Sail Labrador Ltd. v. Challenge One (The)

Sail Labrador Ltd. v. Challenge One (The)
Collection
Supreme Court Judgments
Date
1999-02-04
Report
[1999] 1 SCR 265
Case number
26083
Judges
Lamer, Antonio; Gonthier, Charles Doherty; Cory, Peter deCarteret; Iacobucci, Frank; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil
On appeal from
Federal Court of Appeal
Subjects
Contract
Notes
SCC Case Information: 26083
Decision Content
Sail Labrador Ltd. v. Challenge One (The), [1999] 1 S.C.R. 265
Sail Labrador Limited Appellant
v.
The Owners, Navimar Corporation Ltée and
All Others Interested in the Ship Challenge One,
Her Equipment, Bunkers and Freights, and
the Ship Challenge One, Her Equipment,
Bunkers and Freights Respondents
Indexed as: Sail Labrador Ltd. v. Challenge One (The)
File No.: 26083.
Hearing and judgment: October 9, 1998.
Reasons delivered: February 4, 1999.
Present: Lamer C.J. and Gonthier, Cory, Iacobucci, Major, Bastarache and Binnie JJ.
on appeal from the federal court of appeal
Contracts ‑‑ Option to purchase ‑‑ Conditions precedent ‑‑ Substantial performance ‑‑ Charter party providing for option to purchase vessel at end of lease ‑‑ Option made subject to “full performance” of all obligations under charter party ‑‑ One of lease payments made late owing to bank error ‑‑ Whether doctrine of substantial performance applies ‑‑ Whether option to purchase still valid.
The appellant entered into a five‑year agreement with the respondent Navimar to charter a vessel. Under clause 30 of the charter party, the appellant had an option to purchase the vessel at the end of the five‑year period subject to “full performance of all its obligations in th[e] Charter Party including but not limited to payments being made promptly and in accordance with the schedule of Clause 10 throughout th[e] Agreement”. Clause 10 specified the annual payment rate, while clause 11 set out a payment schedule of seven monthly instalments each year. The accepted practice between the parties was for the appellant to submit seven post‑dated, uncertified cheques to the respondent at the beginning of each operating season. While there were no problems with the cheques for the first four years, the cheque for the first payment in the fifth year was returned by reason of insufficient funds. The trial judge found that the bank’s refusal to honour the appellant’s cheque was due to an error by a bank employee. The respondent wrote to the appellant informing it that the option to purchase was void and of no further effect because of the appellant’s failure to make the payment as required. In this same letter, the respondent gave the appellant instructions on how it could remedy its late payment. The appellant promptly made the payment with interest in accordance with the respondent’s instructions. All subsequent payments were made on time. Under clause 25 of the charter party, the appellant had to supply deck and engine room logs if required by the respondent. After the appellant’s late payment the respondent made such a request; it argued at trial that the appellant had breached clause 25 by failing to provide all copies of the logs as requested. At the end of the five‑year lease the appellant gave the respondent notice of its intention to exercise the option to purchase and tendered payment. The respondent refused to execute a bill of sale. The Federal Court, Trial Division, granted the appellant’s action for a declaration that it was entitled to exercise the option. The Federal Court of Appeal allowed the respondent’s appeal.
Held: The appeal should be allowed.
Per Lamer C.J. and Gonthier, Cory, Iacobucci, Major and Bastarache JJ.: While an option may be a unilateral contract, it may also be an element of a bilateral contract in which it is contained. Whether a contract which contains an option clause establishes a single, bilateral contract or two separate contracts, one bilateral and the other unilateral, is a matter of construction. Courts must examine the text of the contract and the context surrounding it in order to determine the intention of the parties, keeping in mind that this Court has previously approved of the tendency by courts to treat offers as calling for bilateral rather than unilateral performance whenever a contract can fairly be so construed. In this case, the lease and the option form a single, bilateral contract. The option and the charter party in which it is contained are intimately connected to one another. The option requires consideration to be binding on both parties, but it can be assumed that it is based on the same consideration as the underlying lease, namely the lease payments. Further connections between the option and the charter party are the fact that the option is specifically made dependent on the performance of the terms of the charter party and the fact that the option and the charter party involve the same property. This single contract contains many terms, some relating to the lease, others to the option. The option itself forms part of the consideration flowing from the respondent to the appellant under this bilateral contract.
