Judgments

[1997] 3 F.C. 154

A-533-96

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 (Appellants) (Defendants)

v.

Sail Labrador Limited (Respondent) (Plaintiff)

Indexed as: Sail Labrador Ltd. v. Challenge One (The) (C.A.)

Court of Appeal, Pratte, Décary JJ.A. and Chevalier D.J.—Montréal, March 10 and Ottawa, April 15, 1997.

Contracts — Option to purchase clause in charter party conditional upon full performance of all obligations — One payment late due to bank error — Option treated as void — F.C.T.D. Judge granting equitable relief, relying on de minimis rule, doctrine of “spent breach” — Issue on appeal whether Judge erred in granting relief where charter party obligation breached — De minimis rule one of limited application where parties implicitly agreed substantial performance acceptable — Could not be invoked once found breach committed — Trial Judge misapplied “spent breach” doctrine — Courts examine language of contract not to determine “if equity will intervene” but to identify parties’ true intention — Rights of parties under option to purchase — Basic principle: strict compliance required — Whether compliance required at given time prior to exercise of option matter of construction of each contract — Not for courts to rewrite contracts — Cases on relief against forfeiture inapplicable as courts lack power to excuse non-performance of conditions precedent — Open to parties to commercial contract, bargaining on equal terms, to make time of the essence.

This was an appeal from the judgment of Nadon J. allowing an action for a declaration that Sail Labrador was entitled to exercise the option to purchase contained in a charter party. According to the charter party, Sail Labrador had the option to purchase the Challenge One at the end of the five-year charter period “subject to full performance of all its obligations in this Charter Party”, including payments being made promptly. Clause 11 set out a schedule of payments. The first payment during the fifth year was late due to a bank error. Before payment was made Navimar notified the respondent that as a result of the failure to make the payment on time, the option to purchase was void. Payment was made the next day. All subsequent payments were made on time. Sail Labrador sought to exercise the option to purchase, but Navimar refused to execute the bill of sale on the basis that Sail Labrador was in breach of the agreement. The Trial Judge found that Sail Labrador had breached clause 11, but resorted to equitable principles, the de minimis rule and the doctrine of “spent breach”, in reaching the conclusion that Sail Labrador had fully performed all of its obligations under the charter party.

The issue was whether the Trial Judge had erred in deciding that Sail Labrador could exercise the option to purchase notwithstanding its failure to perform the obligations set out in the agreement.

Held, the appeal should be allowed.

The Trial Judge improperly applied the de minimis rule, which is a rule of interpretation used to determine whether a breach has been committed, not to qualify a breach as being minimal. It applies to prevent the finding of a breach on the basis that the parties have implicitly agreed, with respect to certain obligations, that substantial performance will be tantamount to strict performance. It is a rule of limited application. Having found that a breach had been committed, the Trial Judge could no longer look to the de minimis rule as supporting the conclusion that the breach was so negligible as to not constitute a breach.

The Trial Judge was also mistaken when he related the doctrine of “spent breach” to equity considerations. Courts examine the language of the contract not to determine “if equity will intervene” as he suggested, but to identify the true intention of the parties. A plaintiff invoking the aid of a court to enforce an option for sale must show that the terms of the option have been strictly observed. Otherwise, the option will be enforced only if failure to fulfil the conditions precedent can be related to the conduct of the owner. Such was not the case herein. Courts have endeavoured to soften the sometimes harsh consequences of the application of this proposition by examining whether the wording of the option and of the entire agreement could support the 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 doctrine of “spent breach” is not an exception to the principle of strict compliance. But whether strict compliance is required at any given time prior to the exercise of the option is a matter of construction of each contract. The language used by the parties in framing the option clause and the agreement is key. Courts must give effect to the parties’ intention. Where the parties have insisted that a condition precedent be fulfilled at a certain time, it should not be open to the courts to decide that it could be fulfilled at a later time.

This was a commercial contract. The parties were dealing at arm’s length. Shipowners and charterers are in a position to look after themselves by contracting only on terms which are acceptable to them. Sail Labrador must have been aware that time of payment was of the essence as far as the option clause was concerned. The wording of clause 30 was inescapable. The option to purchase could be enforced by Sail Labrador only if it had made each and every payment the very day it was due. Upon a true construction of the option to purchase clause and of the charter party, Navimar had the right or privilege to reject an offer to purchase if Sail Labrador failed as it did to make prompt payment according to the schedule in clause 11. The doctrine of spent breach did not apply.

