Sail Labrador Ltd. v. Challenge One (The), [1999] 1 SCR 265

Sail Labrador Ltd. v. Challenge One (The), [1999] 1 S.C.R. 265

Sail Labrador Limited Appellant

v.

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  Respondents

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

File No.:  26083.

Hearing and judgment:  October 9, 1998.

Reasons delivered:  February 4, 1999.

Present:  Lamer C.J. and Gonthier, Cory, Iacobucci, Major, Bastarache and Binnie JJ.

on appeal from the federal court of appeal

Contracts ‑‑ Option to purchase ‑‑ Conditions precedent ‑‑ Substantial performance ‑‑ Charter party providing for option to purchase vessel at end of lease ‑‑ Option made subject to “full performance” of all obligations under charter party ‑‑ One of lease payments made late owing to bank error ‑‑ Whether doctrine of substantial performance applies ‑‑ Whether option to purchase still valid.

The appellant entered into a five‑year agreement with the respondent Navimar to charter a vessel.  Under clause 30 of the charter party, the appellant had an option to purchase the vessel at the end of the five‑year period subject to “full performance of all its obligations in th[e] Charter Party including but not limited to payments being made promptly and in accordance with the schedule of Clause 10 throughout th[e] Agreement”.  Clause 10 specified the annual payment rate, while clause 11 set out a payment schedule of seven monthly instalments each year.  The accepted practice between the parties was for the appellant to submit seven post‑dated, uncertified cheques to the respondent at the beginning of each operating season.  While there were no problems with the cheques for the first four years, the cheque for the first payment in the fifth year was returned by reason of insufficient funds.  The trial judge found that the bank’s refusal to honour the appellant’s cheque was due to an error by a bank employee.  The respondent wrote to the appellant informing it that the option to purchase was void and of no further effect because of the appellant’s failure to make the payment as required.  In this same letter, the respondent gave the appellant instructions on how it could remedy its late payment.  The appellant promptly made the payment with interest in accordance with the respondent’s instructions.  All subsequent payments were made on time.  Under clause 25 of the charter party, the appellant had to supply deck and engine room logs if required by the respondent.  After the appellant’s late payment the respondent made such a request; it argued at trial that the appellant had breached clause 25 by failing to provide all copies of the logs as requested.  At the end of the five‑year lease the appellant gave the respondent notice of its intention to exercise the option to purchase and tendered payment.  The respondent refused to execute a bill of sale.  The Federal Court, Trial Division, granted the appellant’s action for a declaration that it was entitled to exercise the option.  The Federal Court of Appeal allowed the respondent’s appeal.

Held:  The appeal should be allowed.

Per Lamer C.J. and Gonthier, Cory, Iacobucci, Major and Bastarache JJ.:  While an option may be a unilateral contract, it may also be an element of a bilateral contract in which it is contained.  Whether a contract which contains an option clause establishes a single, bilateral contract or two separate contracts, one bilateral and the other unilateral, is a matter of construction.  Courts must examine the text of the contract and the context surrounding it in order to determine the intention of the parties, keeping in mind that this Court has previously approved of the tendency by courts to treat offers as calling for bilateral rather than unilateral performance whenever a contract can fairly be so construed.  In this case, the lease and the option form a single, bilateral contract.  The option and the charter party in which it is contained are intimately connected to one another.  The option requires consideration to be binding on both parties, but it can be assumed that it is based on the same consideration as the underlying lease, namely the lease payments.  Further connections between the option and the charter party are the fact that the option is specifically made dependent on the performance of the terms of the charter party and the fact that the option and the charter party involve the same property.  This single contract contains many terms, some relating to the lease, others to the option.  The option itself forms part of the consideration flowing from the respondent to the appellant under this bilateral contract.

Time is not of the essence of a contract unless the parties have expressly made it of the essence or the nature of the property or circumstances allow for such a presumption.  Commercial parties should be familiar enough with the applicable law to know that they must use very precise words if their intention is to make time the essence of a contract.  The words used in the option clause are simply not precise enough to satisfy this Court that these parties intended to make timely lease payments the essence of this contract.  This conclusion is bolstered by the respondent’s admission that contracts used in this industry often include the actual words “time is of the essence” when that is in fact the parties’ intention.  Even if it could be said that the words of the option clause are adequate to make time of the essence in relation to the lease payments, the actual wording of the clause could only support a finding that time is of the essence in relation to clause 10.  The trial judge properly found no breach of clause 10 because the appellant’s single late payment did not breach the clause 10 requirement to pay $85,000 for the year in which the late payment occurred.  Since the presumption that time is not of the essence has not been displaced, the bilateral nature of the contract in this case requires that the substantial non‑performance doctrine be applied.

The trial judge’s finding that there was substantial compliance with clause 25 should not be disturbed.  The vessel in question falls within the scope of s. 261(1)  of the Canada Shipping Act , which dictates that the logs must remain on board the vessel.  Furthermore, clause 25 makes no reference to the removal of the logs from the vessel or the making of copies of the logs, but refers to the actual logs only.  The clause 25 requirement that the appellant supply the logs to the respondent upon request should therefore have been interpreted as requiring them to be made available on board the vessel.

Although clause 11 of the charter party specifically states that the appellant is to make monthly payments “in cash in Canadian currency by way of Bank Transfer and/or certified cheques”, the fact that the respondent accepted the practice of making payment by post‑dated, uncertified cheques indicates that it was not insistent on strict compliance with the method of payment set out in clause 11.  It follows that the respondent cannot now insist on a strict application of clause 11.  The modified method of payment accepted by the parties involved a risk of delay in clearing the cheques.  The respondent must bear the consequences of this risk equally with the appellant because it materialized as a result of their mutually accepted alteration of the strict terms of the agreement.  The appellant had sufficient funds in its account to cover its cheque and had no reason to suspect a bank error might delay payment of those funds to the respondent.  The appellant always had the intention to pay on time and took all the steps that it could reasonably have been expected to take given the modified payment arrangement into which the parties had entered.  Upon being notified by the respondent that its cheque had been refused, the appellant promptly paid the amount due plus interest in accordance with the respondent’s instructions.  The appellant also made all of the remaining payments under the charter party on time.  In these circumstances, the appellant substantially performed its modified clause 11 obligations.

The respondent has no right to cancel the appellant’s option to purchase the vessel in this case.  This result is consistent with the true intentions of these parties as revealed by all of the circumstances and with the applicable policy reasons.  The respondent has received a significant benefit from the appellant’s defective performance which it cannot restore.  Furthermore, there is no proportionality between the impact of the appellant’s defective performance on the respondent and the benefit the appellant will lose if the respondent is permitted to void the option.  The deficient performance did not give rise to uncertainty because there was no reason for the respondent to believe that the single late payment, which was caused by a bank error rather than any fault of the appellant, would put future lease payments in doubt.  The concern in this instance must be with fairness.  On the facts of this case, the respondent was simply not deprived of what it bargained for.

Per Binnie J.:  The question of whether a contractual term is satisfied by substantial performance, or whether strict (or “complete” or “exact”) performance is required, is a matter of interpretation.  Everything turns on the intention of the parties as expressed (in this case) in the charter party.  Here, the contracting parties stipulated “full performance” as a condition precedent to the exercise of the option, and this stipulation should be respected by the courts.  The words “all obligations” refer to all of the things required under the contract, and the words “full performance” must therefore refer to the sufficiency of performance of each of them.  Substantial performance is less than full performance, according to the ordinary meaning of the words.  An option is a unilateral obligation, irrespective of whether it is contained in a unilateral or a bilateral contract.  The general approach in Pierce v.  Empey was therefore agreed with.  It is not without significance that in this case the parties stipulated for “full performance” in relation to the exercise of the option (i.e., by including the stipulation in the option clause itself) rather than in relation to their contract generally.  While in some contracts the parties can be interpreted to have agreed to the option being governed by the more flexible standard of “substantial” performance, they did not do so here.  However, on a proper interpretation of the charter party the conditions precedent to the exercise of the option were satisfied in “full” (or, in the instance of the banking arrangements, the owners were estopped from saying otherwise), and the charterers were thus entitled to exercise the option.

Cases Cited

By Bastarache J.