Time is not of the essence of a contract unless the parties have expressly made it of the essence or the nature of the property or circumstances allow for such a presumption. Commercial parties should be familiar enough with the applicable law to know that they must use very precise words if their intention is to make time the essence of a contract. The words used in the option clause are simply not precise enough to satisfy this Court that these parties intended to make timely lease payments the essence of this contract. This conclusion is bolstered by the respondent’s admission that contracts used in this industry often include the actual words “time is of the essence” when that is in fact the parties’ intention. Even if it could be said that the words of the option clause are adequate to make time of the essence in relation to the lease payments, the actual wording of the clause could only support a finding that time is of the essence in relation to clause 10. The trial judge properly found no breach of clause 10 because the appellant’s single late payment did not breach the clause 10 requirement to pay $85,000 for the year in which the late payment occurred. Since the presumption that time is not of the essence has not been displaced, the bilateral nature of the contract in this case requires that the substantial non‑performance doctrine be applied.
The trial judge’s finding that there was substantial compliance with clause 25 should not be disturbed. The vessel in question falls within the scope of s. 261(1) of the Canada Shipping Act , which dictates that the logs must remain on board the vessel. Furthermore, clause 25 makes no reference to the removal of the logs from the vessel or the making of copies of the logs, but refers to the actual logs only. The clause 25 requirement that the appellant supply the logs to the respondent upon request should therefore have been interpreted as requiring them to be made available on board the vessel.
Although clause 11 of the charter party specifically states that the appellant is to make monthly payments “in cash in Canadian currency by way of Bank Transfer and/or certified cheques”, the fact that the respondent accepted the practice of making payment by post‑dated, uncertified cheques indicates that it was not insistent on strict compliance with the method of payment set out in clause 11. It follows that the respondent cannot now insist on a strict application of clause 11. The modified method of payment accepted by the parties involved a risk of delay in clearing the cheques. The respondent must bear the consequences of this risk equally with the appellant because it materialized as a result of their mutually accepted alteration of the strict terms of the agreement. The appellant had sufficient funds in its account to cover its cheque and had no reason to suspect a bank error might delay payment of those funds to the respondent. The appellant always had the intention to pay on time and took all the steps that it could reasonably have been expected to take given the modified payment arrangement into which the parties had entered. Upon being notified by the respondent that its cheque had been refused, the appellant promptly paid the amount due plus interest in accordance with the respondent’s instructions. The appellant also made all of the remaining payments under the charter party on time. In these circumstances, the appellant substantially performed its modified clause 11 obligations.
The respondent has no right to cancel the appellant’s option to purchase the vessel in this case. This result is consistent with the true intentions of these parties as revealed by all of the circumstances and with the applicable policy reasons. The respondent has received a significant benefit from the appellant’s defective performance which it cannot restore. Furthermore, there is no proportionality between the impact of the appellant’s defective performance on the respondent and the benefit the appellant will lose if the respondent is permitted to void the option. The deficient performance did not give rise to uncertainty because there was no reason for the respondent to believe that the single late payment, which was caused by a bank error rather than any fault of the appellant, would put future lease payments in doubt. The concern in this instance must be with fairness. On the facts of this case, the respondent was simply not deprived of what it bargained for.
Per Binnie J.: The question of whether a contractual term is satisfied by substantial performance, or whether strict (or “complete” or “exact”) performance is required, is a matter of interpretation. Everything turns on the intention of the parties as expressed (in this case) in the charter party. Here, the contracting parties stipulated “full performance” as a condition precedent to the exercise of the option, and this stipulation should be respected by the courts. The words “all obligations” refer to all of the things required under the contract, and the words “full performance” must therefore refer to the sufficiency of performance of each of them. Substantial performance is less than full performance, according to the ordinary meaning of the words. An option is a unilateral obligation, irrespective of whether it is contained in a unilateral or a bilateral contract. The general approach in Pierce v. Empey was therefore agreed with. It is not without significance that in this case the parties stipulated for “full performance” in relation to the exercise of the option (i.e., by including the stipulation in the option clause itself) rather than in relation to their contract generally. While in some contracts the parties can be interpreted to have agreed to the option being governed by the more flexible standard of “substantial” performance, they did not do so here. However, on a proper interpretation of the charter party the conditions precedent to the exercise of the option were satisfied in “full” (or, in the instance of the banking arrangements, the owners were estopped from saying otherwise), and the charterers were thus entitled to exercise the option.
