Frustrating but not Frustrated

Ontario courts not buying the “frustration” and “duress” arguments being bandied-about by aggressive lawyers for their buyer wannabe clients.

There is an ancient tenet of contract law known as “frustration” which can be used to cancel an otherwise binding contract. Greatly simplified, this doctrine provides that if there is a situation where, through no fault of either party, unanticipated circumstances occur which make it all but impossible to fulfill the contract, then the contract can be cancelled, with no liability on either side.

In Taylor v. Caldwell, the famous 1863 U.K. case widely said to be the progenitor of all frustration cases, a fancy concert venue was rented-out to host a specific gala musical performance but then suddenly and mysteriously burned down to the ground on the eve of the event. When the owner of the venue asked for payment nonetheless, the musical performers argued that the rental contract was frustrated because the unanticipated intervening catastrophic fire made it impossible to host the concert at the now charred remains of the venue. The court concluded that the contract had been frustrated, and therefore cancelled, with no party liable to the other.

Fast forward 150 years to the other side of the Atlantic, where the Ontario Court of Appeal, in the 2019 Roskaft v. RONA Inc. case, held that an employment contract can also be “frustrated” where a regular employee suddenly becomes totally debilitated, with no realistic likelihood of returning to work within any reasonable period of time. In this case, the employment contract was frustrated, and the employer was relieved of common law notice and severance obligations to that long-time employee.

The classic “frustration” argument being trotted-out by over-stretched buyers not being able to finance closings.

In both cases, frustration assumes that the parties have not otherwise considered the possibility of such an event happening and have not otherwise made alternative arrangements in case of such events. So, for instance, in Taylor v. Caldwell (i.e. the burned-out concert hall case), had the parties contracted for alternative venues or alternative dates or insurance in the case of casualty (as is likely the case with more modern concert hall rental contracts), the court might not have been so fast to conclude frustration.

While the doctrine of frustration has been well established in common law for over 150 years and has application in almost any kind of contract imaginable, a couple of recent Ontario court decisions have confirmed that buyers cannot use suddenly falling market conditions as an excuse to declare their real estate purchase contracts frustrated. While such a conclusion might be seen by most Building readers as trite, it did not seem to deter at least a couple of Ontario lawyers from arguing frustration to try and break ill-timed purchase contracts for their buyer clients.

In Bang v. Sebastian, a 2018 Ontario case involving a Mississauga resale, the clearly over-extended buyer contracted at what was arguably the height of the market in 2017 for the purchase of two properties from two separate vendors. She sold her existing home and managed to close one of the new properties, but then, apologetically, turned to the un-closed vendor and explained that her inability to get suitable financing in a falling market meant that her contract with that vendor was frustrated and, therefore, she would not be closing and would like her deposit back, with no further liability.

In Paradise Homes North West v. Sidhu, a 2019 Ontario case involving a Brampton new-build, the first-time homebuyer contracted, again at what was arguably the height of the market in 2017, for the purchase of a pre-construction townhome. He made most of the deposits but then defaulted on the final deposit and again on closing. He too explained that his inability to get suitable financing in a falling market meant that his contract was frustrated and, therefore, he would not be closing and would like his deposits back, with no further liability.

The buyers’ remarkably similar “frustration” arguments in both cases failed miserably. Although decided by different judges, both decisions, significantly paraphrased, focused on the fact that the risk of falling markets cannot be something that reasonable people would consider an “unanticipated circumstances” resulting in an impossible contract. In the Mississauga case, the judge was critical of the buyer for alleging “unanticipated circumstances” when the buyer deliberately deleted the financing condition in order to make her offer more attractive — how can difficulty obtaining financing be an “unanticipated circumstance” to a buyer who had, but then deliberately deleted, an express financing condition?! In the Brampton case, the judge was critical of the buyer for alleging “unanticipated circumstances” when the buyer was himself a graduate business student — how can difficulty obtaining financing in a falling market be an “unanticipated circumstance” to a buyer who studied business?!

The Mississauga case also had an interesting twist: the buyer argued that she only deleted the financing condition “under duress,” presumably from the vendors and agents who advised her that her offer won’t be competitive if conditional on financing in a hot market. Duh! No kidding! While contracts can be cancelled if signed “under duress,” this type of defense is rare and limited for the proverbial signing “with a gun (a real gun) to one’s head” scenarios. The court rightly distinguished the very real economic pressures of a hot market from the “unfair, excessive or coercive” conduct that is required for true duress and refused to entertain the buyer’s argument that she signed “under duress.”

On the one hand, the development and construction industry can be reasonably comforted by these Ontario decisions.  On the other hand, the very fact that many of the deals signed-up in 2017 are not closing (many of the pre-construction contracts signed in 2017 are only now coming-up for closing), and buyers are even thinking that such arguments like “frustration” and “duress” are worth litigating are, well, cause for pause.


Megan J. Lem is a corporate lawyer in the New York office of Kirkland & Ellis LLP.
Megan J. Lem practices corporate securities law at Kirkland & Ellis LLP and is called to the bar in New York and Ontario.

 

Jeffrey W. Lem is a lawyer in the Ontario Public Service and bencher of Law Society of Upper Canada.
Jeffrey W. Lem is Editor-in-Chief of the Real Property Reports and the Director of Titles for the Province of Ontario. The opinions expressed in this article are personal to the author and not attributable or referable to the government of the Province of Ontario.
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