CASES JUDICIALLY CONSIDERED

APPLIED:

Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co. of London, Ltd., [1964] 2 Lloyd’s Rep. 153 (C.A.); Pierce v. Empey, [1939] S.C.R. 247; [1939] 4 D.L.R. 672; Tenax Steamship Co. Ltd. v. Brimnes (Owners), [1975] Q.B. 929 (C.A.).

DISTINGUISHED:

Sport International Bussum BV v Inter-Footwear Ltd., [1984] 2 All ER 321 (H.L.).

CONSIDERED:

A/S Awilco v Fulvia SpA di Navigazione, [1981] 1 All ER 652 (H.L.); Scandinavian Trading Tanker Co AB v Flota Petrolera Acuatoriana, [1983] 2 All ER 763 (H.L.); United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104 (C.A.); Sparkhall v. Watson, [1954] 2 D.L.R. 22; [1954] O.W.N. 101 (Ont. H.C.).

REFERRED TO:

Farr v. Atwood (1988), 63 O.R. (2d) 543 (C.A.); affg (1987), 62 O.R. (2d) 306 (Dist. Ct.); Fridor Investments Ltd. v. Magee, [1969] 2 O.R. 388; (1969), 69 D.L.R. (2d) 387 (C.A.); affg [1968] 2 O.R. 733; (1968), 58 D.L.R. (2d) 325 (H.C.); West Country Cleaners (Falmouth) Ltd. v. Saly, [1966] 1 W.L.R. 1485 (C.A.); B & R Holdings Ltd. v. Western Grocers Ltd.; Westfair Foods Ltd. v. B & R Holdings Ltd. (1982), 25 R.P.R. 121 (Man. Q.B.); North Central Expressways Ltd. v. MacCrostie (1979), 96 D.L.R. (3d) 637 (Sask. Q.B.); Petrillo et al. v. Nelson (1980), 29 O.R. (2d) 791; 114 D.L.R. (3d) 273; 13 R.P.R. 222 (C.A.); Birchmont Furniture Ltd. v. Loewen (1978), 84 D.L.R. (3d) 599; [1978] 2 W.W.R. 483 (Man. C.A.); affg [1977] 3 W.W.R. 651 (Man. Q.B.).

APPEAL from F.C.T.D. judgment allowing an action for a declaration that respondent was entitled to exercise an option to purchase a ship, which was conditional upon full performance of all obligations in the charter party, even though it was found to have breached the clause setting out the schedule of payments (Sail Labrador Ltd. v. Challenge One (The), [1996] 3 F.C. 821 (1996), 115 F.T.R. 128 (T.D.)). Appeal allowed.

COUNSEL:

Alain R. Pilotte for appellants.

Elizabeth M. Heneghan for respondent.

SOLICITORS:

Alain R. Pilotte Law Office, Montréal, for appellants.

Elizabeth M. Heneghan Law Office, St. John’s, for respondent.

The following are the reasons for judgment rendered in English by

Décary J.A.: This is an appeal from a reported judgment of the Trial Division.[1]

The respondent Sail Labrador Limited (Sail Labrador) entered into a bareboat charter party (the charter party) with the appellant Navimar Corporation Ltée (Navimar) to charter the ship Challenge One for five years. Pursuant to clause 30 of the charter party, Sail Labrador had the option to purchase the Challenge One at the end of the five-year period, “subject to full performance of all its obligations in this Charter Party”. Sail Labrador sought to exercise the option to purchase, but Navimar refused to execute the bill of sale on the basis that Sail Labrador was in breach of clauses 8, 9, 11, 15, 25, 28, 30 and 34 of the agreement.

Sail Labrador then sought to obtain in the Trial Division of this Court a declaration that it was entitled to exercise the option to purchase.