Cases Cited
By Bastarache J.
Applied: A/S Tankexpress v. Compagnie Financière Belge Des Pétroles S/A (1948), 82 Lloyd’s L.R. 43; distinguished: Pierce v. Empey, [1939] S.C.R. 247; referred to: Canadian Long Island Petroleums Ltd. v. Irving Industries (Irving Wire Products Division) Ltd., [1975] 2 S.C.R. 715; Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187; Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co., of London, Ltd., [1964] 2 Lloyd’s Rep. 153; Tenax Steamship Co. v. The Brimnes (Owners), [1975] Q.B. 929; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104; Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444; West Country Cleaners (Falmouth) Ltd. v. Saly, [1966] 1 W.L.R. 1485; Monk Corp. v. Island Fertilizers Ltd., [1991] 1 S.C.R. 779; Dawson v. Helicopter Exploration Co., [1955] S.C.R. 868; Daku v. Daku (1964), 49 W.W.R. 552; Friesen v. Bomok (1979), 95 D.L.R. (3d) 446; Nieckar v. Sliwa (1976), 67 D.L.R. (3d) 378; Nilsson v. Romaniuk (1984), 59 A.R. 39; Re Kennedy & Beaucage Mines Ltd., [1959] O.R. 625; Davis v. Shaw (1910), 21 O.L.R. 474; Lombard North Central Plc. v. Butterworth, [1987] Q.B. 527; United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904; Parkin v. Thorold (1852), 16 Beav. 59, 51 E.R. 698; Stickney v. Keeble, [1915] A.C. 386; Scandinavian Trading Tanker Co AB v. Flota Petrolera Ecuatoriana — The Scaptrade, [1983] 2 All E.R. 763; LeMesurier v. Andrus (1984), 31 R.P.R. 143, rev’d on other grounds (1986), 54 O.R. (2d) 1; Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (1921); Lang v. Provincial Natural Gas and Fuel Co. of Ontario (1908), 17 O.L.R. 262; Sprague v. Booth (1908), 21 O.L.R. 637, aff’d [1909] A.C. 576; Hare v. Nicoll, [1966] 2 Q.B. 130; Krause v. Bain Bros. Alta. Ltd. (1972), 29 D.L.R. (3d) 500; Bass Holdings Ltd. v. Morton Music Ltd., [1987] 2 W.L.R. 397; Birchmont Furniture Ltd. v. Loewen (1978), 84 D.L.R. (3d) 599; Petrillio v. Nelson (1980), 114 D.L.R. (3d) 273; Runnymede Iron & Steel Ltd. v. Rossen Engineering and Construction Co., [1962] S.C.R. 26; Gillespie v. Wells (1912), 2 D.L.R. 519; Zim Israel Navigation Co. v. Effy Shipping Corp. — The “Effy”, [1972] 1 Lloyd’s Rep. 18.
By Binnie J.
Applied: Pierce v. Empey, [1939] S.C.R. 247; referred to: United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104; Dominion Grange Mutual Fire Insurance Association v. Bradt (1895), 25 S.C.R. 154; Regina Industries Ltd. v. City of Regina, [1947] S.C.R. 345.
Statutes and Regulations Cited
Canada Shipping Act, R.S.C., 1985, c. S‑9, s. 261(1) .
Federal Court Act, R.S.C., 1985, c. F‑7, s. 3 .
Judicature Act, R.S.A. 1980, c. J‑1, s. 22.
Judicature Act, R.S.N. 1990, c. J‑4, s. 91.
Judicature Act, R.S.N.B. 1973, c. J‑2, s. 32.
Judicature Act, R.S.N.S. 1989, c. 240, s. 43(8).
Law and Equity Act, R.S.B.C. 1996, c. 253, s. 31.
Law of Property Act, 1925 (U.K.), 15 & 16 Geo. 5, c. 20, s. 41.
Mercantile Law Amendment Act, C.C.S.M, c. M120, s. 5.
Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, s. 15.
Queen’s Bench Act, R.S.S. 1978, c. Q‑1, s. 45(6).
