Clock’s Ticking – 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes), ‘Time is of the Essence’ Clauses and “Harsh” Outcomes

The Court of Appeal for Ontario’s recent decision in 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes) (“3 Gill Homes“)[1] reminds parties to a contract that breach of a “time is of the essence clause” – even a breach by a matter of minutes – is sufficient to justify termination of the contract.

Although the Court’s reasons are straightforward and apply the well-accepted rules of contractual interpretation, this decision nevertheless raises certain questions as to the nature of a termination on such a strict reading of the contract, which we consider below.

Factual Background

On July 4, 2020, the appellant entered into three agreements for purchase and sale (“APS“) for the construction of three separate residential homes. While two of the APSs closed without issue, the third (which was the subject of this appeal) did not.

The APS at issue was scheduled to close on August 31, 2021, but experienced construction delays which prevented the closing as set out in the terms of the APS. The APS contained the following termination and “time is of the essence” clauses:

16.02 Upon default by the Purchaser, in addition to any other rights or remedies which the Vendor may have, the Vendor, at its option, shall have the right to declare this Agreement null and void and in such event, all monies paid hereunder and monies paid or payable for extras and/or upgrades ordered by the Purchaser, whether or not installed in the Property, shall be forfeited to the Vendor, without prejudice to the Vendor’s rights to bring such further or other action as may be available to it as a result of such breach. It is understood and agreed that the rights contained herein on the part of the Vendor are in addition to any other rights which the Vendor may have at law, in equity or under any other provisions of this Agreement, and the Vendor expressly has the right to exercise all or any one or more of the rights contained in this Agreement, at law or in equity, without prejudice to the subsequent right of the Vendor to exercise any remaining right or rights at law, in equity or in this Agreement…

[…]

17.04 Time shall be of the essence of this Agreement in all respects, and any waiver, extension, abridgement or other modification of any time provisions shall not be effective unless made in writing and signed by the parties hereto or by their respective solicitors who are hereby expressly authorized in that regard. [emphasis added]

However, and of note, neither party exercised their right to terminate the APS notwithstanding the delay in achieving closing.

After missing the original closing date, the parties amended the APS, changing the closing date to January 28, 2022. The amended APS included a “time is of the essence” clause similar to that included in the original APS.

As the January closing date approached, the respondent delivered multiple reminders about the importance of timely payment, with the deadline for payment of the closing funds (the “Funds”) being 3:00PM on January 25, 2022. The day before closing, the appellant requested an extension to the closing date, but the respondent denied any extension (as it was permitted to do based on the terms of the APS). At the same time, the respondent reiterated the importance of the appellant paying the Funds by 3:00PM the next day, as was required under the terms of the APS. Crucially, the respondent also advised the appellant that failure to pay the Funds by the deadline would result in the termination of the APS.

On the closing day, at 2:47PM, counsel for the appellant advised counsel for the respondent that the Funds had been obtained, and that banking procedures were underway to transfer the Funds to the respondent. However, at 3:10PM, with the Funds having not yet been transferred, the appellants were advised that the transaction would not close because the payment deadline had been missed. The funds were ultimately transferred at 3:35PM, but were rejected and returned by the respondent. The respondent then terminated the APS on the basis that the appellant failed to pay the Funds by the deadlines as set out in the APS.

The Application Judge’s Decision

The appellant sought a declaration that the respondent had breached the APS by refusing to accept the transfer of funds. In the alternative, the appellant sought a declaration that the APS was unconscionable and termination could not be enforced. The appellant also claimed that it was entitled to damages in the form of lost profits because the property had been resold by the time of the lawsuit.

The application judge found that pursuant to the terms of the APS, the appellant had a strict requirement to close (e.g. deliver the Funds) before 3:00PM on January 28, 2022.

Since the property was within the land titles system, the application judge deemed the use of the electronic registration system mandatory, thus engaging another provision of the APS which dictated that the respondent would not be required to release the transfer or deed for electronic registration unless the Funds had been remitted to the respondent’s lawyer by 3:00pm on the closing date. The judge found that this provision obliged the appellant to pay the Funds by the time and date specified under the APS, and as such, the respondent was entitled to terminate the APS because of the late payment. While the result seemed harsh, the application judge found that it was not unfair for the respondent to enforce the payment deadline in light of the time is of the essence clause.