Applied:  A/S Tankexpress v. Compagnie Financière Belge Des Pétroles S/A (1948), 82 Lloyd’s L.R. 43; distinguished:  Pierce v. Empey, [1939] S.C.R. 247; referred to:  Canadian Long Island Petroleums Ltd. v. Irving Industries (Irving Wire Products Division) Ltd., [1975] 2 S.C.R. 715; Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187; Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co., of London, Ltd., [1964] 2 Lloyd’s Rep. 153; Tenax Steamship Co. v. The Brimnes (Owners), [1975] Q.B. 929; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104; Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444; West Country Cleaners (Falmouth) Ltd. v. Saly, [1966] 1 W.L.R. 1485; Monk Corp. v. Island Fertilizers Ltd., [1991] 1 S.C.R. 779; Dawson v. Helicopter Exploration Co., [1955] S.C.R. 868; Daku v. Daku (1964), 49 W.W.R. 552; Friesen v. Bomok (1979), 95 D.L.R. (3d) 446; Nieckar v. Sliwa (1976), 67 D.L.R. (3d) 378; Nilsson v. Romaniuk (1984), 59 A.R. 39; Re Kennedy & Beaucage Mines Ltd., [1959] O.R. 625; Davis v. Shaw (1910), 21 O.L.R. 474; Lombard North Central Plc. v. Butterworth, [1987] Q.B. 527; United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904; Parkin v. Thorold (1852), 16 Beav. 59, 51 E.R. 698; Stickney v. Keeble, [1915] A.C. 386; Scandinavian Trading Tanker Co AB v. Flota Petrolera Ecuatoriana — The Scaptrade, [1983] 2 All E.R. 763; LeMesurier v. Andrus (1984), 31 R.P.R. 143, rev’d on other grounds (1986), 54 O.R. (2d) 1; Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (1921); Lang v. Provincial Natural Gas and Fuel Co. of Ontario (1908), 17 O.L.R. 262; Sprague v. Booth (1908), 21 O.L.R. 637, aff’d [1909] A.C. 576; Hare v. Nicoll, [1966] 2 Q.B. 130; Krause v. Bain Bros. Alta. Ltd. (1972), 29 D.L.R. (3d) 500; Bass Holdings Ltd. v. Morton Music Ltd., [1987] 2 W.L.R. 397; Birchmont Furniture Ltd. v. Loewen (1978), 84 D.L.R. (3d) 599; Petrillio v. Nelson (1980), 114 D.L.R. (3d) 273; Runnymede Iron & Steel Ltd. v. Rossen Engineering and Construction Co., [1962] S.C.R. 26; Gillespie v. Wells (1912), 2 D.L.R. 519; Zim Israel Navigation Co. v. Effy Shipping Corp. — The “Effy”, [1972] 1 Lloyd’s Rep. 18.

By Binnie J.

Applied:  Pierce v. Empey, [1939] S.C.R. 247; referred to:  United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104; Dominion Grange Mutual Fire Insurance Association v. Bradt (1895), 25 S.C.R. 154; Regina Industries Ltd. v. City of Regina, [1947] S.C.R. 345.

Statutes and Regulations Cited

Canada Shipping Act , R.S.C., 1985, c. S‑9 , s. 261(1) .

Federal Court Act , R.S.C., 1985, c. F‑7 , s. 3 .

Judicature Act, R.S.A. 1980, c. J‑1, s. 22.

Judicature Act, R.S.N. 1990, c. J‑4, s. 91.

Judicature Act, R.S.N.B. 1973, c. J‑2, s. 32.

Judicature Act, R.S.N.S. 1989, c. 240, s. 43(8).

Law and Equity Act, R.S.B.C. 1996, c. 253, s. 31.

Law of Property Act, 1925 (U.K.), 15 & 16 Geo. 5, c. 20, s. 41.

Mercantile Law Amendment Act, C.C.S.M, c. M120, s. 5.

Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, s. 15.

Queen’s Bench Act, R.S.S. 1978, c. Q‑1, s. 45(6).

Supreme Court Act, R.S.P.E.I. 1988, c. S‑10, s. 29(2).

Authors Cited

Annotation, “The Law of Options”, [1930] 1 D.L.R. 1.

Cozzillio, Michael J.  “The Option Contract:  Irrevocable Not Irrejectable” (1990), 39 Cath. U. L. Rev. 491.

Di Castri, Victor.  The Law of Vendor and Purchaser, vol. 1.  Toronto:  Carswell, 1988 (loose‑leaf updated July 1998, release 3).

Halsbury’s Laws of England, vol. 9(1), 4th ed. (reissue).  By Lord Mackay of Clashfern.  London:  Butterworths, 1998.

Perell, Paul M.  “Options, Rights of Repurchase and Rights of First Refusal as Contracts and as Interests in Land” (1991), 70 Can. Bar Rev. 1.

Perell, Paul M.  “Putting Together the Puzzle of Time of the Essence” (1990), 69 Can. Bar Rev. 417.

Treitel, G. H.  The Law of Contract, 9th ed.  London:  Sweet & Maxwell, 1995.

Waddams, S. M.  The Law of Contracts, 3rd ed.  Toronto:  Canada Law Book, 1993.

APPEAL from a judgment of the Federal Court of Appeal, [1997] 3 F.C. 154, 212 N.R. 256, [1997] F.C.J. No. 451 (QL), reversing a judgment of the Federal Court, Trial Division, [1996] 3 F.C. 821, 115 F.T.R. 128, [1996] F.C.J. No. 919 (QL), granting a declaration that an option to purchase could be exercised.  Appeal allowed.

Elizabeth M. Heneghan, Q.C., for the appellant.

Alain R. Pilotte and Julie Bergevin, for the respondents.

The judgment of Lamer C.J. and Gonthier, Cory, Iacobucci, Major and Bastarache JJ. was delivered by

//Bastarache J.//

1                                   Bastarache J. -- The main issue in this appeal is the effect of deficient performance of the terms of a lease upon an owner’s right to cancel a purchase option which is expressly made exercisable subject to full performance of the terms of the lease.

Facts

2                                   The respondent Navimar is the owner of the vessel Challenge One.  On June 21, 1985, the appellant Sail Labrador entered into a five-year charter party agreement with the respondent to charter this vessel.  Under clause 30 of the charter party, the appellant had an option to purchase the Challenge One at the end of the five‑year period subject to full performance of all its obligations in the charter party.  The relevant provisions of the charter party are:

Hire

10.  The Charterer shall pay to the Owner for the use of the vessel a rate of $85,000. Canadian currency per year for each year commencing on and from the day of delivery or June 10, 1985 which ever is the later;  hire to continue until the date of redelivery.  If the vessel is lost the hire payable for the year of the loss being calculated prorata of the number of days the vessel was available of 208 days.  Should the vessel be lost after December 1st of any operating year (which concludes on January 3rd of the following calendar year) the annual Charter of that operating year is payable in full.

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.

First year of Charter 1985

1.  1985     August              10th      $12,142.85

2.  1985     September        10th      $12,142.85

3.  1985     October           10th      $12,142.85

4.  1985     November        10th      $12,142.85

5.  1985     December        10th      $12,142.85

6.  1986     January             10th      $12,142.85

7.  1986     February          10th      $12,142.90

Second year of Charter 1986

1.  1986     August              10th      $12,142.85

2.  1986     September        10th      $12,142.85

3.  1986     October           10th      $12,142.85

4.  1986     November        10th      $12,142.85

5.  1986     December        10th      $12,142.85

6.  1987     January             10th      $12,142.85

7.  1987     February          10th      $12,142.90

Third year of Charter 1987

1.  1987     August              10th      $12,142.85

2.  1987     September        10th      $12,142.85

3.  1987     October           10th      $12,142.85

4.  1987     November        10th      $12,142.85

5.  1987     December        10th      $12,142.85

6.  1988     January             10th      $12,142.85

7.  1988     February          10th      $12,142.90

Fourth year of Charter 1988

1.  1988     August              10th      $12,142.85

2.  1988     September        10th      $12,142.85

3.  1988     October           10th      $12,142.85

4.  1988     November        10th      $12,142.85

5.  1988     December        10th      $12,142.85

6.  1989     January             10th      $12,142.85

7.  1989     February          10th      $12,142.90

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 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.

3                                   Clause 11 of the charter party required the appellant to make a total of 35 monthly payments to the respondent, seven payments during each year of the five-year charter party.  The accepted practice between the parties was for the appellant to submit seven post-dated, uncertified cheques to the respondent at the beginning of each operating season.  There were no problems with the cheques for the first four years.  However, the cheque for the first payment in the fifth year, due on June 10, was returned by reason of insufficient funds.  The trial judge found that the bank’s refusal to honour the appellant’s cheque was due to an error by a bank employee.

4                                   In a letter dated June 28, 1989, the respondent notified the appellant that its cheque had been refused.  The respondent informed the appellant that the option to purchase was void and of no further effect because of the appellant’s failure to make the payment as required on June 10, 1989.  In this same letter, the respondent gave the appellant instructions on how it could remedy its late payment.  The appellant promptly made the payment with interest in accordance with the respondent’s instructions.  All subsequent payments were made on time.

5                                   On October 31, 1989, the appellant wrote to the respondent expressing its view that the option to purchase remained effective.  The appellant noted that the default had been due to a bank error and that the error had been promptly remedied in accordance with the respondent’s instructions.

