discretion to approve the contract was not limited, and could be exercised on any basis that impacted on the vendor’s best interests. The letter from the vendor’s lawyer of September 7 had the legal effect of terminating the FastTrack contact.”
Here are some comments by Justice Slatter in the FastTrack decision:
“79 In this legal context it is entirely artificial to think that the lawyer would exercise the power to approve the contract contrary to the wishes or best interests of the client. The following scenarios might be imagined:
(a) The client says to the lawyer: "I had my doubts about this contract, but I signed it because I knew it was subject to your approval, and I was quite sure you wouldn't approve it."
(b) The client says to the lawyer: "I signed this contract, but I'm really having second thoughts about it. Here are my concerns; do you agree?"
(c) The client says to the lawyer: "I signed this contract, but my [spouse, accountant, associates] point out that I overlooked an important [personal, tax, business] consequence of the deal. I don't want you to approve it."
(d) The client says to the lawyer: "Look at this fantastic contract I negotiated!"
Because of solicitor-client privilege the other contracting party will not know which scenario has unfolded. In all of them (even the last one) the diligent lawyer will discuss the pros and cons of the contract with the client, and go through any concerns of the client. If at the end of the meeting the client has been satisfied, the lawyer will undoubtedly grant the necessary approval. However, if at the end of the meeting the client is unwilling to proceed with the contract (even though the client may initially have been enthusiastic) the lawyer has no alternative but to withhold approval. That is exactly why the lawyer's approval was contracted for, and that is exactly what the parties must be taken to have intended. Absent express wording to the contrary, any other interpretation is inconsistent with the role of lawyers…
82 It is not accurate to describe the effect of a "subject to lawyer's approval" condition as functionally turning the contract into a mere option. A binding contract exists but its performance is suspended: Dynamic Transport. It is true that the presence of any condition precedent means that no performance is due until the condition is satisfied or waived. The more subjectively based the condition, the more it may look like an "option", but it is still a binding agreement subject to the condition being met or waived. If the parties sign a contract containing a "subject to lawyer's approval" clause, they must accept that, while they have an "agreement in principle", the party stipulating for that clause wishes to have a sober second thought after consulting its closest adviser. There is nothing inherently unfair or commercially unreasonable about that, especially where (as in this case) both the vendor and FastTrack stipulated for such a clause. There are many good reasons why one or both parties might want to "lock-in" the terms of the deal before taking the contract to their lawyer or other advisors.
83 It is true that the generic "good faith" clause applies to the "subject to lawyer's approval" clause. That only means, in this context, that the client may be obliged to take the contract to the lawyer and instruct the lawyer to review it: Dartington Properties Ltd. v. Harris,  B.C.J. No. 729 at para. 10 (C.A.) (QL). The good faith clause does not mean that the client has to try to talk the lawyer into approving the contract. The whole point of the clause is that the lawyer will give the client advice, not the other way around.”
Justice Slatter quoted with approval a decision of the Manitoba Court of Appeal in Megill v. Woo (1989) wherein the Court stated:
“Solicitor’s approval meant more than a review of the wording to ensure that all things were properly in place.”
Justice Slatter also went on in his reasons to comment as follows:
“On their ordinary meaning, the words of the approval power are unlimited, except by the express “good faith” clause in the contract.”
“… Clients routinely consult their lawyers not only about legal matters, but about business matters, family matters, and personal issues. As an immediate example, a lawyer with a busy real estate practice may have as much knowledge as anybody in the community as to property values, and whether the business terms of the sale of land are commercially reasonable. The boundary between ‘purely legal’ issues and other matters on which lawyers are routinely consulted is impossible to define. When a contracting party stipulates for its lawyer’s approval, it should be presume to encompass wide ranging advice on what is in the client’s best interests. If nothing else, it follows that if any limits are to be placed on a clause that a contract is ‘subject to lawyer’s approval’, those limitations must be set out in the contract. The parol evidence rule effectively requires that anyway.”
Judge Harrison in Draper v. Morrow commented on the uncertainty of the law in respect to the meaning of the phrase “subject to lawyer’s approval”, by stating:
“The above precedents set forth in some detail the relevant caselaw in this province (Megill-Stevenson Co. v. Woo) and further give a constructive view as to how the same caselaw is to be interpreted albeit within the Province of Alberta. Regardless, this court has before it the opinions of two Canadian courts of appeal, Manitoba and Alberta. Both Justice Slatter in FastTrack and Justice Huband were of the opinion that subject to lawyer’s approval provides the party so stipulating with wide protection. Justice Huband found that such a condition meant more than a review of the wording. Justice Slatter has built on that principle stating that unless restrictive terms are placed within the parties’ proposed agreement limiting the lawyer’s function, no such restriction can be imputed.”
And particularly with respect to the Draper case summarized the situation as follows:
· contractual documentation establish an obligation on the part of the vendors to sell
· corresponding obligation on the part of the purchaser to buy
· this particular condition precedent remains mutual in nature
· the evidence establishes that the purchaser sought and received similar protection governed by very similar wording
· The number of visits by both vendors to their lawyer’s office is beyond dispute
· in my opinion, the vendors required the protection they stipulated
· they were totally on their own at the time the contract was negotiated
· the duration of time they had available to them was very short
· one hour to decide on a three million dollar deal
· the Morrows exercised their assumed contractual obligations in a responsible business fashion
· they appear to have acted in good faith
· no one is suggesting that there is another pending offer for more money.
· the Morrows’ lawyer’s disapproval of the offer appears to have come from instructions they gave to him
· I feel that very little turns on how the lawyer reached his decision in this matter
· This court cannot insert itself into the confidential sanctuary within which the Morrows were eventually able to receive the advice and direction they wanted and indeed, on the facts, required
· This latter step was taken pursuant to the terms of the contract and in the opinion of this court, was permitted without restriction.
So, there you have it. If we were in New Zealand, such a clause just means the “legal terms”, but in both Alberta and Manitoba, there are important decisions stating that on the plain meaning of the words “subject to lawyer’s approval”, that this means “business terms” as well.
Naturally, the standard form clauses could be amended to make this clear one way or the other.
In the meantime, however, in my view, the Ontario courts are more likely to follow Justice Slatter’s view that the “business terms” are to be reviewed by the lawyer.
You will also remember the statement from Justice Slatter:
“The whole point of the clause is that the lawyer will give the client advice, not the other way around.”
This would fall within the purview of the Supreme Court of Canada’s decision on “good faith” set out in Bhasin v. Hrynew (13 November 2014).
Consequently, the client cannot arrive at the lawyer’s doorstep with a reason to have the lawyer not approve. The lawyer must have a reason, whether it be legal terms or business terms for “not approving”. This is a professional responsibility and it must be exercised professionally, honourably, ethically and in good faith.
Brian Madigan LL.B., Broker