Supreme Court Act, R.S.P.E.I. 1988, c. S‑10, s. 29(2).
Authors Cited
Annotation, “The Law of Options”, [1930] 1 D.L.R. 1.
Cozzillio, Michael J. “The Option Contract: Irrevocable Not Irrejectable” (1990), 39 Cath. U. L. Rev. 491.
Di Castri, Victor. The Law of Vendor and Purchaser, vol. 1. Toronto: Carswell, 1988 (loose‑leaf updated July 1998, release 3).
Halsbury’s Laws of England, vol. 9(1), 4th ed. (reissue). By Lord Mackay of Clashfern. London: Butterworths, 1998.
Perell, Paul M. “Options, Rights of Repurchase and Rights of First Refusal as Contracts and as Interests in Land” (1991), 70 Can. Bar Rev. 1.
Perell, Paul M. “Putting Together the Puzzle of Time of the Essence” (1990), 69 Can. Bar Rev. 417.
Treitel, G. H. The Law of Contract, 9th ed. London: Sweet & Maxwell, 1995.
Waddams, S. M. The Law of Contracts, 3rd ed. Toronto: Canada Law Book, 1993.
APPEAL from a judgment of the Federal Court of Appeal, [1997] 3 F.C. 154, 212 N.R. 256, [1997] F.C.J. No. 451 (QL), reversing a judgment of the Federal Court, Trial Division, [1996] 3 F.C. 821, 115 F.T.R. 128, [1996] F.C.J. No. 919 (QL), granting a declaration that an option to purchase could be exercised. Appeal allowed.
Elizabeth M. Heneghan, Q.C., for the appellant.
Alain R. Pilotte and Julie Bergevin, for the respondents.
The judgment of Lamer C.J. and Gonthier, Cory, Iacobucci, Major and Bastarache JJ. was delivered by
//Bastarache J.//
1 Bastarache J. -- The main issue in this appeal is the effect of deficient performance of the terms of a lease upon an owner’s right to cancel a purchase option which is expressly made exercisable subject to full performance of the terms of the lease.
Facts
2 The respondent Navimar is the owner of the vessel Challenge One. On June 21, 1985, the appellant Sail Labrador entered into a five-year charter party agreement with the respondent to charter this vessel. Under clause 30 of the charter party, the appellant had an option to purchase the Challenge One at the end of the five‑year period subject to full performance of all its obligations in the charter party. The relevant provisions of the charter party are:
Hire
10. The Charterer shall pay to the Owner for the use of the vessel a rate of $85,000. Canadian currency per year for each year commencing on and from the day of delivery or June 10, 1985 which ever is the later; hire to continue until the date of redelivery. If the vessel is lost the hire payable for the year of the loss being calculated prorata of the number of days the vessel was available of 208 days. Should the vessel be lost after December 1st of any operating year (which concludes on January 3rd of the following calendar year) the annual Charter of that operating year is payable in full.
Annual Schedule Payments
11. The annual Charter hire shall be payable in seven (7) monthly instalments each and every year of the Charter in accordance with the following schedule.
First year of Charter 1985
1. 1985 August 10th $12,142.85
2. 1985 September 10th $12,142.85
3. 1985 October 10th $12,142.85
4. 1985 November 10th $12,142.85
5. 1985 December 10th $12,142.85
6. 1986 January 10th $12,142.85
7. 1986 February 10th $12,142.90
Second year of Charter 1986
1. 1986 August 10th $12,142.85
2. 1986 September 10th $12,142.85
3. 1986 October 10th $12,142.85
4. 1986 November 10th $12,142.85
5. 1986 December 10th $12,142.85
6. 1987 January 10th $12,142.85
7. 1987 February 10th $12,142.90
Third year of Charter 1987
1. 1987 August 10th $12,142.85
2. 1987 September 10th $12,142.85
3. 1987 October 10th $12,142.85
4. 1987 November 10th $12,142.85
5. 1987 December 10th $12,142.85
6. 1988 January 10th $12,142.85
7. 1988 February 10th $12,142.90
Fourth year of Charter 1988
1. 1988 August 10th $12,142.85
2. 1988 September 10th $12,142.85
3. 1988 October 10th $12,142.85
4. 1988 November 10th $12,142.85
5. 1988 December 10th $12,142.85
6. 1989 January 10th $12,142.85
7. 1989 February 10th $12,142.90
Fifth year of Charter 1989
1. 1989 June 10th $12,142.85
2. 1989 July 10th $12,142.85
3. 1989 August 10th $12,142.85
4. 1989 September 10th $12,142.85
5. 1989 October 10th $12,142.85
6. 1989 November 10th $12,142.85
7. 1989 December 10th $12,142.90
Payments herein above set out are payable to Owners at Quebec City in cash in Canadian currency by way of Bank Transfer and/or certified cheques deposited to the account of:
Navimar Corporation Ltd.
