Broken Deals in Business Acquisitions
Author: James J. LeMoine/Bull, Housser & Tupper LLP

This article is an excerpt from a chapter of the forthcoming 2010 Update of Advising British Columbia Businesses. The full book with update will be available in print and online in August 2010. The author and CLEBC wish to thank Travis Cramb for his assistance in preparing the chapter update.


Before delving into the practical matters that should be considered when a representation or warranty is found to be untrue either before or after the deal, every deal lawyer must consider the following academic point. Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, gave the Supreme Court of Canada an opportunity to strike down the doctrine of fundamental breach. Members of the court, though disagreeing on the application of the facts, agreed that the doctrine of fundamental breach is not a part of Canadian law. The court in Tercon said that, in order for exclusion clauses to be applied by the courts, clear language is necessary to exclude liability. Only on application of Tercon by the lower courts will the full effect of the decision be felt. However, the drafting of exclusion clauses will need to be considered much more carefully in light of Tercon.

The doctrine of fundamental breach had previously been considered by the Supreme Court of Canada in Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426. That court said that, where one party has failed to perform a primary obligation and that failure has deprived the other party of substantially the whole benefit of the contract, the innocent party should have the right to put to an end all of the unperformed obligations of both parties. The doctrine of fundamental breach allowed the courts to strike exclusion clauses, and other parts of a contract, in the context of a fundamental breach by the party seeking to enforce the exclusion clause. Tercon has stripped the courts of the ability to use an evaluation of the severity of a breach as justification for changing the bargain the parties have struck and replaced it with the following three-part test:

(1) As a matter of interpretation, does the exclusion clause even apply to the circumstances established in evidence?

(2) If the first question is answered in the affirmative, was the exclusion clause unconscionable when the agreement was first entered into?

(3) If the first two questions are answered in the affirmative, the court may refuse to enforce an exclusion clause because of “some paramount consideration of public policy sufficient to override the public interest in freedom of contract” (Tercon, per Binnie J. (dissenting, though not on this point), at para. 82).
The first hurdle, whether the exclusion clause applies, should be considered carefully when drafting exclusion clauses. In Tercon, the majority held that the exclusion clause, though very broad, did not exclude damages for allowing an ineligible bidder to enter the bidding process. Stating that all damages are excluded is unlikely to be sufficient.

1. Repudiation

The issue of repudiation arises when one of the parties states or acts in such a way as to provide evidence that they intend not to be bound by the contract. This often occurs shortly after signing of the agreement when buyer’s or seller’s remorse strikes. It is imperative that the actions or statements constituting the repudiation be documented. Anticipatory repudiation, being an outward display of an intention to refuse to perform as required by the agreement, is truly a repudiation prior to any part of the agreement being performed. In both cases, the party who is not repudiating the agreement may have an option to elect to either: (1) treat the contract as at an end; or (2) be ready to perform at the closing and sue for damages when the other party fails to close. Regardless of the election made, the election must be communicated to the repudiating party, and the decision must be made within a reasonable period of time. Excessive delay in electing a course of action can give rise to estoppel by conduct.

2. Untrue Representations and Warranties

In evaluating which actions to take in the event of untrue representations and warranties, first evaluate whether a claim on the basis of an untrue statement can be proven. Except in the presence of “liquidated damages” clauses, it can be difficult to prove the effect that an untrue representation or warranty had on the purchase price.

Share and asset purchase agreements should include clauses requiring the vendor to confirm that the representations and warranties in the agreement are true and correct at closing. This is especially important in situations where there will be a significant time period between the time of signing the agreement and the time of closing.

3. Breach of Condition

Breaches of conditions of the agreement are treated in much the same way as breaches involving the repudiation of the agreement. Obviously, depending on what term of the agreement is being repudiated, the act of repudiating the agreement is a statement or act showing that the repudiating party intends to breach the condition.

The non-breaching party has three options, two of which are the same as those available in the case of repudiation. The options are: (1) accept the breach; (2) affirm the contract and continue as if the breach did not occur; or (3) waive the breach. A breach of condition will entitle the non-breaching party to bring an action for damages. Accepting the breach will not bring the contract to an end unless the breach is also a repudiation of the contract which is accepted by the non-breaching party. Affirming the contract requires the non-breaching party to continue to perform its obligations under the contract, but does not waive the non-breaching party’s right to bring an action for damages. Lastly, waiving the breach has the practical affect of striking the condition from the contract with all of the remaining obligations continuing as if the breach did not occur. Regardless of the option chosen in the particular situation, communication of the chosen course should be made to the breaching party. Note that waiver of a true condition precedent, a condition based on the happening of a future event beyond the control of the parties to a contract, is permitted by s. 54 of the Law and Equity Act only if the three requirements of that section are met (Turney v. Zhilka, [1959] S.C.R. 578, created the rule that true conditions precedent cannot be waived even if the condition is for the sole benefit of one party to the contract). Section 54 of the Law and Equity Act permits a party to a contract to waive a condition precedent dependent on the action of a non-party if: (1) the condition benefits only the waiving party; (2) the contract can be performed without the occurrence of the condition; and (3) the waiver is made before the time required for fulfillment of the condition or within a reasonable time if no time is specified.

Waiver and affirmation are similar in that the contract continues. However, waiving a breach will not entitle the waiving party to sue for damages or restitution. In communicating to the other side your client’s decision on whether to affirm or waive, it is imperative that you articulate your client’s intentions clearly.

 

 

 

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