6                                   Under clause 25 of the charter party, the respondent had the right to be supplied with the vessel’s deck and engine room logs upon request.  Prior to the June 1989 late payment, the respondent had made no such requests.  The respondent’s first request under clause 25 was contained in a letter to the appellant dated July 13, 1989.  The respondent argued at trial that the appellant had breached clause 25 by failing to provide all copies of the logs as requested.

7                                   On January 5, 1990, the appellant gave the respondent notice of its intention to exercise the option.  On January 19, the appellant tendered the sum of $200,000.  The respondent refused to execute a bill of sale on the basis that the appellant had breached several clauses of the charter party agreement thereby rendering the option void.

8                                   The appellant commenced an action against the respondent in the Federal Court, Trial Division, seeking a declaration that it was entitled to exercise the option.  The learned trial judge granted the declaration.  The Federal Court of Appeal disagreed and allowed an appeal by the respondent.  The appellant obtained leave to appeal that decision to this Court with regard to the breaches of clauses 11 and 25 of the charter party.

9                                   On October 9, 1998, this Court set aside the decision of the Federal Court of Appeal with costs throughout, reasons to follow.  These are our reasons.

Judicial History

Federal Court, Trial Division, [1996] 3 F.C. 821

10                               In response to the appellant’s action, the respondent alleged that the appellant had breached eight separate clauses of the charter party agreement.  Nadon J. found that the appellant had breached two clauses of the charter party agreement:  clauses 11 and 25.

11                               In assessing whether there had been breaches of the charter party, Nadon J. made findings of fact relevant to clauses 11 and 25.  For example, in relation to clause 11, he found that the appellant’s late payment had been due to a bank error.  He also found that the appellant had quickly remedied the late payment with interest in accordance with the respondent’s instructions.  With reference to clause 25, Nadon J. found that a lack of commercial photocopiers at the appellant’s disposal had contributed to its failure to provide copies of its log books as required by this clause.  No discussion of the effect of the actions of the appellant preceded Nadon J.’s conclusion that the appellant had effectively breached clauses 11 and 25.

12                               After concluding that the appellant had breached two clauses of the charter party, Nadon J. undertook an analysis of the legal principles which would permit him to decide whether the option to purchase was still enforceable.  He began by stating that charter party agreements are governed by ordinary principles of contract law.  He then cited s. 3  of the Federal Court Act , R.S.C., 1985, c. F-7 , to reach the conclusion that the Federal Court has jurisdiction to grant equitable relief.

13                               Nadon J. examined the general characteristics of option contracts.  To this end, he cited this Court’s decisions in Canadian Long Island Petroleums Ltd. v. Irving Industries (Irving Wire Products Division) Ltd., [1975] 2 S.C.R. 715, and Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187.

14                               Nadon J. then addressed the de minimis non curat lex principle.  He concluded that this principle prevents minor or trivial divergences from the terms of a contract from being considered breaches.  He cited Margaronis Navigation Agency, Ltd. v. Henry W. Peabody & Co., of London, Ltd., [1964] 2 Lloyd’s Rep. 153 (C.A.), for the proposition that negligible divergences from required performance should be disregarded when considering whether a contractual obligation has been broken.

15                               Nadon J. next made reference to the doctrine of “spent breach”.  He cited British authorities for the proposition that British law requires strict performance of conditions precedent of unilateral contracts, including option contracts.  He noted, however, that English courts have recognized the doctrine of spent breach as an exception to the requirement of strict compliance in cases involving option contracts.  According to this doctrine, if an option is conditional upon the performance of covenants, the optionee will not be prevented from exercising the option because of past breaches of the covenants if the breaches are “spent”, in the sense of not giving rise to a subsisting cause of action at the time the optionee seeks to exercise the option.

16                               Nadon J. held that Canadian law also recognizes a requirement that conditions precedent be strictly complied with prior to the exercise of an option to purchase.  He held, however, that Canadian law leaves room for the operation of equitable doctrines to relieve optionees from this strict performance requirement.  To support this conclusion, Nadon J. cited Duff C.J. in Pierce v. Empey, [1939] S.C.R. 247, at p. 252:

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 . . . . [Emphasis added.]

17                               Nadon J. then cited numerous authorities for the proposition that the doctrine of spent breach has been recognized in Canadian law.  Accordingly, he concluded that a party will not be denied the right to exercise an option if a previous breach has been remedied by the time the option is exercised.

18                               Nadon J. then turned to clause 30 of the charter party, the option clause.  He held that this clause required only that the appellant substantially perform its obligations under the charter party.

19                               Turning to the breaches of clauses 11 and 25, Nadon J. then held that since the appellant had remedied its breach of clause 11 before the exercise of the option, this “spent” breach could not prevent it from exercising the option.  Nadon J. made no finding of fact as to when or if the appellant’s breach of clause 25 had been remedied.  He simply concluded that it would not be equitable to dis-entitle the appellant from exercising the option because of this trivial breach.

20                               Nadon J. therefore concluded that the appellant was entitled to exercise the option to purchase set out in clause 30.  He issued a declaration to this end.

Federal Court of Appeal, [1997] 3 F.C. 154

21                               The respondent’s main ground of appeal was that Nadon J. had erred in deciding that the appellant could exercise the option to purchase notwithstanding its failure to perform its obligations under clauses 11 and 25 of the charter party agreement.

22                               Décary J.A. delivered the unanimous judgment of the court.  He proceeded on the basis of Nadon J.’s findings that the appellant had breached clauses 11 and 25.

23                               Décary J.A. held that Nadon J. had improperly applied the de minimis principle.  According to Décary J.A., de minimis is only a rule of interpretation used to determine whether a breach has been committed.  That is, the principle only applies to prevent the finding of a breach on the basis that the parties have implicitly agreed that substantial performance will be tantamount to strict performance.  The principle cannot be used to qualify a breach as minimal.  Therefore, Décary J.A. held that Nadon J., having found that a breach had been committed, could no longer look to the de minimis principle to conclude that the breach was so negligible as to not constitute a breach.

24                               Décary J.A. also suggested that Nadon J. had misinterpreted the words of Duff C.J. in Pierce.  According to Décary J.A., Pierce does not stand for the general proposition that Canadian law leaves room for the operation of equitable doctrines to relieve optionees from strict performance.  Rather, Pierce will only relieve deficient performance of conditions precedent if the deficiency can be related to the conduct of the owner.  Décary J.A. then held that no such relation had been established in this case.

25                               Décary J.A. held that Nadon J. erred when he related the doctrine of “spent breach” to equity considerations.  According to Décary J.A., even though courts have endeavoured to soften the harsh consequences of requiring strict performance by examining whether the wording of the agreement could support an 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 basic principle of strict performance remains good law.  Whether strict performance is required at any given time prior to the exercise of the option is a matter of construction of each contract and the doctrine of spent breach is not an exception to this principle.

26                               Décary J.A. held that the language used by the parties is key to the interpretation of contracts because courts must give effect to the intention of the parties.  He held that if the parties insisted that a condition precedent be fulfilled at a certain time, then it should not be open to the courts to decide that it could be fulfilled at a later time.  This would amount to rewriting the contract.  To this end, Décary J.A. cited the words of Cairns L.J. in Tenax Steamship Co. v. The Brimnes (Owners), [1975] Q.B. 929 (C.A.), at p. 971:  “While 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.”

27                               Turning to clause 30, the Court of Appeal held that the inclusion of the words “promptly”, “in accordance with the schedule” and “throughout this Agreement” in this clause led to the inescapable conclusion that the appellant could only enforce the option if it had made each and every payment the very day it was due under clause 11.  I would note that the Court of Appeal’s reference to the option clause includes the notation “[sic]” after the words “Clause 10”.  Décary J.A.’s reasoning suggests that he proceeded on the assumption that the reference to clause 10 in the option clause was a typographical error intended to read clause 11, although no such finding was made by the trial judge.

28                               Décary J.A. allowed the appeal on the basis of the appellant’s breach of clause 11.  As a result, he did not find it necessary to address the breach of clause 25.

Analysis

Nature of the Contract

29                               A great deal of the written and oral arguments in this case were directed at establishing whether the option is an independent contract from the underlying charter party or whether it is simply a term of the charter party.  In other words, the question which arose was whether the facts of this case give rise to a single contract or to two separate but related contracts.

30                               The respondent urged this Court to find that the option clause creates a separate contract from the charter party.  According to the respondent, the option is a “contract within a contract”.  In order to understand why the respondent takes this position, it is useful to examine the performance of contracts more generally.  For this purpose, I will refer to two well recognized textbooks on contracts:  G. H. Treitel’s The Law of Contract (9th ed. 1995) and S. M. Waddams’ The Law of Contracts (3rd ed. 1993).