. . .
Should any one of the payments not be deposited as set forth herein, the Owner may forthwith withdraw the vessel from the service/or the Charterer without prejudice to any claim which the Owner may have against the Charterer pursuant to this Charter, nor to any additional rights and/or claims of the Owner pursuant to any collateral guarantee provided by Sail Labrador Ltd. and/or any one of its share holders and/or directors and/or any other guarantors.
. . .
Reports
25. The Charterer, shall keep the Owner informed of the arrival and departure of this vessel at and from all ports of call other than those referred to in Clause 3. At the end of each month the Charterer shall supply deck and engine room logs of the voyages if required by Owner.
. . .
Option to Purchase
30. Subject to full performance of all its obligations in this Charter Party including but not limited to payments being made promptly and in accordance with the schedule of Clause 10 throughout this Agreement, the Charterer shall have an option to purchase the vessel after the five (5) year period of this Charter for the sum of Two Hundred Thousand Dollars ($200,000.00) cash if he notifies the Owner in writing of his intention to purchase by no later than March 31, 1990.
This option shall be enforceable only for a period of fifteen (15) days from the time the Charterer’s notice is sent to Owner and is subject to cash payment.
3 Clause 11 of the charter party required the appellant to make a total of 35 monthly payments to the respondent, seven payments during each year of the five-year charter party. The accepted practice between the parties was for the appellant to submit seven post-dated, uncertified cheques to the respondent at the beginning of each operating season. There were no problems with the cheques for the first four years. However, the cheque for the first payment in the fifth year, due on June 10, was returned by reason of insufficient funds. The trial judge found that the bank’s refusal to honour the appellant’s cheque was due to an error by a bank employee.
4 In a letter dated June 28, 1989, the respondent notified the appellant that its cheque had been refused. The respondent informed the appellant that the option to purchase was void and of no further effect because of the appellant’s failure to make the payment as required on June 10, 1989. In this same letter, the respondent gave the appellant instructions on how it could remedy its late payment. The appellant promptly made the payment with interest in accordance with the respondent’s instructions. All subsequent payments were made on time.
5 On October 31, 1989, the appellant wrote to the respondent expressing its view that the option to purchase remained effective. The appellant noted that the default had been due to a bank error and that the error had been promptly remedied in accordance with the respondent’s instructions.
6 Under clause 25 of the charter party, the respondent had the right to be supplied with the vessel’s deck and engine room logs upon request. Prior to the June 1989 late payment, the respondent had made no such requests. The respondent’s first request under clause 25 was contained in a letter to the appellant dated July 13, 1989. The respondent argued at trial that the appellant had breached clause 25 by failing to provide all copies of the logs as requested.
7 On January 5, 1990, the appellant gave the respondent notice of its intention to exercise the option. On January 19, the appellant tendered the sum of $200,000. The respondent refused to execute a bill of sale on the basis that the appellant had breached several clauses of the charter party agreement thereby rendering the option void.
8 The appellant commenced an action against the respondent in the Federal Court, Trial Division, seeking a declaration that it was entitled to exercise the option. The learned trial judge granted the declaration. The Federal Court of Appeal disagreed and allowed an appeal by the respondent. The appellant obtained leave to appeal that decision to this Court with regard to the breaches of clauses 11 and 25 of the charter party.
9 On October 9, 1998, this Court set aside the decision of the Federal Court of Appeal with costs throughout, reasons to follow. These are our reasons.
Judicial History
Federal Court, Trial Division, [1996] 3 F.C. 821
10 In response to the appellant’s action, the respondent alleged that the appellant had breached eight separate clauses of the charter party agreement. Nadon J. found that the appellant had breached two clauses of the charter party agreement: clauses 11 and 25.
