Duty of Good Faith to Complete Contracts #349
By Gerry Neely
Lawyers used to feel they could confidently advise clients that, if the buyers failed to pay on the closing dates or sellers failed to deliver executed conveyancing documents by those dates, the contract could be terminated by the innocent party because of the "time is of the essence" clause. However, over the past two decades the judges in several cases have accepted the argument that there is an implied duty on the part of sellers and buyers to act in good faith to complete contracts.
Examples include an Ontario case where a document prepared by the buyer's lawyer was not in registrable form. This wasn't discovered until late in the day and, by the time it had been corrected and delivered to the seller, the registry was closed. When the seller refused to close, the judge held that the seller was not entitled to use the "time is of the essence" clause to terminate the contract because he had breached his duty to act in good faith. 1
In another Ontario case, a buyer refused to complete because of a shortfall of 0.16 per cent of the total property the seller had agreed to sell and convey. The court refused to allow this repudiation on the basis that the parties to the contract owed each other a duty to "act reasonably and in good faith and not in a capricious or arbitrary manner." 2
These decisions mean that a lawyer advising a client cannot assume that a court will automatically allow the client to exercise the contractual right the client has to terminate the contract.
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