The Trial Judge found that two of the clauses, i.e. clauses 11 and 25, had been breached. He nevertheless allowed Sail Labrador’s action. First, he said, it was open to the Court to grant equitable relief. Then he examined the rules pertaining to the interpretation of contracts as they apply to options to purchase[2] and expanded on two of these rules: the de minimis rule, whereby the courts consider that minor divergences from the terms of a contract do not constitute breaches; and the doctrine of “spent breach”, whereby courts have softened the principle of strict compliance with all conditions precedent before an option to purchase may be exercised: the person seeking to exercise the option is allowed to exercise it notwithstanding past breaches provided that these breaches have been cured by the time the option is exercised. The Trial Judge appears to have used equitable principles, the de minimis rule and the doctrine of spent breach to reach his ultimate conclusion that “Sail Labrador has fully performed all of its obligations under the charterparty”.[3]

Navimar appealed on two grounds.

First, it claimed that the Trial Judge did not exercise his discretion judicially when he denied its motion for an adjournment at the beginning of the hearing. In view of the conclusion I have reached with respect to the second ground, it will not be necessary to deal with this issue in these reasons.

Second, it argued that the Trial Judge erred in failing to find a breach of clauses 28 and 34 and in exercising the equitable jurisdiction of the Court in the circumstances. Sail Labrador did not challenge the findings of the Trial Judge with respect to the breach of clauses 11 and 25. We dismissed from the bench the appeal with respect to clauses 28 and 34, on the basis that the findings of non-breach were findings of facts which were open to the Trial Judge.

The remaining issue, therefore, is whether the Trial Judge erred in deciding that Sail Labrador could exercise the option to purchase notwithstanding its failure to perform the obligations set out in clauses 11 and 25.

Clauses 11, 25 and 30 read as follows:

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.

…

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 [sic] 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. [A.B., Vol. 1, at pp. 47, 48, 54 and 55.]

I shall deal first with the breach of clause 11.

The relevant facts are as follows. Clause 11 provided for payments of hire by Sail Labrador to Navimar. Sail Labrador was obliged to make seven payments of hire to Navimar each year of the charter party. Payments were made on time for the first four years. The first payment during the fifth year (1989) was to be made on June 10. The evidence indicated that the cheque received by Navimar for the payment due on June 10 hire was returned by Sail Labrador’s bank by reason of insufficient funds. Sail Labrador explained that, at that time, it had incurred extraordinary expenses to refit the Challenge One. In order to meet these expenses, it had obtained from its bank an extension of its line of credit. However, due to an error made by a bank employee, when the cheque made payable to Navimar was presented, it was refused by reason of insufficient funds.

On June 28, 1989, Navimar’s counsel sent the following letter to Sail Labrador:

We have been advised by Navimar that you have failed to pay the charter hire in the amount of $12,142.85 due on 10 June 1989. The cheque received by Navimar from you for that payment has been returned by reasons of insufficient funds. Our client was also informed yesterday that the balance in Sail Labrador’s bank account is still insufficient to cover the above-mentioned payment despite the fact that Sail Labrador had received a cheque of $50,000 from the Government on June 15, 1989.

Navimar has instructed us to advise that owing to your failure to make the 10 June 1989 payment of the charter hire, the option to purchase contained in clause 30 of the Charter Party is void and of no further effect.

Further, three days following your receipt of this letter, unless the payment of the amount due and the accrued interest of $4.91 per day is transferred in the meantime into the bank account of Navimar Corporation Limited at the Bank of Montreal, 800 Place D’Youville, Quebec account #1081-864, Navimar will instruct John Roil, Q.C. to deliver to us on behalf of Navimar the Certificates lodged with Mr. Roil, representing all issued shares in the capital stock of Sail Labrador Limited, pursuant to the terms of a pledge agreement executed by the share holders of Sail Labrador Limited in favour of Navimar …. [Emphasis added.] [A.B., Vol. 1, at p. 60.]

Although the evidence is not clear on this point, it appears that the payment was made by Sail Labrador on or about June 29, 1989, after the letter dated June 28, 1989, was received. All subsequent payments were made on time.

It was not until October 31, 1989, that Sail Labrador replied to the letter dated June 28, 1989. It did so in the following terms:

In your letter of June 28, 1989 you took the position, on behalf of Navimar, that as a result of an alleged failure on the part of Sail Labrador Limited to pay charter hire in the amount of $12,142.85 on June 10, 1989, the option to purchase contained in clause 30 of the Charter Party is void and that if payment of the allegedly due funds was not forthcoming within three days following receipt of your letter, Navimar would instruct John Roil, Q.C. to turn over all pledged shares to Navimar.