11 In assessing whether there had been breaches of the charter party, Nadon J. made findings of fact relevant to clauses 11 and 25. For example, in relation to clause 11, he found that the appellant’s late payment had been due to a bank error. He also found that the appellant had quickly remedied the late payment with interest in accordance with the respondent’s instructions. With reference to clause 25, Nadon J. found that a lack of commercial photocopiers at the appellant’s disposal had contributed to its failure to provide copies of its log books as required by this clause. No discussion of the effect of the actions of the appellant preceded Nadon J.’s conclusion that the appellant had effectively breached clauses 11 and 25.
12 After concluding that the appellant had breached two clauses of the charter party, Nadon J. undertook an analysis of the legal principles which would permit him to decide whether the option to purchase was still enforceable. He began by stating that charter party agreements are governed by ordinary principles of contract law. He then cited s. 3 of the Federal Court Act, R.S.C., 1985, c. F-7 , to reach the conclusion that the Federal Court has jurisdiction to grant equitable relief.
13 Nadon J. examined the general characteristics of option contracts. To this end, he cited this Court’s decisions in Canadian Long Island Petroleums Ltd. v. Irving Industries (Irving Wire Products Division) Ltd., [1975] 2 S.C.R. 715, and Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187.
14 Nadon J. then addressed the de minimis non curat lex principle. He concluded that this principle prevents minor or trivial divergences from the terms of a contract from being considered breaches. He cited Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co., of London, Ltd., [1964] 2 Lloyd’s Rep. 153 (C.A.), for the proposition that negligible divergences from required performance should be disregarded when considering whether a contractual obligation has been broken.
15 Nadon J. next made reference to the doctrine of “spent breach”. He cited British authorities for the proposition that British law requires strict performance of conditions precedent of unilateral contracts, including option contracts. He noted, however, that English courts have recognized the doctrine of spent breach as an exception to the requirement of strict compliance in cases involving option contracts. According to this doctrine, if an option is conditional upon the performance of covenants, the optionee will not be prevented from exercising the option because of past breaches of the covenants if the breaches are “spent”, in the sense of not giving rise to a subsisting cause of action at the time the optionee seeks to exercise the option.
16 Nadon J. held that Canadian law also recognizes a requirement that conditions precedent be strictly complied with prior to the exercise of an option to purchase. He held, however, that Canadian law leaves room for the operation of equitable doctrines to relieve optionees from this strict performance requirement. To support this conclusion, Nadon J. cited Duff C.J. in Pierce v. Empey, [1939] S.C.R. 247, at p. 252:
It is well settled that a plaintiff invoking the aid of the court for the enforcement of an option for the sale of land must show that the terms of the option as to time and otherwise have been strictly observed. The owner incurs no obligation to sell unless the conditions precedent are fulfilled or, as the result of his conduct, the holder of the option is on some equitable ground relieved from the strict fulfilment of them . . . . [Emphasis added.]
17 Nadon J. then cited numerous authorities for the proposition that the doctrine of spent breach has been recognized in Canadian law. Accordingly, he concluded that a party will not be denied the right to exercise an option if a previous breach has been remedied by the time the option is exercised.
18 Nadon J. then turned to clause 30 of the charter party, the option clause. He held that this clause required only that the appellant substantially perform its obligations under the charter party.
19 Turning to the breaches of clauses 11 and 25, Nadon J. then held that since the appellant had remedied its breach of clause 11 before the exercise of the option, this “spent” breach could not prevent it from exercising the option. Nadon J. made no finding of fact as to when or if the appellant’s breach of clause 25 had been remedied. He simply concluded that it would not be equitable to dis-entitle the appellant from exercising the option because of this trivial breach.
20 Nadon J. therefore concluded that the appellant was entitled to exercise the option to purchase set out in clause 30. He issued a declaration to this end.
Federal Court of Appeal, [1997] 3 F.C. 154
21 The respondent’s main ground of appeal was that Nadon J. had erred in deciding that the appellant could exercise the option to purchase notwithstanding its failure to perform its obligations under clauses 11 and 25 of the charter party agreement.
22 Décary J.A. delivered the unanimous judgment of the court. He proceeded on the basis of Nadon J.’s findings that the appellant had breached clauses 11 and 25.