31                               Both Treitel and Waddams recognize that, as a general rule, parties to a contract must perform their obligations specifically as dictated by the contract.  However, if the performance is deficient, for example in quality, quantity or timeliness, it is accepted that the defect in performance must attain a certain minimum degree of seriousness to entitle the non-offending party to rescind the contract.  The failure in performance must substantially deprive the other party of what was bargained for.  This concept is referred to as substantial non-performance or as a requirement that a breach go to the “root” of the contract.  In English legal literature, the expression “substantial failure” is used.  If this minimum standard is not met, rescission will not be available to the non-offending party.  This party will be forced to settle for a remedy in damages.  Thus, courts are concerned with the consequences of the deficient performance and the nature of the prejudice caused to the non-offending party when determining whether rescission is available (Treitel, at pp. 685-86; Waddams, at pp. 394-96).  The case of Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26 (C.A.), stands for the proposition that courts will apply this type of substantial non-performance test to determine if rescission is available in cases involving charter party contracts like the one in question.

32                               The important point for the purposes of this case is the fact that, in the past, courts have distinguished deficient performance in bilateral contracts from deficient performance of options, which have generally been categorized as unilateral contracts.  A brief review of basic contract law principles may be in order.

33                               A bilateral contract is a contract in which both parties undertake obligations through an exchange of promises.  Acceptance of a bilateral contract, as a general rule, occurs when the offeree communicates its counter-promise to the offeror.  In contrast, a unilateral contract is one in which a party makes a promise in return for the performance or forbearance of an act.  There is no counter-promise to perform this act or forbearance.  In this way, a unilateral contract is a contract in which only one party undertakes a promise.  This promise takes the form of an offer which can only be accepted by performance of the required act or forbearance.  Such performance provides the other party’s consideration, allowing it to enforce the original promise (Treitel, at pp. 35-36; Waddams, at p. 111; United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104 (C.A.)).

34                               As noted above, courts have generally categorised options as unilateral contracts.  In Mitsui, supra, Major J. set out the three principal features of options, at pp. 200-201:  (1) exclusivity and irrevocability of the offer to sell within a specific time period; (2) specification of how the contract of sale may be created by the option holder; and (3) obligation of the parties to enter into a contract of sale if the option is exercised.  At page 201, Major J. cites the following words of Lord Diplock in Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444 (H.L.), at pp. 476-77, with approval:

The option clause cannot be classified as a mere “agreement to make an agreement.”  There are not any terms left to be agreed between the parties. In modern terminology, it is to be classified as a unilateral or “if” contract.  Although it creates from the outset a right on the part of the lessees, which they will be entitled, but not bound, to exercise against the lessors at a future date, it does not give rise to any legal obligations on the part of either party unless and until the lessees give notice in writing to the lessors, within the stipulated period, of their desire to purchase the freehold reversion to the lease.  The giving of such notice, however, converts the “if” contract into a synallagmatic or bilateral contract, which creates mutual legal rights and obligations on the part of both lessors and lessees.

35                               In Canadian Long Island Petroleums Ltd., supra, at p. 732, Martland J. states:

In other words, the essence of an option to purchase is that, forthwith upon the granting of the option, the optionee upon the occurrence of certain events solely within his control can compel a conveyance of the property to him.

36                               Thus, it is clear that an option may take the form of a unilateral contract.  Upon granting the option, the optionor undertakes the promise to honour its terms if it is exercised by the optionee.  The optionee, on the other hand, is under no corresponding obligation to exercise the option.  However, if the optionee chooses to exercise the option, it can do so simply by performing the required conditions precedent.

37                               In contrast to the substantial non-performance doctrine which they have applied to bilateral contracts, courts have historically tended to require that conditions precedent to the exercise of options be strictly performed to give rise to liability on the part of the optionor.  For example, in Pierce, supra, a mortgagor in default executed a quit claim deed of the mortgaged land to the mortgagee, who was in possession following foreclosure proceedings.  In a letter from the mortgagee’s solicitor to the mortgagor’s solicitor which accompanied the quit claim deed, the mortgagor was granted a right, for a period of three months, to repurchase the land  upon payment of the full amount due under the mortgage.  This Court found, at pp. 250-51, that even though the option formed part of the arrangement by which the equity of redemption was released, the parties had clearly expressed their intention that the land rest in the mortgagee free from the equity of redemption.  Clearly, the option was a separate, unilateral contract and the conditions precedent to its exercise had to be strictly performed.  According to Duff C.J. (at p. 252):

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. . .  .  [Emphasis added.]

38                               Likewise, in West Country Cleaners (Falmouth) Ltd. v. Saly, [1966] 1 W.L.R. 1485 (C.A.), Danckwerts L.J., at p. 1489, noted that “an option of this character is a privilege — a right which has always been treated by the law as requiring complete compliance with the terms and conditions upon which the option is to be exercised”.  According to the Court, this principle applies even if the condition is the performance of an obligation under another term of the contract in which the option is contained (at p. 1489-90).

39                               The apparent rationale for the inapplicability of the doctrine of substantial non-performance to the conditions precedent for the exercise of options is the absence of mutual promises in unilateral contracts.  That is, since the optionee has made no counter-promise, the optionor has no remedy if the performance is deficient except to refuse to honour its promise.  The unavailability of the substantial non-performance doctrine is thus not based on a requirement for certainty (Treitel, at p. 723).  The end result is that deficient performance of a condition precedent to the exercise of an option will allow the optionor to refuse to honour the option without showing that there was substantial non-performance.  On the other hand, if the performance in question is a promised term of a bilateral contract, like a charter party, the substantial non-performance doctrine would apply to limit the non-offending party’s right to rescind.  In this way, it appears that the current law prevents the substantial non-performance doctrine from relieving deficient performance of conditions precedent in option contracts because it automatically categorizes them as unilateral in nature.

40                               It thus becomes clear why the respondent urges this Court to find that the option is a separate contract from the underlying, bilateral charter party.  It seeks to have the option categorised as an independent, unilateral contract to prevent the appellant from relying on the argument that it has substantially performed the contract.  However, while an option may be a unilateral contract, not all options are unilateral contracts.  Pierce, supra, has been interpreted as establishing that all options are unilateral contracts.  I disagree and would add that any previous case law which restricts the interpretation of options in this way must not be followed.  That an option may be an element of a bilateral contract in which it is contained rather than an independent, unilateral contract is supported by this Court’s decision in Monk Corp. v. Island Fertilizers Ltd., [1991] 1 S.C.R. 779, where it was recognized that a single contract can contain terms which relate to different subject matters.

41                               Whether a contract which contains an option clause establishes a single, bilateral contract or two separate contracts, one bilateral and the other unilateral, is a matter of construction.  Courts must examine the text of the contract and the context surrounding it in order to determine the intention of the parties, keeping in mind that this Court has previously approved of the tendency by courts to treat offers as calling for bilateral rather than unilateral performance whenever a contract can fairly be so construed:  Dawson v. Helicopter Exploration Co., [1955] S.C.R. 868, at p. 874, per Rand J.

42                               In the case at bar, the option and the charter party in which it is contained  are intimately connected to one another.  For example, an examination of the issue of consideration reveals such a connection.  Without consideration, an option is treated like a simple offer.  In such a case, the offeror can withdraw the option at any time prior to acceptance, a power clearly running contrary to the very nature of the option.  See for example Annotation, “The Law of Options”, [1930] 1 D.L.R. 1, at p. 2; M. J. Cozzillio, “The Option Contract:  Irrevocable Not Irrejectable” (1990), 39 Cath. U. L. Rev. 491; P. M. Perell, “Options, Rights of Repurchase and Rights of First Refusal as Contracts and as Interests in Land” (1991), 70 Can. Bar Rev. 1, at p. 3; V. Di Castri, The Law of Vendor and Purchaser (loose-leaf), vol. 1, at pp. 6-16.1 to 6-18.  In his article, supra, Cozzillio notes that in the case of options contained in lease agreements, American courts have been willing to presume that the rental payments under the lease serve as consideration for the option (at p. 509).  In his book, supra, Di Castri notes that Canadian courts, like those in the United States, are also willing to presume that options contained in lease agreements gain consideration through the payment of rent under the lease (at p. 6-17).  In his article, supra, Perell confirms that this is the practice in Canada (at p. 4).  For Canadian cases which found that options contained in lease agreements gain consideration through the payment of rent under the lease, see for example Daku v. Daku (1964), 49 W.W.R. 552 (Sask. C.A.); Friesen v. Bomok (1979), 95 D.L.R. (3d) 446 (Sask. Q.B.); Nieckar v. Sliwa (1976), 67 D.L.R. (3d) 378 (Sask. Q.B.); Nilsson v. Romaniuk (1984), 59 A.R. 39 (Q.B.).

