22 Aug OCA decision highlights need for precise language in contracts

A properly drafted contract can make the difference between a good transaction or business relationship and one that deteriorates into a legal battle, Barrie commercial litigator Scott Hawryliw tells AdvocateDaily.com.

“People come in to see me because someone they’re in business with is not doing what they’re supposed to be doing in the contract,” says Hawryliw, founder of SRH Litigation. “Most of the time the contracts are not very thorough or comprehensive and don’t adequately define the understanding of the parties in terms of what everyone is supposed to be doing.

“I think the smart business practice is to try to be proactive in drafting contracts to try to avoid litigation.”

He points to a recent decision by the Ontario Court of Appeal that involved the purchase and sale of a house in Toronto.

At issue was the buyer’s discovery after signing the purchase and sale agreement that the house had previously been used for a marijuana grow operation. About a month after the $916,000 deal had gone through, the buyer’s real estate representative made the discovery after doing some online research. Toronto police confirmed that the residence had been used as a grow-op in 2004.

The purchaser dispatched a letter indicating he didn’t want to close the deal but the sellers refused to terminate the agreement and return the $30,000 deposit, Hawryliw says, noting they also sought damages for any loss they might suffer as a result of the delayed re-sale of the property.

The sellers ultimately sold the property to another purchaser for $86,100 less, according to court transcripts.

While the lower court ruled in favour of the purchaser, the Ontario Court of Appeal set aside that judgment earlier this year, based on “the seller’s state of knowledge and belief.”

“It was open to the parties to craft the representation and warranty so that it either spoke to the Sellers’ state of knowledge and belief on closing, or required the Sellers to give some sort of declaration or bring-down certificate about the state of their knowledge on closing. The Purchaser did neither,” wrote Justice David M. Brown for the Court of Appeal panel.

The court’s decision was based on the wording of the illegal substances clause of the purchase and sale agreement, making it relevant only if the seller had knowledge of the illicit use of the property. If it was more precise, observes Hawryliw, the purchaser may have had a way out of the deal.

“Something I see regularly is that there are aspects that are not thoroughly addressed and things start to go sideways,” he says.

Hawryliw says he often comes across gaps in agreements laying out business relationships and that when the case goes to court, neither party has control and it is the court that ultimately declares how the issue will be resolved.

“Clearer contracts will help to avoid litigation,” he states. “Detail is definitely good, but so is ensuring the parties fully understand their rights and obligations under the contract.”