The Latest on Creative (but Unsuccessful) Attempts to Get Out of a Really Bad Real Estate Deal

In the recent case of Forest Hill Homes (Cornell Rouge) v Peimian Ou, Mr. Justice Morgan of the Ontario Superior Court dealt with a summary judgment motion relating to an aborted real estate deal.

In this case, Ou agreed to purchase a home to be built from the plaintiff, Forest Hill Homes, for about $1.7 million. Ou provided deposits that added up to over $100,000 and, on closing, had to come up with almost $1.6 million to close.

On that day, Forest Hill Homes was ready to close the transaction, but Ou did not have sufficient funds.

This apparent breach of contract led to a lawsuit and ultimately to a motion for judgment brought by Forest Hill Homes.

At the motion, Ou brought out a series of arguments in an attempt to concoct a defence to what seemed to be an indefensible position.

Firstly, he argued that his performance of his obligation to close was made impossible by a drastic and unforeseeable drop in the real estate market. This, in turn, made it impossible for him to obtain the required financing. Accordingly, the contract was frustrated and Ou should be relieved of the obligation to close.

In fact, the property which he had agreed to purchase for over $1.7 million was, as at the date of the motion, worth just over $1 million. The fact that the real estate market had dropped significantly could not be challenged. However, and not surprisingly, the Court ruled that this did not amount to a frustration of contract. For a contract to be frustrated, there must be a radical change that transforms the nature of the contract. Here, the parties had intended that the property be sold for an agreed-upon sum. These were the essential terms of the contract and they did not change because of a drop in the market.

Ou then argued that the plaintiff’s sales agent had misrepresented the sale to them. The alleged misrepresentation took the form of the sales agent describing the deal as “the opportunity of a lifetime.” Supposedly this was said to Ou on the day that he signed the agreement of purchase and sale.

This language has been put forward in Court as a basis for a claim of misrepresentation on numerous occasions. It never works. The Court of Appeal has made it clear that to have an effect in law, a representation must be in respect of an ascertainable fact and not a mere opinion. A statement of opinion, judgment, probability, or expectation, or as merely a loose conjectural or exaggerated statement, does not count. This is because the person hearing the statement is not justified in relying on it.

Therefore, even if the sales agent did make that statement, it could never amount to an actionable misrepresentation.

Furthermore, and as is usually the case, the sales agreement contained a clause that made clear that any pre-contractual representation could not be relied upon.

Finally, Ou claimed that he had paid a bribe to the agent to jump the queue of potential purchasers and sign the sales agreement quickly. He argued that this excused his failure to close. In fact, there is no authority in Ontario for the proposition that a person who pays a bribe can have the contract rescinded as a result. In fact, the authorities are clear that it is the defrauded principal of an agent who takes a bribe, not the party paying the bribe, who can have the contract rescinded for that reason.

The last interesting point arising from this case has to do with the plaintiff’s claim for interest.

The agreement of purchase and sale provided that the plaintiff could charge interest in the amount of 20% of the purchase price if Ou failed to pay the balance due on closing. Ou argued that this was excessively onerous and ought not to be enforceable.

Our Court of Appeal has made it clear that a surprisingly onerous term of a contract may be unenforceable if it cannot be presumed that the non-drafting party had actually agreed to it. In other words, a stringent and onerous provision can only be relied upon if the party seeking to do so can show that reasonable measures were taken to draw the terms to the attention of the other party.

In this case, there was no evidence that this particular provision had been drawn to Ou’s attention when he signed the agreement of purchase and sale and accordingly, the plaintiff was unable to enforce it.

At the end of it all, judgment was awarded against Ou for over $500,000, being the difference between the purchase price and the value of the property at the time of the motion. In addition, he forfeited his deposits.

This would seem to be a rather extreme consequence arising from a drop in the real estate market, but unfortunately for Ou, that is simply how the numbers turned out.