43                               The option in the present case requires consideration to be binding on both parties, but it can be assumed that it is based on the same consideration as the underlying lease, namely the lease payments.  In this way, the charter party and the option in this case are specially connected.

44                               Another connection between the option and the charter party is the fact that the option is specifically made dependent on the performance of the terms of the charter party.  An option is not always made dependent on the performance of the underlying contract.  In Re Kennedy & Beaucage Mines Ltd., [1959] O.R. 625 (C.A.), an agreement gave the defendant a 99-year lease of land which included an option to purchase that same land at any time during the currency of the lease.  This agreement did not expressly make the option dependent upon fulfilment of the covenants of the underlying lease.  Nevertheless, the optionor brought an action seeking a declaration that the optionee was not entitled to exercise the option because it had breached the covenants of the lease.  The Ontario Court of Appeal found that the lease and the option were separate and independent contracts, although contained in the same document.  One of the reasons the court came to this conclusion was the fact that the option was not made dependent on the covenants in the underlying lease.

45                               The present case involves another significant connection:  the option and the charter party involve the same property, namely the vessel the Challenge One.  In Daku, the plaintiff brought an action for specific performance of an option contained within a lease.  Under the agreement, the plaintiff received a three year lease of real property and an option to purchase that same property.  The Court of Appeal unanimously allowed the application.  In a concurring decision, Brownridge J.A. stated, at p. 557:  “It is true, of course, that a lease and an option may be two separate agreements although contained in one document”.

46                               However, Brownridge J.A. went on to find that the option and the lease could not be separated on the facts of that case.  He concluded that the document as a whole would have to stand or fall in its entirety (at p. 557).  Thus, since the lease stood, so too did the option.

47                               In contrast, in Davis v. Shaw (1910), 21 O.L.R. 474 (Div. Ct.), a document contained a purchase and sale agreement for one parcel of land, and an option to purchase another parcel of land.  In that case, the plaintiff sought specific performance of the option and argued that the sale of the first parcel of land constituted the consideration for the option to purchase the second parcel.  The court rejected this submission.  According to the court, the option to purchase the second parcel of land was not sufficiently connected to the sale of the first parcel of land to allow for a finding that the sale price also constituted consideration for the option.  The court thus found that the two agreements, the sale and the option, though contained in the same document, were two independent agreements.

48                               The apparent inconsistency between the cases of Davis and Daku can be reconciled by the fact that in one case the underlying contract and the option applied to two separate parcels of land, while in the other the underlying contract and the option applied to the same property.  Thus, in Davis, where the underlying contract and the option applied to two separate parcels of land, the court found two separate contracts, though contained in the same document.  In Daku, where the underlying contract and the option applied to the same property, the court found a single contract.

49                               Based on the examination of the facts in the present case, it is my opinion that the lease and the option form a single, bilateral contract.  This single contract contains many terms, some relating to the lease, others to the option.  The option itself forms part of the consideration flowing from the respondent to the appellant under this bilateral contract.

Interpretation of the Contract

50                               Having found that the option in the present case is a clause of the bilateral charter party, it must next be determined whether the parties have expressly provided for literal and strict enforcement of any or all of the terms of this contract.  Courts will generally give effect to the parties’ intentions by upholding any clear contractual provisions which provide that the breach of a certain term, no matter how slight, will justify rescission of the entire contract by the non-offending party (Waddams, supra,  pp. 400-401; Treitel, supra, pp. 694-95; Lombard North Central Plc. v. Butterworth, [1987] Q.B. 527 (C.A.)).  If the parties have made no such provisions, the bilateral nature of the contract in the present case will require that this Court apply the substantial non-performance doctrine.

51                               One element of performance which parties to a contract may wish to have strictly interpreted is the timing of performance.  In United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904, the House of Lords traced the legal and equitable treatment of the timing of performance.  Generally, at common law at the time of the Judicature Acts, time was presumed to be of the essence in all contracts.  However, as Lords Diplock and Simon of Glaisdale point out in United Scientific, at pp. 927-28 and pp. 940-41 respectively, even at that time exceptions to this strict common law approach were being recognized and developed.  At the same time, in equity, time was generally presumed not to be of the essence.  In Parkin v. Thorold (1852), 16 Beav. 59, 51 E.R. 698, Lord Romilly M.R. noted that “time is held to be of the essence of the contract in equity, only in cases of direct stipulation, or of necessary implication” (p. 65).  Similarly, in Stickney v. Keeble, [1915] A.C. 386 (H.L.), Lord Parker of Waddington said, at pp. 415-16:

Where it [equity] could do so without injustice to the contracting parties it decreed specific performance notwithstanding failure to observe the time fixed by the contract for completion, and as an incident of specific performance relieved the party in default by restraining proceedings at law based on such failure.

This is really all that is meant by and involved in the maxim that in equity the time fixed for completion is not of the essence of the contract, but this maxim never had any application to cases in which the stipulation as to time could not be disregarded without injustice to the parties, when, for example, the parties, for reasons best known to themselves, had stipulated that the time fixed should be essential, or where there was something in the nature of the property or the surrounding circumstances which would render it inequitable to treat it as a non-essential term of the contract.

52                               In United Scientific, supra, Lord Diplock reiterated the historic approach of equity to the issue of the timeliness of performance as follows, at p. 927:

. . . the rules of equity, to the extent that the Court of Chancery had developed them up to 1873 as a system distinct from rules of common law, did not regard stipulations in contracts as to the time by which various steps should be taken by the parties as being of the essence of the contract unless the express words of the contract, the nature of its subject matter or the surrounding circumstances made it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract.  [Emphasis added.]

53                               Thus, at the time of the Judicature Acts, equity presumed that time was not of the essence unless the parties had expressly made it of the essence or the nature of the property or circumstances allowed for such a presumption.  Since the Judicature Acts, the rule of equity has prevailed in Canada and there is therefore no general presumption that time is of the essence.  See for example in Alberta, Judicature Act, R.S.A. 1980, c. J-1, s. 22; in British Columbia, Law and Equity Act, R.S.B.C. 1996, c. 253, s. 31; in Manitoba, Mercantile Law Amendment Act, C.C.S.M, c. M120, s. 5; in New Brunswick, Judicature Act, R.S.N.B. 1973, c. J-2, s. 32; in Newfoundland, Judicature Act, R.S.N. 1990, c. J-4, s. 91; in Nova Scotia, Judicature Act, R.S.N.S. 1989, c. 240, s. 43(8); in Ontario, Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, s. 15; in Prince Edward Island, Supreme Court Act, R.S.P.E.I. 1988, c. S-10, s. 29(2); in Saskatchewan, Queen’s Bench Act, R.S.S. 1978, c. Q-1, s. 45(6).  Similarly, in United Scientific, Lord Simon noted, at p. 940, that “in modern English law time is prima facie not of the essence of a contract”.  See Law of Property Act, 1925 (U.K.), 15 & 16 Geo. 5, c. 20, s. 41.

54                               This Court must therefore begin from the presumption that time is not of the essence in the contract in the present case.  However, keeping in mind that parties to commercial contracts are free to make time of the essence in relation to the performance of any contractual obligations (United Scientific, at p. 923; Scandinavian Trading Tanker Co AB v. Flota Petrolera Ecuatoriana — The Scaptrade, [1983] 2 All E.R. 763 (H.L.), at p. 768), I must assess whether these parties have expressly made time the essence of this contract through the incorporation of a “time of the essence” clause.  If they have not, this Court may still conclude that time is of the essence if the nature of the property involved or the circumstance of this case call for such an interpretation.

Is Clause 30 a “Time of the Essence” Clause?

55                               This Court must look to the actual language used by these parties in clause 30, the option clause, to determine whether it was their intention to expressly make time of the essence.  The respondent submits that since this is a commercial contract entered into by equal parties, the wording of clause 30 must be strictly construed.  The respondent further submits that the words “promptly and in accordance with the schedule” make time of the essence in relation to the lease payments.  Accordingly, the argument goes, the appellant’s single late payment, even though it was caused by a bank error and quickly remedied with interest, allows the respondent to put an end to the option.

56                               Before discussing the strict interpretation urged by the respondent, I would point out that commercial parties should be familiar enough with the applicable law to know that they must use very precise words if their intention is to make time the essence of a contract.  This is self-evident given that the reason for the inclusion of a clause of this nature in the first place is to provide certainty about the consequences of breach which the substantial non-performance doctrine cannot provide.  Furthermore, because of the real possibility of an unjust enrichment, courts must be certain that it was the parties’ intention to allow any breach of the timing of performance, no matter how minor or non-prejudicial, to justify rescission of the entire contract.

