Commercially Reasonable and Diligent Efforts at the Earliest Possible Date: A Novel Contract Clause Unpacked

The recent case of Epix Developments Ltd. v. Bonnis Development Union Street Limited Partnership (Epix) addressed the interpretation of a novel compound contractual clause following the termination of an agreement due to a repudiatory breach in a real property transaction.

Background

The plaintiffs, Epix Developments Ltd. and Epix Main Street Limited Partnership (Plaintiff), and the defendant, Bonnis Development Union Street Limited (Defendant) entered into two agreements wherein the Plaintiff sought to purchase from the Defendant three adjacent lots located in Vancouver’s Chinatown with significant history and development potential (Property).  

The Defendant applied to the City of Vancouver (City) in 2017 to rezone the Property to “Comprehensive Development” (CD-1) to permit mixed commercial and residential use. The Defendant revised and resubmitted its rezoning application in late 2019. Around November 2020, staff at the City recommended the rezoning application pass, subject to the Defendant satisfying certain conditions. The Defendant subsequently decided to sell the Property, rather than complete the redevelopment process itself.

In negotiations beginning in May 2021 between the Plaintiff and Defendant, the Defendant provided misleading information, including emails suggesting zoning had “passed,” which it had not, and that it expected to receive a development permit as long as the additional conditions and items identified in a City prior-to letter were satisfactorily addressed.

This purported rezoning approval made the Property attractive to the Plaintiff, and in July 2021 the parties entered into the first agreement for the purchase and sale of the Property (Purchase Agreement). Upon the Plaintiff discovering the rezoning had not yet occurred, the parties entered into a second agreement in September 2021 (Amending Agreement, and together with the Purchase Agreement, the Agreements), which expressly made enactment of the rezoning a condition precedent to completion of the transaction. A deposit of C$1.1-million (Deposit) was also paid by the Plaintiff to its solicitor pursuant to the Purchase Agreement.

The Plaintiff raised concerns to the Defendant about the rezoning-related requirements from fall 2021 to February 2022. The Plaintiff repeatedly attempted to engage with the Defendant, and the Defendant was unresponsive. In March 2022 the Defendant advised it would not extend the outside date for the contract (Outside Date), stating it had worked hard and diligently to fulfil the condition precedent for rezoning, implying that the Plaintiff should close the transaction without the rezoning having been enacted. The Defendant then expressly asked the Plaintiff to advise if it would close by the Outside Date, failing which the Defendant would consider the contract to have ended. The Plaintiff responded that it was ready, willing and able to close on the parties’ deal — in other words, with rezoning enacted — which then prompted this litigation. The parties claimed the Deposit and various damages.

The Novel Clause

To address the Defendant’s new obligation to obtain the enactment of rezoning before completion of the transaction, the Amending Agreement provided that the Defendant “will make commercially reasonable and diligent efforts” to obtain approvals “at the earliest possible date”.

The phrase “commercially reasonable efforts” has been previously interpreted by the B.C. Court of Appeal in Sutter Hill Management Corporation v. Mpire Capital Corporation, as “efforts that would appear to be reasonable from a commercial perspective,” based on “sound judgment.” On its own, the phrase “commercially reasonable efforts” is not the same as “best efforts,” which is understood to require that “no stoned [be] left unturned.”

In Epix, there was a question to be answered: what, if anything, did the inclusion of the language “diligent efforts” and “at the earliest possible date” add to the Defendant’s obligations to fulfill the conditions precedent under the Agreements? Neither the Plaintiff nor the Defendant were able to provide any authorities where the contract in question used the phrase “commercially reasonable and diligent efforts” to fulfill certain conditions “at the earliest possible date.”

The trial judge held that the analysis must reflect the totality of the words used, including the phrase “at the earliest date possible,” stating that the parties chose to include the words “diligent efforts” and “at the earliest possible date” in the specific clause that set the standard for not just the degree of effort required from the Defendant to fulfill the conditions precedent, but the speed at which those tasks should be pursued. The trial judge held that the choice to include both terms must be given meaning, and that they cannot just be ignored or deemed “surplus.”  However, the trial judge was also not satisfied that, in the circumstances of this case, it was appropriate to equate “diligent efforts” with “best efforts.”

In interpreting “diligent efforts,” the trial judge held that the ordinary meaning of the term “diligent” includes the notion of being careful, conscientious and attentive, as well as embodying a sense of persistence or steady effort. The language of “at the earliest possible date” was interpreted by the trial judge as invoking the notion of aiming to complete as soon as possible, recognizing there could be external forces at work. Therefore, the trial judge held that it was in both parties’ interests to complete the deal quickly and what was bargained for was a site that was close to, if not fully, “development-ready.” Both facts necessitated further work and collaboration by the parties to achieve, even if they did not have ultimate control over what the City would do and on what timelines.

As a result, the trial judge concluded that, in light of the specific language of the clause, viewed in the context of the Agreements as a whole and the surrounding circumstances, the parties intended that the Defendant make careful, conscientious and persistent efforts to do what appeared reasonable from a commercial perspective in order to obtain the enactment of rezoning and the issuances of the development permit, or at least a prior-to letter, at the earliest possible date. In the trial judge’s view, this standard does not require the party with the obligation to take steps that would be commercially unreasonable, based on their sound business judgment, but does oblige them to find ways to continue moving steadily forward.

The Decision 

The Agreements specifically provided that in the event one party defaults on its obligation to complete the transaction pursuant to the terms of the Agreements, the non-defaulting party is entitled to the Deposit, together with all interest it has accrued. The Agreements also provided to limit the Defendant’s remedies solely to the forfeiture of the Deposit (plus interest), but if the Plaintiff is found to be the innocent party, the Plaintiff is entitled to the return of the Deposit (plus interest) without prejudice to the Plaintiff’s right to additional remedies.

The trial judge held that the Defendant breached its contractual obligations, thereby entitling the Plaintiff to terminate the Agreements and that the Plaintiff was contractually entitled to the return of the Deposit, together with interest, plus damages for breach of contract.

Key Takeaways

1. The “commercially reasonable efforts” standard can be interpreted to require more stringent or increased effort if the phrase is further modified in an agreement, so any modifications to this standard should be made with caution.
2. The standard of efforts described in an agreement to satisfy an obligation will be determined by considering the full context of the description of the standard and the full circumstances surrounding the actions taken to satisfy the obligation.

For more information, please contact the authors or any member of our Commercial Real Estate group.