Written By David Gruber and Benjamin Reedijk
A recent decision of the British Columbia Court of Appeal, Sutter Hill Management Corporation v Mpire Capital Corporation [Sutter Hill], 2022 BCCA 13, offers an illustration of the potentially harsh consequences that can arise where a party fails to fulfill a clause that requires it to make "best efforts" to fulfill a condition precedent.
The litigation arose over an agreement of purchase and sale (the APS) the parties entered into on January 14, 2016. Pursuant to the APS, Mpire Capital Corporation (the Purchaser) agreed to purchase certain companies owned by Sutter Hill Management Corporation and Sweet Investments Ltd. (the Vendors), the primary asset of which was a large care home and real estate, contracts, and licenses related to the care home.
On July 31, 2017, with the APS not yet closed, the parties amended their agreement (the Amended APS). The Amended APS contained a condition precedent requiring that the Fraser Health Authority (the FHA) approve the transfer of some of the subject contracts and licenses to the Purchaser, and required the Purchaser to use "commercially reasonable best efforts to satisfy [the condition precedent of the FHA's approval] as soon as possible."
Between the execution of the Amended APS and November 8, 2017, the parties were forced to wait while the FHA considered whether to approve the transfer. On November 8, as part of the final approval process, the FHA sent the Purchaser three agreements for its review and comment. The next day, the Purchaser forwarded those agreements to its Toronto solicitor.
Eleven days later, on November 20, 2017, the Purchaser's Toronto solicitor informed the Purchaser that he did not have the expertise to advise on the agreements, and that, accordingly, the Purchaser should find a B.C.-based lawyer to advise on the agreements. The Purchaser retained Vancouver counsel on November 24, 2017.
On November 27, 2017, the Vendors sent the Purchaser a notice of default, alleging that the Purchaser had failed to use best efforts to secure the FHA's approval. The Vendors stated that unless the default was cured by December 12, it would treat the agreement as at an end. The agreements had not been returned by December 14, and on that day, the Vendors wrote to the Purchaser, alleging that the agreement was at an end, and that, accordingly, the Purchaser's $300,000 deposit was forfeit. The Vendors then commenced a claim against the Purchaser for the deposit, which was held in trust.
The Chambers Decision
The Chambers Judge dismissed the Vendors' claim. He first considered the meaning of the phrase "commercially reasonable best efforts." The Chambers Judge observed that contracts sometimes include a requirement for "commercially reasonable" efforts, and at other times, for "best efforts," but that the combination of the two terms appeared to be a novelty in the caselaw. This was attributed by the chambers judge to "overdrafting" on the part of the parties. Determining that it was not possible to construct a meaning out of two apparently contradictory phrases, the Chambers Judge proceeded to apply a commercially reasonable standard and a best efforts standard in the alternative.
The Chambers Judge held that regardless of which standard was applied, the Purchaser was not in breach of the Amended APS. Key to his reasoning was the finding that it was reasonable for the Purchaser to retain new counsel once its Toronto solicitor indicated that he no longer had expertise, and that in the context of the months-long timeframe, the delay was not particularly significant. Further, the Chambers Judge noted that the FHA's approval may not have been forthcoming in any event.
The Decision of the Court of Appeal
The Court of Appeal allowed the Vendors' appeal. It held that the Chambers Judge had erred in two key respects.
The First Error: Interpreting the Condition Precedent
The first error pertained to the Chambers Judge's interpretation of the "commercially reasonable best efforts" clause. The Court of Appeal held that the Chambers Judge erred in principle in finding that the clause was identical to those referring to commercially reasonable efforts and any difference was the result of "overdrafting," and then by focusing on caselaw which interpreted such clauses. Instead, the law required the Chambers Judge to presume that the parties would not use superfluous words, and thus to incorporate into his analysis all of the words used by the parties, which including the use of the terms "best" and "as soon as possible" as well as "commercially reasonable." Furthermore, the surrounding circumstances indicated that it was important to the parties to have the agreement close as soon as possible.
On this basis, the Court of Appeal interpreted the clause as "something between 'commercially reasonable efforts,' meaning those efforts that would appear to be reasonable from a commercial perspective, and 'best efforts' which, as the judge noted, would generally be taken to mean leaving no stone unturned." Thus, properly interpreted, the clause required the Purchaser 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 Second Error: Not Attributing the Solicitor's Delay to the Purchaser
Because the Chambers Judge had found, in the alternative, that the Purchaser would have satisfied the requirements under the condition precedent even if it required best efforts, his interpretive error alone would not have led to the appeal being allowed. However, the Court of Appeal also found that the Chambers Judge erred by failing to attribute the delay caused by Purchaser's Toronto solicitor to the Purchaser.
The Court of Appeal explained that as the agent of the Purchaser, any delay caused by the Toronto solicitor was attributable in law to the Purchaser, something which the Chambers Judge appeared to have not recognized (possibly because he had erroneously believed that the Toronto solicitor had withdrawn from the file, when in fact he had merely asked the Purchaser to take on additional counsel). The Court of Appeal further found that the delay caused by the Toronto solicitor brought the Purchaser below the standard of doing everything it reasonably could to obtain the necessary approvals as soon as possible except for such steps that would be commercially unreasonable. That the FHA's approval may not have been forthcoming even without the delay was irrelevant. So too was the fact that the parties had already been delayed (due to the FHA) for a much longer time period than the five weeks the Court of Appeal attributed to the Purchaser.
The Sutter Hill decision is, first and foremost, a caution to parties with respect to the use of the term "best efforts" in the context of resolving conditions precedent. As the facts of this case illustrate, this phrase imposes potentially onerous requirements on a party, even where such a clause is softened by explicitly excluding commercially unreasonable efforts. The Court of Appeal's decision appears to turn on the 11 days it took for the Toronto solicitor to inform the Purchaser that he lacked the requisite expertise. While it was certainly not ideal for the solicitor to take that long to recognize that he could not advise on the agreements the FHA had provided, this delay was modest in the context of the transaction as a whole, which had been executed almost two years before the events in question. Nevertheless, this delay was sufficient to put the Purchaser in default of its obligation under the Amended APS.
The Sutter Hill decision is also a reminder that parties are, generally speaking, responsible for the actions of their agents in the context of any obligations they take on to fulfill a condition precedent. Both the Purchaser's internal correspondence and correspondence between the parties indicated that there was significant frustration on the Purchaser's part with the Toronto solicitor's delay. The Purchaser clearly recognized the urgency of the situation and attempted to move matters along, which was a significant reason why the Chambers Judge had found in its favour. Yet at law, the Purchaser was at the mercy of its solicitor's apparent lack of urgency due to the solicitor's role as an agent of the Purchaser, leading to a costly result.