57                               In my opinion, the words used in clause 30 are simply not precise enough to satisfy this Court that these parties intended to make timely lease payments the essence of this contract.  The word “promptly” adds nothing to the words “in accordance with the schedule”.  Read together, these words call for regular payment. Nothing exceptional about the obligations of the parties can be inferred.  This conclusion is bolstered by the respondent’s admission in oral argument that contracts used in this industry often include the actual words “time is of the essence” when the parties intend to, in fact, make time of the essence.

58                               Binnie J., in his separate reasons, attaches great importance to the use of the words “full performance” in clause 30.  An examination of the use of this expression in case law reveals that these words, which do not appear to be terms of art, refer to the obligation to do all things required under the contract, not to the manner of performance of the obligation; see LeMesurier v. Andrus (1984), 31 R.P.R. 143 (Ont. H.C.), at p. 168, reversed on other grounds (1986), 54 O.R. (2d) 1 (C.A.).  This view is also advocated in the United States; see for example Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (N.Y. 1921), at p. 890 (Cardozo J.).  Halsbury’s Laws of England, which Binnie J. quotes, refers to “exact” performance when addressing the issue under review here, but states that even exact performance is mitigated by the doctrine of substantial non-performance in appropriate cases; see Halsbury’s Laws of England (4th ed. 1998), vol. 9(1), at para. 921.  I would therefore conclude that the use of the words “full performance” by these parties was not sufficient to change their obligations, particularly since timely performance, which is at issue here, is generally considered to be a separate issue.

59                               Even if it could be said that the words of clause 30 are adequate to make time of the essence in relation to the lease payments, the actual wording of clause 30 could only support a finding that time is of the essence in relation to Clause 10, since it reads:  “payments being made promptly and in accordance with the schedule of clause 10 throughout this Agreement”.  The respondent urges this Court to find that the reference to clause 10 in the option clause is a typographical error and was meant to read “clause 11”.  It appears that the Federal Court of Appeal proceeded on this assumption since its reference to the option clause includes the notation “[sic]” after the words “clause 10”.  As noted, no such finding was made by the trial judge.  Both clauses 10 and 11 contain schedules.  Furthermore, a reference to clause 10 in the option clause is more consistent with what the parties would reasonably have intended had they addressed their minds to this issue upon entering the charter party.  Indeed, it makes more commercial sense that the respondent would be more insistent on receiving a total of $85,000 per year than each monthly payment on the exact day it falls due.  In addition, it is unlikely that the parties could have intended that a single late payment among 35 payments made over a five year term, caused by no fault of the appellant and quickly remedied with interest, would void the option, given its importance to the contract as a whole.

60                               Since the option clause expressly refers to clause 10 and not clause 11, it is logical to conclude that the parties could only have intended that time be of the essence in relation to clause 10, should the words used in fact be sufficient to imply a time of the essence clause.  The trial judge properly found no breach of clause 10 because the appellant’s single late payment did not breach the clause 10 requirement to pay $85,000 for the year in which the late payment occurred.  As the trial judge found, the late payment was, at most, a breach of clause 11, which sets out the exact day upon which each monthly payment was due.

61                               Having found that the actual wording of clause 30 reveals no intention on behalf of these parties to expressly make timely lease payments of the essence in relation to the exercise of the option by the appellant, this Court must next assess whether the nature of the property involved or the circumstances in the present case call for such an interpretation.

Can “Time is of the Essence” be Implied from the Property Involved or the Circumstances in the Present Case?

62                               Time will be presumed to be of the essence if the subject matter of a contract is the acquisition of a perishable commodity or something which is likely to rapidly change in value.  See for example Lang v. Provincial Natural Gas and Fuel Co. of Ontario (1908), 17 O.L.R. 262 (Ch. D.); Sprague v. Booth (1908), 21 O.L.R. 637 (C.A.), aff’d [1909] A.C. 576 (P.C.); Hare v. Nicoll, [1966] 2 Q.B. 130 (C.A.); United Scientific, supra, at p. 950.  In such cases, if the seller fails to deliver within the specified time, the buyer may be seriously prejudiced.  No such potential prejudice arises in the present case.  The property at issue is a vessel.  It is not perishable.  Furthermore, it cannot be said that its value will fluctuate greatly, as for example, the value of corporate shares.  In any event, the appellant’s lack of timeliness is in no way related to the delivery of the vessel.  Rather, the appellant made a single late lease payment and failed to deliver the log books in the manner requested.  As a result, I cannot conclude that the nature of the property in the present case would make it inequitable to presume time was not of the essence in relation to the exercise of the option.

63                               Finally, I must assess whether the circumstances surrounding this contract would make it inequitable for this Court to presume that time was not of the essence in relation to the exercise of the option.

64                               The respondent places a great deal of emphasis on the commercial nature of this contract.  However, there is no general rule making time the essence of all commercial contracts (United Scientific, supra, at pp. 924 and 950).  Indeed, in United Scientific, Lord Diplock refused to hold that a timetable specified in a rent review clause was of the essence where no specific “time of the essence” clause was incorporated into the contract.  As in other cases, the Court was concerned with whether the deficiency in performance was of vital importance given the contractual context (Treitel, supra, at p. 715).

65                               Although he was dealing with a charter party which did not contain an option, the words of Lord Diplock in Scandinavian Trading Tanker Co AB, supra, at p. 768, are applicable here:

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 . . . .  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.

66                               The fact that commercial parties are free to make time of the essence rather than to make time not of the essence confirms that there is no general rule that time is of the essence in all commercial contracts.  Indeed, under such a rule, the essential question surrounding the availability of rescission would revolve around whether or not a given contract could be classified as “commercial” or not.  The actual intentions of the parties and requirements of the contractual context would be rendered irrelevant.  The problems of drawing a distinction on this artificial ground are apparent; see Treitel, at p. 742.

67                               The respondent also urged this Court to presume that time is of the essence in the present case because it involves the exercise of an option to purchase.  According to this argument, time is always of the essence in relation to the exercise of options.  See for example Krause v. Bain Bros. Alta. Ltd. (1972), 29 D.L.R. (3d) 500 (Alta. S.C.T.D.); United Scientific, supra; P. M. Perell, “Putting Together the Puzzle of Time of the Essence” (1990), 69 Can. Bar Rev. 417, at p. 425; Di Castri, supra, at p. 6-12.

68                               I must disagree with the statement that time is always of the essence in option contracts.  Option case law reveals that courts have not applied any such strict approach to the timing of performance.  One example of the flexibility courts have applied to performance in option contexts is the doctrine of spent breach.  This doctrine mitigates against the severity of the application of the strict performance rule to options by preventing deficiently performed conditions precedent which have been remedied by the time the option is to be exercised from rendering the option void.  For example, in Bass Holdings Ltd. v. Morton Music Ltd., [1987] 2 W.L.R. 397 (Ch. D.), a lease contract included an option to renew provided the tenant was not in breach of any of the tenant’s covenants contained in the lease.  The tenant was at one time in breach of this condition because his rent was overdue.  However, he had remedied that breach by the time he sought to exercise the option.  In its interpretation of the contract, the court found that such “spent” breaches do not prevent the exercise of the option.  The language here may be somewhat confusing.  In reality, this doctrine simply provides that the option clause is interpreted to mean that conditions precedent are met providing that the positive covenants of the underlying contract have been performed at the time of the exercise of the option.  There is, therefore, no breach, even though some payments were made late.  Late payment can be remedied because this possibility is implied in the interpretation of the option clause.

69                               The doctrine of spent breach has also been recognized by Canadian appeal courts.  In Birchmont Furniture Ltd. v. Loewen (1978), 84 D.L.R. (3d) 599 (Man. C.A.), a lease contained an option to purchase “provided there be no default by the Tenant in any of the terms and conditions expressed or implied in the within Lease” (p. 599).  The tenant had defaulted under the lease, but there were no outstanding defaults when the time came to exercise the option.  The Manitoba Court of Appeal, per Hall J.A., confirmed the trial judge’s interpretation of the option clause and allowed the tenant to exercise the option because the deficient performance of the lease had been remedied prior to the exercise of the option.  See also Petrillo v. Nelson (1980), 114 D.L.R. (3d) 273 (Ont. C.A.).

70                               My review of the doctrine of spent breach reveals that courts have not assumed that time is always of the essence in option cases.  The respondent’s argument that time is necessarily of the essence in the present case simply because it involves an option must therefore fail.

71                               No other  circumstances in the present case support a presumption that these parties would have intended to make the timing of each of the 35 lease payments of the essence had they addressed their minds to this issue upon entering the charter party.  It is, to my mind, incredible that the parties could have intended that a single late payment among 35 payments made over a five-year term, caused by no fault of the appellant and quickly remedied with interest, would deprive the appellant of the option, given its importance to the contract as a whole.  This conclusion is reinforced when one considers that the respondent did not insist on strict compliance with the method of payment set out in clause 11, a matter which will be discussed more fully below.