23 Décary J.A. held that Nadon J. had improperly applied the de minimis principle. According to Décary J.A., de minimis is only a rule of interpretation used to determine whether a breach has been committed. That is, the principle only applies to prevent the finding of a breach on the basis that the parties have implicitly agreed that substantial performance will be tantamount to strict performance. The principle cannot be used to qualify a breach as minimal. Therefore, Décary J.A. held that Nadon J., having found that a breach had been committed, could no longer look to the de minimis principle to conclude that the breach was so negligible as to not constitute a breach.
24 Décary J.A. also suggested that Nadon J. had misinterpreted the words of Duff C.J. in Pierce. According to Décary J.A., Pierce does not stand for the general proposition that Canadian law leaves room for the operation of equitable doctrines to relieve optionees from strict performance. Rather, Pierce will only relieve deficient performance of conditions precedent if the deficiency can be related to the conduct of the owner. Décary J.A. then held that no such relation had been established in this case.
25 Décary J.A. held that Nadon J. erred when he related the doctrine of “spent breach” to equity considerations. According to Décary J.A., even though courts have endeavoured to soften the harsh consequences of requiring strict performance by examining whether the wording of the agreement could support an interpretation that all conditions must be fulfilled by the time the option was exercised rather than at the time they initially were to be fulfilled, the basic principle of strict performance remains good law. Whether strict performance is required at any given time prior to the exercise of the option is a matter of construction of each contract and the doctrine of spent breach is not an exception to this principle.
26 Décary J.A. held that the language used by the parties is key to the interpretation of contracts because courts must give effect to the intention of the parties. He held that if the parties insisted that a condition precedent be fulfilled at a certain time, then it should not be open to the courts to decide that it could be fulfilled at a later time. This would amount to rewriting the contract. To this end, Décary J.A. cited the words of Cairns L.J. in Tenax Steamship Co. v. The Brimnes (Owners), [1975] Q.B. 929 (C.A.), at p. 971: “While it can properly be said that a person who has paid late has remedied his failure to pay, it cannot be said that he has remedied his failure to pay punctually.”
27 Turning to clause 30, the Court of Appeal held that the inclusion of the words “promptly”, “in accordance with the schedule” and “throughout this Agreement” in this clause led to the inescapable conclusion that the appellant could only enforce the option if it had made each and every payment the very day it was due under clause 11. I would note that the Court of Appeal’s reference to the option clause includes the notation “[sic]” after the words “Clause 10”. Décary J.A.’s reasoning suggests that he proceeded on the assumption that the reference to clause 10 in the option clause was a typographical error intended to read clause 11, although no such finding was made by the trial judge.
28 Décary J.A. allowed the appeal on the basis of the appellant’s breach of clause 11. As a result, he did not find it necessary to address the breach of clause 25.
Analysis
Nature of the Contract
29 A great deal of the written and oral arguments in this case were directed at establishing whether the option is an independent contract from the underlying charter party or whether it is simply a term of the charter party. In other words, the question which arose was whether the facts of this case give rise to a single contract or to two separate but related contracts.
30 The respondent urged this Court to find that the option clause creates a separate contract from the charter party. According to the respondent, the option is a “contract within a contract”. In order to understand why the respondent takes this position, it is useful to examine the performance of contracts more generally. For this purpose, I will refer to two well recognized textbooks on contracts: G. H. Treitel’s The Law of Contract (9th ed. 1995) and S. M. Waddams’ The Law of Contracts (3rd ed. 1993).
31 Both Treitel and Waddams recognize that, as a general rule, parties to a contract must perform their obligations specifically as dictated by the contract. However, if the performance is deficient, for example in quality, quantity or timeliness, it is accepted that the defect in performance must attain a certain minimum degree of seriousness to entitle the non-offending party to rescind the contract. The failure in performance must substantially deprive the other party of what was bargained for. This concept is referred to as substantial non-performance or as a requirement that a breach go to the “root” of the contract. In English legal literature, the expression “substantial failure” is used. If this minimum standard is not met, rescission will not be available to the non-offending party. This party will be forced to settle for a remedy in damages. Thus, courts are concerned with the consequences of the deficient performance and the nature of the prejudice caused to the non-offending party when determining whether rescission is available (Treitel, at pp. 685-86; Waddams, at pp. 394-96). The case of Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26 (C.A.), stands for the proposition that courts will apply this type of substantial non-performance test to determine if rescission is available in cases involving charter party contracts like the one in question.
