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Contracts - Performance and discharge - Performance - Inability to perform

Thursday, September 01, 2016 @ 8:00 PM  

Appeal by the defendant, Aujla, from a finding of contractual liability. The plaintiff 0909043 BC Ltd owned commercial property in Chilliwack and the defendant Snowland Sporting Goods (Snowland) owned a hotel property in Williams Lake. Aujla had an ownership interest in the Williams Lake property through a holding company. The parties entered into two written contracts to contemporaneously swap ownership of the properties through share transfers and purchases. A term in each contract provided for payment of $500,000 in the event of default. The plaintiff Badesha claimed that he was willing and able to complete, but that Aujla failed to proceed. Aujla took the position the agreements were unenforceable and that the $500,000 provision was an impermissible penalty clause. The trial judge found that the agreements were sufficiently certain as to their terms, and that the $500,000 clause was not disproportionate to the damages recoverable for Aujla’s breach. The plaintiffs were awarded damages of $1 million based on the default provisions in each contract. Aujla appealed.

HELD: Appeal allowed. The written documents did not describe transactions that were intelligible in law. One agreement was fatally undermined by the requirement that Snowland sell 100 per cent of its shares to Badesha. The requirement confused the corporate entity with its owners. Aujla was unable to sell shares of Snowland, as a holding company owned its shares. The legal distinction between a corporation and its owners rendered the contract incapable of performance as drafted. The other contract was similarly flawed. It was not possible to discern from the pleadings and the trial judge’s findings of fact how the two contracts should be rectified in respect of the parties, their obligations, and the structure of the intended transaction. The existence of widely divergent alternatives demonstrated that the contract was not suitable for rectification. The trial judge erred in rectifying the contract under the circumstances. There were no enforceable contracts to support a claim for damages for non-performance. Even if the proper corporate vendor could be determined, Aujla could not be liable for either company’s non-performance. The order under appeal was set aside and the plaintiffs’ claim was dismissed.