As you now know, as a result of a letter sent by The Royal Bank of Canada, Sail Labrador’s bankers, dated June 30, 1989 to you (further copy enclosed) the only reason why the payment of $12,142.85 was not made was because of an error on the part of the bank. The matter has now been rectified and your clients are now in receipt of the payment in dispute as well as all subsequent payments. Indeed, we note that your client has not made any attempts to have Mr. Roil turn over the pledged shares.

In view of this, whatever technical breach existed, if any, has now been cured and our clients’ right to exercise the option to purchase the vessel and to have Mr. Roil to continue to hold the pledged shares has now been reinstated. In any event, we are confident that any court would be prepared to grant relief from forfeiture in such circumstances. [A.B., Vol. 1, at pp. 120-121.]

The Trial Judge, who did not refer to the above-mentioned letters, made the following finding:[4]

The matter was promptly addressed and Navimar received the payment of the June 10, 1989 hire. In the circumstances, there was a breach of clause 11 which, however, Sail Labrador quickly remedied.

He eventually dismissed Navimar’s arguments as follows:[5]

Counsel for Navimar took the position that any breach of the charterparty by the plaintiff constituted a bar to the exercise of the option set forth in clause 30. On the other hand, counsel for the plaintiff argued that clause 30 required substantial performance only. Counsel further argued that minor breaches should not constitute a bar to the exercise of the option by her client.

I cannot agree with the position advanced by counsel for Navimar. In my view, clause 30 requires the plaintiff to substantially perform its obligations under the charterparty. As I have already made clear, it is my view that, save for clauses 11 and 25, the plaintiff is not in breach. With regard to clause 11, the plaintiff was late in respect of one payment of hire during the five-year period of the charterparty. That breach was remedied by the plaintiff when it was made aware of the banking error. Thus, when the plaintiff, on January 5, 1990, exercised the option to purchase by giving written notice thereof to Navimar, it was not in breach of clause 11 of the charterparty. The obligation to pay the hire had, by then, been performed.

I pause here to observe that the Trial Judge improperly applied the de minimis rule. That rule is a rule of interpretation. It is used to determine whether a breach has been committed, not to qualify a breach as being minimal. It applies to prevent the finding of a breach on the basis that the parties have implicitly agreed, with respect to certain obligations, that substantial performance will be tantamount to strict performance. It is a rule of limited application. To use the words of Sellers L.J. in Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co. of London, Ltd.:[6]

It seems to me that in all cases the Court is called upon to consider the substance of the matter and will not regard or give effect to what are undoubtedly, in the view of the Court, trivialities, matters of little moment, of a trifling and negligible nature.

Diplock L.J. appears to have used an even more restrictive test when dealing with commercial contracts:[7]

Did he perform it within that margin of error which in those circumstances it was not commercially practicable to avoid?

Having found that a breach had been committed, the Trial Judge could no longer look at the de minimis rule to conclude that the breach was so negligible as to not constitute a breach.

The Trial Judge was also mistaken when he related the doctrine of “spent breach” to equity considerations. Courts examine the language of the contract not to determine “if equity will intervene”,[8] as he suggested, but to identify the true intention of the parties.

A good starting point in identifying the rights of the parties under an option to purchase is the following proposition made by Duff C.J. in Pierce v. Empey:[9]

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 ….

Absent strict compliance, therefore, the holder of an option to purchase can successfully seek enforcement of the option only if his failure to fulfil the conditions precedent can be related to the conduct of the owner.[10] No such relation has been established in the case at bar.