32 The important point for the purposes of this case is the fact that, in the past, courts have distinguished deficient performance in bilateral contracts from deficient performance of options, which have generally been categorized as unilateral contracts. A brief review of basic contract law principles may be in order.
33 A bilateral contract is a contract in which both parties undertake obligations through an exchange of promises. Acceptance of a bilateral contract, as a general rule, occurs when the offeree communicates its counter-promise to the offeror. In contrast, a unilateral contract is one in which a party makes a promise in return for the performance or forbearance of an act. There is no counter-promise to perform this act or forbearance. In this way, a unilateral contract is a contract in which only one party undertakes a promise. This promise takes the form of an offer which can only be accepted by performance of the required act or forbearance. Such performance provides the other party’s consideration, allowing it to enforce the original promise (Treitel, at pp. 35-36; Waddams, at p. 111; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104 (C.A.)).
34 As noted above, courts have generally categorised options as unilateral contracts. In Mitsui, supra, Major J. set out the three principal features of options, at pp. 200-201: (1) exclusivity and irrevocability of the offer to sell within a specific time period; (2) specification of how the contract of sale may be created by the option holder; and (3) obligation of the parties to enter into a contract of sale if the option is exercised. At page 201, Major J. cites the following words of Lord Diplock in Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444 (H.L.), at pp. 476-77, with approval:
The option clause cannot be classified as a mere “agreement to make an agreement.” There are not any terms left to be agreed between the parties. In modern terminology, it is to be classified as a unilateral or “if” contract. Although it creates from the outset a right on the part of the lessees, which they will be entitled, but not bound, to exercise against the lessors at a future date, it does not give rise to any legal obligations on the part of either party unless and until the lessees give notice in writing to the lessors, within the stipulated period, of their desire to purchase the freehold reversion to the lease. The giving of such notice, however, converts the “if” contract into a synallagmatic or bilateral contract, which creates mutual legal rights and obligations on the part of both lessors and lessees.
35 In Canadian Long Island Petroleums Ltd., supra, at p. 732, Martland J. states:
In other words, the essence of an option to purchase is that, forthwith upon the granting of the option, the optionee upon the occurrence of certain events solely within his control can compel a conveyance of the property to him.
36 Thus, it is clear that an option may take the form of a unilateral contract. Upon granting the option, the optionor undertakes the promise to honour its terms if it is exercised by the optionee. The optionee, on the other hand, is under no corresponding obligation to exercise the option. However, if the optionee chooses to exercise the option, it can do so simply by performing the required conditions precedent.
37 In contrast to the substantial non-performance doctrine which they have applied to bilateral contracts, courts have historically tended to require that conditions precedent to the exercise of options be strictly performed to give rise to liability on the part of the optionor. For example, in Pierce, supra, a mortgagor in default executed a quit claim deed of the mortgaged land to the mortgagee, who was in possession following foreclosure proceedings. In a letter from the mortgagee’s solicitor to the mortgagor’s solicitor which accompanied the quit claim deed, the mortgagor was granted a right, for a period of three months, to repurchase the land upon payment of the full amount due under the mortgage. This Court found, at pp. 250-51, that even though the option formed part of the arrangement by which the equity of redemption was released, the parties had clearly expressed their intention that the land rest in the mortgagee free from the equity of redemption. Clearly, the option was a separate, unilateral contract and the conditions precedent to its exercise had to be strictly performed. According to Duff C.J. (at p. 252):
It is well settled that a plaintiff invoking the aid of the court for the enforcement of an option for the sale of land must show that the terms of the option as to time and otherwise have been strictly observed. The owner incurs no obligation to sell unless the conditions precedent are fulfilled or, as the result of his conduct, the holder of the option is on some equitable ground relieved from the strict fulfilment of them. . . . [Emphasis added.]
38 Likewise, in West Country Cleaners (Falmouth) Ltd. v. Saly, [1966] 1 W.L.R. 1485 (C.A.), Danckwerts L.J., at p. 1489, noted that “an option of this character is a privilege — a right which has always been treated by the law as requiring complete compliance with the terms and conditions upon which the option is to be exercised”. According to the Court,