72                               Since the presumption that time is not of the essence has not been displaced, the bilateral nature of the contract in the present case requires that this Court apply the substantial non-performance doctrine.

Application of the Substantial Non-Performance Doctrine

1.  Breach of Clause 25

73                               In the present case, the trial judge found that clause 25 of the charter party, namely the duty to provide log books, had been minimally breached. I agree, noting however that this is not meant to be taken as an application of the de minimis non curat lex principle.  Nevertheless, since there was some disagreement in the courts below about the application of this principle, I will take this opportunity to address it briefly.

74                               The trial judge below was of the opinion that a court can apply de minimis after finding a minor divergence in performance from the express terms of a contract to prevent that divergence from being considered a breach.  He made no distinction between the application of the principle to unilateral as opposed to bilateral contracts. In contrast, the Federal Court of Appeal was of the opinion that de minimis is only a rule of contractual interpretation used to determine whether or not a breach has been committed.  According to Décary J.A., the principle can only be applied to prevent the finding of a breach on the basis that the parties had implicitly agreed that substantial performance would be tantamount to strict performance. He found that the principle could not be used to qualify a breach as minimal.  Therefore, Décary J.A. held that the trial judge, having found that a breach had been committed, could no longer look to the de minimis principle to conclude that the breach was so trivial that it did not constitute a breach.  However, like the trial judge, Décary J.A. did not comment on whether the application of the de minimis principle would differ depending on whether a case involved a unilateral or a bilateral contract.

75                               While there is little jurisprudence which expressly addresses how the de minimis principle is to be applied, the case law which does exist suggests that the approach of the trial judge is correct, providing it is specified that a finding of de minimis means that no fundamental breach permitting rescission has been committed, not that there has been no breach giving rise to an action in damages.  For example, in Runnymede Iron & Steel Ltd. v. Rossen Engineering and Construction Co., [1962] S.C.R. 26, this Court dealt with the deficient performance of a contract of sale.  In the contract, the respondent agreed to sell and deliver steel rails to the appellant.  Approximately 20 to 25 percent of the delivered rails were defective.  The appellant sought to rescind the entire contract.  The important element of the case for present purposes is the order in which this Court dealt with the breach.  The Court first found that the respondent had breached the contract by providing defective goods.  Only then did the Court state that de minimis could not be applied since at least 20 percent of the goods were defective.  This case thus supports the approach of the trial judge, namely that a court should first find a divergence from the performance dictated in the contract and then assess whether that divergence is de minimis.

76                               In Gillespie v. Wells (1912), 2 D.L.R. 519 (Man. K.B.), the plaintiff and defendant entered a contract for the sale of land.  The defendant agreed to sell its property in exchange for a promise from the plaintiff to make specified payments over a specified term.  The defendant refused to transfer the property claiming that the plaintiff had not fully performed a condition precedent, namely tendering the full amount owing under the payment schedule.  The plaintiff brought this action for specific performance.  The Court found that the plaintiff had indeed diverged from the contractually required performance because her final payment was deficient by $2.20.  Nevertheless, the Court granted specific performance by applying de minimis to the plaintiff’s slight deficiency in performance.  In this way, the Court first found a divergence in performance and only then applied de minimis.  At no point in the judgment did the Court suggest that de minimis actually prevented the finding of a breach in the first place.  The rule was simply used to qualify the breach as minimal.

77                               While I agree with the trial judge on the method in which the de minimis principle should be applied, I disagree that it should be applied in the present case.  I leave the scope of the de minimis principle, and more particularly whether it applies to unilateral contracts, to be determined in the appropriate case.

78                               Instead of referring to the de minimis principle in his interpretation of clause 25, the trial judge should have interpreted this clause in light of s. 261(1)  of the Canada Shipping Act , R.S.C., 1985, c. S-9 , which states:

261. (1) An official log shall be kept in every foreign-going ship and every home-trade ship of or over fifty tons register tonnage registered in Canada in the appropriate form for that ship approved by the Minister.

79                               According to the terms of the charter party, the Challenge One is a home-trade ship which falls within the scope of s. 261(1).  It is described as a vessel of about 56.5 tons which is to be operated between Harbour Deep and Jackson’s Arm White Bay, Newfoundland.  Accordingly, s. 261 dictates that the logs of the Challenge One must remain on board the vessel.  Furthermore, clause 25 makes no reference to the removal of the logs from the vessel or the making of copies of the logs.  It refers to the actual logs only.  The clause 25 requirement that the appellant supply the logs to the respondent upon request should therefore have been interpreted as requiring the logs to be made available to the respondent on board the vessel.  I note, however, that it is likely that Nadon J. assumed clause 25 only required the appellant to supply the respondent with copies of the logs because he was aware of the statutory requirement that the actual log books remain on board the vessel.

80                               In the circumstances of the case, I would not disturb the finding of the trial judge that there was substantial compliance with clause 25.  As mentioned, the Court of Appeal did not deal with clause 25.

2.  Breach of Clause 11

81                               Clause 11 of the charter party specifically states that the appellant is to make monthly payments “in cash in Canadian currency by way of Bank Transfer and/or certified cheques”.  Yet, the accepted practice between these parties was for the appellant to submit seven post-dated, uncertified cheques to the respondent at the beginning of each operating season.  The adoption of this alternative method of payment indicates that the respondent was not insistent on strict compliance with the method of payment set out in clause 11.  It follows that the respondent cannot now insist on a strict application of clause 11.  In A/S Tankexpress v. Compagnie Financière Belge Des Pétroles S/A (1948), 82 Lloyd’s L.R. 43 (H.L.), a charter party gave the owner a right to withdraw the ship if the charterer did not pay “[i]n cash, monthly, in advance, in London”.  However, the parties had mutually adopted and accepted a practice whereby the charterer would pay by sending a cheque to the owner in the mail.  Thus, like the respondent in the present case, the owner did not insist on strict compliance with the method of payment set out in the agreement.  In Tankexpress, the charterer made all payments in accordance with the adopted practice, but on one occasion the cheque arrived late because it was delayed in transit due to war.  The House of Lords unanimously concluded that the owner did not have the right to withdraw the ship because the charterer had made payment in accordance with the adopted practice.  Lord Uthwatt stated, at p. 57:

I fail to see that it is implicit in this particular arrangement that the charterers are to take the risk that the agreed machinery, to which they must adhere, fails in a particular instance to perform the functions that both have assigned to it.

. . . the charterers having complied with the working arrangement as to payment involved in the accepted method had not breached the contract.

82                               Lord Du Parcq (with Lord Morton concurring) stated, at pp. 58-59:

I conclude, therefore, that if the charterers, when the time came to make the payment due in September, 1939, in fact acted in accordance with the “accepted method,” the owners were not entitled, on the ground that, through no fault of the charterers, receipt of the payment was delayed, to exercise a remedy which was open to them only “in default of” the payment stipulated by the contract.

                                                                   . . .

Whatever form of transmission is adopted, there is a possibility of delay, though it may be a slight possibility.  If one party elects to rely on the postal service, or on any messenger of his own choice, he has to bear the responsibility for his agent’s delay; but when, as in this case, both parties are agreed that a cheque is to be sent, and it is in fact sent by suitable, and normally expeditious, means, the creditor must run the risk of delay equally with the debtor.  It seems to me to be hopeless to contend that the owners’ acceptance of the method of payment was subject to a condition, unexpressed but implied, that if the cheque did not arrive in London on Sept. 27, the charterers, though they were not to blame for the delay, should be treated as having made default, and so would incur the risk of losing a contract of great value.  If such a condition had been expressly stated, the charterers might well have thought that they were being asked, not to conform to a sensible business arrangement, but to walk into a trap.

83                               In Zim Israel Navigation Co. v. Effy Shipping Corp. — The “Effy”, [1972] 1 Lloyd’s Rep. 18 (Q.B. Com. Ct.), the Court applied the reasoning in Tankexpress.  In The “Effy”, a charter party gave the owner a right to withdraw the ship if the charterer did not make monthly cash payments in advance.  The parties had mutually adopted and accepted the practice that the charterer would pay by notifying its Israeli bank to transfer funds to the owner’s London bank via an American bank.  Thus, as in Tankexpress, supra, the owner had not insisted on strict compliance with the method of payment set out in the contract.  On one occasion, the charterer notified its bank to transfer the funds for a timely credit to be made to the owner’s account.  However, due to a bank error, the transfer was late.  The Court found the case to be indistinguishable from Tankexpress.