Chief Justice Duff’s proposition is still, in my view, good law. As I read the subsequent jurisprudence, courts have endeavoured to soften the sometimes harsh consequences of its application by examining whether the wording of the option and of the entire agreement could support the 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 doctrine of “spent breach” does not derogate from the proposition of the Chief Justice and is sometimes incorrectly referred to as an exception to the principle of strict compliance. On the contrary, the basic principle has remained the same throughout: strict compliance is required. But whether it is required at any given time prior to the exercise of the option is a matter of construction of each contract.[11]

The language used by the parties in framing the option clause and the entire agreement is key. Courts must give effect to the intention of the parties. Where the parties have insisted that a condition precedent be fulfilled at a certain time, it should not be open to the courts to decide that it could be fulfilled at a later time.[12] To say, for example, that a late payment is of no consequence provided that it is made at the time the option is exercised, will amount in many instances to a rewriting of the contract. As Cairns L.J. in The Brimnes[13] noted, “[w]hile 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”.

Counsel have referred us to a multitude of decisions dealing with relief against forfeiture. These decisions are of little use in the present instance. As Judson J. stated in Sparkhall v. Watson,[14] “[t]he Court has power to relieve against forfeiture, but no power to excuse performance of conditions precedent”.[15]

Counsel for the appellants relied heavily on the decisions of the House of Lords in A/S Awilco v Fulvia SpA di Navigazione;[16] Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana;[17] and Sport International Bussum BV v Inter-Footwear Ltd.[18] These cases are authority for the proposition that the doctrine of relief against forfeiture is not applicable to time charters; the House of Lords did not address the issue of conditions precedent to an option to purchase and made clear in any event that it was not dealing with demise charters. The decision in Scandinavian Trading Tanker is, however, very helpful in setting guidelines with respect to the interpretation of commercial contracts. The following excerpt of Lord Diplock’s speech is particularly relevant in the case at bar:[19]

Prima facie parties to a commercial contract bargaining on equal terms can make “time to be of the essence” of the performance of any primary obligation under the contract that they please, whether the obligation be to pay a sum of money or to do something else. When time is made of the essence of a primary obligation, failure to perform it punctually is a breach of a condition of the contract which entitles the party not in breach to elect to treat the breach as putting an end to all primary obligations under the contract that have not already been performed.

The A/S Awilco[20] is also a good illustration of how severe courts may be when interpreting clauses which require charterers to make “punctual payment”. The issue was whether the obligation put on the owners, as a result of a mistake by the charterers’ bank, to pay interest of between $70 and $100 to their bank, constituted a breach by the charterers of their obligation to make “punctual payment” entitling the owners to withdraw the vessel. The House of Lords found that it did.

In the case at bar, the wording of clause 30 is inescapable. The option to purchase can only be enforced by Sail Labrador if it has made each and every payment the very day it was due. The words “promptly”, “in accordance with the schedule” and “throughout this Agreement” can bear no other meaning.

This is a commercial contract. The parties, here, were dealing at arm’s length. Shipowners and charterers are in a position to look after themselves by contracting only on terms which are acceptable to them. Sail Labrador could not but have been aware that time of payment was of the essence as far as the option clause was concerned. The parties had indeed given Navimar double protection should Sail Labrador fail to pay on time: Navimar could withdraw the vessel under clause 11 or it could refuse to sell the vessel at the end of the lease under clause 30. Had Navimar decided to forfeit the vessel as it was allowed to do under clause 11, relief against forfeiture might have been sought (I, of course, express no opinion as to whether the relief would have been granted). But Navimar chose, as it had the right to do under the contract, to act under clause 30, and it informed Sail Labrador of its choice even before the latter had made the late payment. That Sail Labrador waited four months to take exception with Navimar’s decision goes a long way in demonstrating how consistent Navimar’s decision was with the intention of the parties to the contract.

I therefore have reached the conclusion, upon a true construction of the option to purchase clause and of the charter party, that Navimar had the right or privilege to reject an offer to purchase if Sail Labrador failed, as it did, to make prompt payment according to the schedule provided in clause 11. This is not a case where the doctrine of spent breach can find application. Nor is it a case where Sail Labrador’s failure can be blamed on Navimar’s conduct.

As my conclusion with respect to the breach of clause 11 disposes of the appeal, I need not examine whether the breach of clause 25 would entail similar results.

The appeal should therefore be allowed, the judgment of the Trial Division should be reversed and the action for a declaration that the respondent was entitled to exercise the option to purchase should be dismissed. The appellants should be entitled to their costs both here and below.

Pratte J.A.: I agree.

Chevalier D.J.: I agree.

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