With respect to unconscionability, the application judge found that there was no evidence of unequal bargaining power, as demonstrated by the successful closing of the two other APSs. The application judge also noted that while the court has equitable jurisdiction to grant relief as against a breach of a time is of the essence clause, such relief would require evidence of unfair or unjust conduct by the party enforcing the clause, and such unfair or unjust conduct was absent in this case.

Finally, the application judge found that even if the appellant had succeeded in its claims, the issue of damages could not be addressed based on the written record, as the property in question had been sold. The value of the property was in dispute, requiring a full trial to resolve.

Issues on Appeal

The appellant raised “approximately” 22 grounds of appeal, which the Court of Appeal grouped into the following questions:

1. Did the application judge err in finding that 3:00 p.m. was the payment deadline under the APS?
2. Did the application judge err in finding that, in respect of the closing payment, time was of the essence?
3. Did the application judge err in finding that the payment deadline was not unconscionable?
4. Were the reasons of the application judge sufficient to permit appellate review?
5. Did the application judge err in finding that damages could not be fairly and justly determined on a written record?

The Court of Appeal’s Decision

The Court of Appeal found that while the result was harsh for the appellant, it was neither unconscionable nor unfair. The clear language in the APS, together with the repeated warnings given by the respondent, meant that the appellant was well aware of the consequences for a failure to pay the Funds by the deadline.

While the appellant argued that the application judge erred in interpreting the APS, particularly regarding the closing time, the Court of Appeal agreed with the application judge’s findings. Specifically, the Court of Appeal found that the APS was clear and required that the Funds be received by 3:00 p.m. on the closing date when electronic registration was mandatory. The Court of Appeal further found that altering the closing time would be an unwarranted intervention by the Court and deviate from the bargain struck between the parties.

Regarding the time is of the essence clause, the Court emphasized that such a clause is “engaged where a time limit is stipulated in a contract… mean[ing] that a time limit in an agreement is essential such that breach of the time limit will permit the innocent party to terminate the contract” upon a breach. [2]

While the appellant argued that the clause had not been strictly enforced in prior transactions between the parties, the Court noted that the November 2021 amendment to the APS made the closing deadline firm. Moreover, according to the Court, the exchanges between the parties leading up to January 28, 2022, demonstrated their shared understanding of enforcing the closing date and time. As such, the Court found no error in the application judge’s reliance on the time is of the essence clause.

With respect to the appellant’s argument that the provision was unconscionable, the Court concluded that there was no basis to interfere with the application judge’s findings, particularly considering the parties’ prior transactions and their sophistication in real estate matters.

Lastly, the Court acknowledged the possibility of the Court’s equitable jurisdiction to relieve against the breach of a time provision, but found that such relief would require an evidentiary foundation showing unfair or unjust action by the respondent, which was lacking in this case.

Commentary

As many commentators have observed, along with the Court of Appeal itself, the outcome of 3 Gill Homes is arguably a harsh one given that the closing deadline was missed by a matter of minutes. The most obvious takeaway is therefore, of course, that parties would be well advised to ensure strict compliance with contractual timelines, particularly where a time is of the essence clause is included in an agreement.

That being said, 3 Gill Homes also raises other interesting questions that, although not presented to the Court, might colour the impact of this case.

First, it is notable that in this case, the time is of the essence clause and related provisions only gave the respondent the option – that is, the discretion – to terminate the APS in case the deadline was missed. In other words, the missing of the deadline did not automatically result in the termination of the APS. As readers will appreciate, this therefore required that the respondent exercise its contractual discretion to terminate the APS for failure to meet the contractual timeless reasonably.

As the Supreme Court of Canada made clear in Wastech, a contractual discretion is exercised reasonably if it is exercised in a manner consistent with the purpose(s) for which it was conferred. On the facts of 3 Gill Homes, it was clear that the parties’ communications and conduct placed a high priority on the deadline being respected; however, it is not clear why this was the case, leaving open the question of whether the appellant might have been able to advance a credible argument that terminating the APS was inconsistent with the purpose of the respondent’s discretion to do so.