84                               Likewise, I am of the opinion that the facts surrounding the application of clause 11 in the case at bar are indistinguishable from Tankexpress. I again refer to the decision of Lord Du Parcq in that case, at p. 59:

There is always a risk that a cheque may be lost in transit, especially when it has to cross the sea, and since all men, and even banks, are capable of error, it may, through some blunder, not be met, although there are funds to meet it.  In either of these events the charterers would no doubt remain liable to pay the hire due, but in neither case would the delay in payment justify cancellation of the contract.  . . .  The risk of delay in the post was hardly more serious than the risk of delay in clearing the cheque.  That these risks should be accepted by the owners is not surprising.  [Emphasis added.]

85                               The fact that the respondent accepted the practice of making payment by post-dated, uncertified cheques is inconsistent with its present insistence on strict compliance with the clause 11 requirement that the appellant pay only with cash or certified cheques on a given day.  Lease payments were made under a modified arrangement, rather than under the strict terms set out in clause 11.  The modified method of payment accepted by the parties involved a risk of delay in clearing the cheques.  Such a delay in fact occurred because of an error by a bank employee.  The respondent must bear the consequences of this risk equally with the appellant because it materialized as a result of their mutually accepted alteration of the strict terms of the agreement.  The respondent cannot now insist that the option clause, which makes the availability of the option dependent on the performance of the written terms of the charter party, be strictly applied to the appellant’s late payment under the modified arrangement.

86                               In Tankexpress, great emphasis was put on two facts:  there were sufficient funds available in the account to cover the cheque on the due date; and the charterer had no reason to expect that those funds would be delayed in reaching the owner.  Similarly, in the present case, the appellant had sufficient funds in its account to cover its cheque and had no reason to suspect a bank error might delay payment of those funds to the respondent.  The appellant always had the intention to pay on time and took all the steps that it could reasonably have been expected to take given the modified payment arrangement into which the parties had entered.  What is more, upon being notified by the respondent that its cheque had been refused, the appellant promptly paid the amount due plus interest in accordance with the respondent’s instructions.  The appellant also made all of the remaining payments under the charter party on time.  Under these circumstances, I would conclude that the appellant substantially performed its modified clause 11 obligations.

Conclusion

87                               I have come to the conclusion that the appellant has substantially performed its obligations under the charter party.  The trial judge was not asked to consider the possible application of relief against forfeiture, forbearance or promissory estoppel.  I will therefore not discuss these remedies.  As just mentioned, the respondent has no right to cancel the appellant’s option to purchase the vessel in the present case.  This result is consistent with the true intentions of these parties as revealed by all of the circumstances and with the applicable policy reasons.  The respondent has received a significant benefit from the appellant’s defective performance which it cannot restore.  Furthermore, there is no proportionality between the impact of the appellant’s defective performance on the respondent and the benefit the appellant will lose if the respondent is permitted to void the option.  The deficient performance did not give rise to uncertainty because there was no reason for the respondent to believe that the single late payment, which was caused by a bank error rather than any fault of the appellant, would put future lease payments in doubt.  The concern of the Court in this instance must be with fairness.  On the facts of this case, the respondent was simply not deprived of what it bargained for.

Disposition

88                               The appeal was allowed, with costs throughout, in a decision rendered from the bench on October 9, 1998.

The following are the reasons delivered by

//Binnie J.//

89                               Binnie J. -- I agree with my colleagues that this appeal must be allowed.  I would not, however, with respect, invoke the doctrine of substantial performance.  As Justice Bastarache makes clear in his reasons (at paras. 25 and 50), the question whether a contractual term is satisfied by substantial performance, or whether strict (or “complete” or “exact”) performance is required, is a matter of interpretation.  Everything turns on the intention of the parties as expressed (in this case) in the charter party.  A concise statement of the rule is found in Halsbury’s Laws of England (4th ed. 1998), vol. 9(1), at para. 924:  “It has been said to be a question of construction in each case whether the parties intended that this doctrine [of substantial performance] should apply or that there should be complete and exact performance”.  Here, the contracting parties stipulated “full performance” as a condition precedent to the exercise of the option:

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 throughout this Agreement, the Charterer shall have an option to purchase the vessel. . . .  [Emphasis added.]

90                               The stipulation that the appellant’s option to purchase the Challenge One was “[s]ubject to full performance of all its obligations in this Charter Party” (emphasis added) should be respected by the courts.  The words “all its obligations” refer to all of the things required under the contract, and the words “full performance” must therefore refer to the sufficiency of performance of each of them.  If the contracting parties had deliberately set out to exclude the doctrine of substantial performance from their contractual arrangement, I do not know what words they could have found to make their intention any clearer.  Substantial performance is less than full performance, according to the ordinary meaning of the words. 

91                               There is good reason why the parties specified full performance.  So long as the option was outstanding, the vessel owners were disabled from selling their ship to anyone but the charterer, yet the charterer was under no reciprocal obligation to buy unless and until the option was exercised.  As Lord Diplock put it in United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904 (H.L.), at p. 929, “the grantor [of the option] needs to know with certainty the moment when [the disability from selling the ship] has come to an end”.  This, I believe, is the commercial rationale for the strict interpretation of options endorsed by Duff C.J. in Pierce v. Empey, [1939] S.C.R. 247, at p. 252.  My colleague suggests that Pierce can be explained on the basis that the option in that case could be characterized as a unilateral contract.  However, an option is a unilateral obligation, irrespective of whether it is contained in a unilateral or a bilateral contract: United Dominions Trust (Commercial), Ltd. v. Eagle Aircraft Services, Ltd., [1968] 1 All E.R. 104 (C.A.), per Diplock L.J., at p. 110: 

While, for simplicity in analysing the relevant differences in legal character, I have spoken of synallagmatic [i.e., bilateral or multilateral] and unilateral or “if” contracts, it would be more accurate to speak of synallagmatic and unilateral obligations, for obligations of these two different kinds are often contained in a single agreement, as where a lease contains an option for renewal.  [Italics in original; underlining added.]

It is the unilateral nature of the obligation rather than the nature of the contract that is the key to the strict interpretation of options.  It is not without significance that in this case the parties stipulated for “full performance” in relation to the exercise of the option (i.e., by including the stipulation in the option clause itself) rather than in relation to their contract generally.  The parties thereby made it clear that whatever consequences may flow from deficient performance of the clauses in question in terms of the ongoing charter of the vessel, such clauses would have to be fully performed if the vessel owners were to continue to be disabled from selling the vessel to third parties by the option.

92                               There are good policy reasons to support the approach taken by Duff C.J. in Pierce and to respect the decision of the parties in this case to call for “full” performance in relation to the exercise of the option.  Owners have a business need to know exactly where they stand in that regard, as pointed out by Lord Diplock.  Determining “full” performance is not without difficulty, but attempting to predict what a court would consider to be “substantial” performance of a condition precedent on the facts of a particular case adds unnecessarily to commercial uncertainty.  I agree with my colleagues that in some contracts the parties may be interpreted to have agreed to the preconditions to the option being governed by the more flexible standard of “substantial” performance.  They did not do so here.

93                               Despite the different view I take of the proper interpretation of the contract, I agree that the appeal must be allowed.  When the terms of the charter party, properly construed, are applied to the facts found by the trial judge, I believe that the requirements of Duff C.J. in Pierce are met, namely that the conditions precedent to the exercise of the option were satisfied or that the “holder of the option is on some equitable ground relieved from the strict fulfilment of them” (p. 252). 

94                               While, as stated, I accept the trial judge’s findings of fact, his interpretation of the legal obligations created by the charter party raises questions of law or mixed questions of fact and law properly reviewable in this Court (see:  Dominion Grange Mutual Fire Insurance Association v. Bradt (1895), 25 S.C.R. 154, at p. 161; Regina Industries Ltd. v. City of Regina, [1947] S.C.R. 345, at p. 354).  I agree with my colleague, for the reasons he gives in para. 59, that the courts below were not entitled to rewrite the option to refer to clause 11 instead of clause 10.  Clause 10 was performed in full.  In any event, the owners were estopped from relying on non-compliance with clause 11 because they accepted an alternate payment arrangement which clearly carried with it the risk of the very type of bank error that in fact materialized.  The possibility of such an estoppel was expressly contemplated in Pierce, supra.  Finally, as to clause 25, the courts below were wrong to read an obligation to furnish copies of log books into a clause which provided for no such thing.  The log books were kept aboard the vessel in accordance with s. 261  of the Canada Shipping Act , R.S.C., 1985, c. S-9 , and would have been “supplied” to the owners at that place if and when the owners had turned up. 

95                               On a proper interpretation of the charter party the conditions precedent to the exercise of the option were therefore satisfied in “full” (or, in the instance of the banking arrangements, the owners were estopped from saying otherwise), and I thus agree with the conclusion of my colleagues that the charterers were entitled to exercise the option.  Therefore, the appeal must be allowed.

Appeal allowed with costs.

Solicitor for the appellant:  Elizabeth M. Heneghan, St. John’s.

Solicitor for the respondents:  Alain R. Pilotte Law Office, Montréal.