Fire Damage Before Completion Date - Doctrine of Frustration #233

By Gerry Neely
B.A., LL.B.

What is the position of the parties to a Contract of Purchase and Sale when fire damages or destroys the building, which is the subject matter of the contract, between the date the contract was signed and the completiond ate? If the Doctrine of Frustration applies, the parties are not required to honour their obligations under the contract.

Frustration of contract occurs when the damage from an intervening event, such as a fire, has the effect of making the contract substantially different from the contract the parties had agreed to. However, the doctrine doesn't apply if the contract states how the parties would deal with the results of such an intervening event.

Paragraph six of the standard form Contract of Purchase and Sale states that the seller bears the risk of damage such as fire until 12:01 a.m. on the completion date. Since the parties have agreed by this clause as to how the problem of the fire would be resolved, the doctrine does not apply and the contract continues in force.

If damages have occurred which the seller is unable to repair before the completion date, the buyer has several remedies. The buyer may rescind the contract, sue the seller for damages, or insist upon a transfer from the seller with appropriate compensation, which may be a reduction in the purchase price.

While the seller may have the same right to force the buyer to purchase, again with appropriate compensation in the buyer's favour, it will be far more difficult for a seller to force a purchaser to ttake the damaged remains. The test is an objective test. Would a reasonable purchasser take what is left at a reduced price?¹

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During the period of a listing an agent submitted an offer to purchase which was rejected. The listing expired November 30th, 1993, and in January, 1994, the sellers ad the prospective buyers introduced by the agent negotiated a sale, a condition of which was that completion was subject to the sale of the purchaser's property. The condition was one which was originally suggested by the agent, but rejected by the purchaser.

The condition was fulfilled and the sale completed in May, 1994. Upon discovering the sale, the agent sued for commission. The agent's claim was that it was the effective cause of sale and that by virtue of paragraph 5(a)(ii) of the standard MLS® Contract, its efforts entitled it to a commission.

The sellers' defense was that the agent's activities fell short of the effort required to make the agent the effective cause of the sale. The judge, however, considered that the agent's introduction of the buyers, together with the agent's participation in the initial negotiations were the foundation for the ultimate sale, which entitled the agent to commission.²

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The value of agency disclosure, as a way of reducing a licensee's liability, is apparent from the results of an Ontario case. An agent had a listing of property which the city, over the objections of the owner, intended to designate as heritage. A buyer noticed the agent's, "For Sale" sign and when asked for information about the property the licensee did not disclose the possible heritage designation. The licensee prepared and submitted the offer which was accepted by the seller.

All parties were aware of the buyer's intention to demolish the buildings. When he was prevented from doing so, he sued. The judge held that the preparation of the offer was done on behalf of the buyer, an action which created an undisclosed dual agency relationship. The seller, of course was liable for damages, but both the agency and the salesperson were also held liable for breaches of their fiduciary duties to disclose the potential heritage designation.³

	1.	Dot Developments v. Fowler, 18 R.P.R. 10). and Gambouras v. Swan, S.C.B.C., Kelwona Registry #12582, Reaons for Judgment, January 6, 1994.
	2.	Homelife Okanagan Realty Inc. v. Galvagno, S.C.B.C., Penticton Registry #9242, Reasons for Judgment, November 7th, 1994.
	3.	Goldstein v. Davison, 39 R.P. R. (2d), p. 61.

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