In that regard, it is interesting to note that the Supreme Court’s analysis in Wastech indicates that determining the purpose of a contractual discretion flows from a review of the contract itself,[3] but the Court did not reference consideration of the parties’ subsequent conduct as part of this analysis. In 3 Gill Homes, the Court of Appeal (and the application judge) considered the parties’ subsequent conduct to be instructive regarding a number of issues, including the proper interpretation of the time is of the essence clause and the unconscionability issues, which presumably falls under the general proposition, applicable in certain circumstances, that the parties’ subsequent conduct may be relevant to the interpretation of a contract.[4] It will be interesting to see whether future decisions consider the subsequent conduct of the parties in the interpretation of a contractual discretionary clause.

On the other hand, there have been no specific pronouncements from Canadian courts as to  whether a contractual right to terminate a contract is even subject to the duty to exercise a contractual discretion in good faith, insofar as it seems this issue has not been considered in Canada at the appellate level outside of the employment context.[5] The Supreme Court in Bhasin observed that “[c]lassifying the decision not to renew the contract [where the defendant had to give notice of non-renewal] as a contractual discretion would constitute a significant expansion of the decided cases under that type of situation”[6], so it is possible that a court might view the discretion to terminate a contract in similar terms.[7]

This issue also raises the further question as to the nature of the discretion to terminate the agreement – specifically, whether it is relevant that the discretion is contractual or at common law.

As noted above, the APS in 3 Gill Homes contained a provision that explicitly entitled the respondent to terminate the APS if the appellant defaulted on its obligations under the APS (including its obligations with respect to timely delivery of the Funds). In this regard, it is unclear whether the respondent terminated the contract purely on the basis of the time is of the essence clause, or on the basis of the discretionary termination clause.

Conversely, and as the Court of Appeal noted, a time is of the essence clause has the effect of making the breach of any contractual time limit a basis upon which the innocent party can terminate the contract. This is because a time is of the essence clause makes a contractual time limit into a condition rather than a warranty, which at common law entitles the innocent party to treat the contract as at an end.

As a result, it is unclear whether a common law discretion to terminate a commercial contract would attract the same restrictions as a contractual discretion to do so, particularly in the context of the possible requirement to exercise a termination clause in good faith. Again, this point does not appear to have received consideration in Canada, particularly given the recency of Wastech. The England & Wales High Court considered a similar issue in MSC Mediterranean Shipping Co SA v. Cottonex Anstalt [2016] EWCA 789, where it determined that a common law right to terminate for repudiatory breach is subject to requirements of good faith, but the Court of Appeal overturned the High Court on this point such that there would seem to be no guidance in that regard.

Ultimately, since these issues were not raised by the parties, determination will have to wait for a future decision. However, it bears keeping in mind that this case stands for the simple principle that parties should be held to their bargains (harsh though the result may be).

[1] 2024 ONCA 6 (CanLII) [“3 Gill Homes“]

[2] Ibid at paras 24-27, citing Di Millo v. 2099232 Ontario Inc., 2018 ONCA 1051 at para. 31.

[3] Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7at paras 71-72.

[4] Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912.

[5] The issue was considered by the Court of Appeal of Alberta in Styles v Alberta Investment Management Corporation, 2017 ABCA 1. There, the Court of Appeal determined that there was no common law obligation to exercise contractual discretionary powers reasonable, and therefore that an employer had no obligation to exercise a discretion reasonably to terminate an employee without cause – in part, because termination without cause is not a breach of contract. As a result, the Court of Appeal concluded that termination without cause cannot be considered a “discretion”: para 41. Notably, this decision was rendered prior to Wastech, so it is unclear to what extent the Court of Appeal’s reasoning still applies.

[6] Bhasin v. Hrynew, 2014 SCC 71 para 72.

[7] In England, this issue has been considered (albeit in the context of an implied term). Specifically, in Monde Petroleum SA v. Westernzagros Ltd [2016] EWHC 1472, the High Court considered whether a contractual right to terminate was subject to an implied term that the party terminating must act in good faith. The Court decided that it was not subject to such an implied term, and interesting, distinguished a termination right from a contractual discretion.

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