Some Thoughts and Observations By a Toronto Mediator – Part 2

In this post, once again, I thought I would provide some additional observations on an aspect of the mediation process.  This post will comment on the relationship between neuroscience and conflict.

There are a number of studies in the booming area of neuroscience that focus on how the human brain relates to conflict and specifically on how male and female brains differ in that connection.  For example, psychologically, females are usually thought to be superior in inter-personal sensitivity than males.  That is a factor that is highly relevant to the issue of empathy, a critical element in the mediation context.

The entire issue of neuroscience is attractive because it deals with physical phenomena.  It produces pictures of brain activity which may suggest universal behavioural features.  In turn, this might enable mediators, counsel and parties to better understand decision-making processes and predict responses which people of a given gender, for example, may exhibit.

In my view, this type of study is particularly valuable to pick up where a mere economic analysis leaves off.  Economics gives us expected value calculations and litigation risk analysis.  It is based on the theory that decisions are made by rational people, who will act in a rational and logical manner in all circumstances.

Anyone with any life experience at all knows that this is simply not the case.  Firstly, people do not act on a rational basis in every case and every time.  Secondly, even where a party strives for rationality, what is rational behaviour to one person will not be rational to another.  Put another way, many if not most decisions are capable of more than one approach which may appear to be rational to some but not to others.  Variables in this connection likely include both culture and gender.  They will also include neuroscientific considerations.

For example, according to neuroscience, people speak in a universal emotional language.  The entire theory behind parties to a mediation gathering in a room and delivering opening statements is probably based on, or at least supported by, the theory of mirror neurons.  The assumption is that people are hardwired for empathy which, as we now know, probably varies with gender. Taken at face value, this may suggest that as a practical matter, the extent to which mediators should permit parties to engage in face-to-face discussion may be influenced by whether or not one or both is male or female.

Unfortunately, the literature is not at all consistent in this area.  Perhaps this is not surprising given the relative infancy of this area of study.  For example, one author suggests that the ability to interpret facial expressions is unconnected with culture.  On the other hand, there is evidence that suggests that the manner in which people perceive the facial expressions of others will indeed differ across cultures.

There is even controversy in the literature as to what mediators ought to do with this type of information.  There are those who consider face-to-face discussion to be important to any party interested in convincing the opposing party of his or her sincerity.  On the other hand, others consider face-to-face discussion to be highly problematic, at least in instances in which there is a perceived power imbalance between the parties.

While these nuances may be controversial, however, there appears to be solid evidence from neuroscientific studies as to the manner in which the brain reacts to emotionally charged issues such as those typical of conflict and efforts to resolve conflict.

For example, while it is normal and natural for a party to a legal dispute to feel angry, it would appear clear that such feelings represent an obstacle to settlement at least in the sense that angry people are less likely to make decisions in their own best interests.

Feelings of anger generally begin with a triggering event which causes a party to assess the relevance of a given situation to his own aspirations and the likelihood of achieving his own goals.  The party will then focus on who is to blame for the problem and assess whether or not the person will be able to cope with the situation as well as the likelihood that the situation will improve.  In the meantime, however, the party dealing with feelings of anger will be subject to an excessive amount of adrenaline produced in the brain.  This hormone is produced by the adrenal glands when the body is in a state of high anxiety, fear or excitement.  While it enhances alertness, and while neuroscience teaches us that emotion of this nature is an integral part of reason and the decision-making process, anger will affect cognitive processing and interfere with the ability to solve complex problems.  It has even been suggested that regardless of personal levels of intelligence, during anger arousal, people perform generally as if they have a learning disability.  Even subtle forms of anger impair problem-solving and general performance.  In addition to increasing error rates, anger narrows mental focus, obscuring alternative perspectives.

The angry person has one “right way” of doing things, which, if selected in anger, is seldom the best way.

Neuroscience tells us that this limitation to a person’s access to rational cognitive functions will arise whenever a person is under stress or threat or feels shame.  On the other hand, when the body senses safety, the nervous system becomes receptive to new information.  This suggests that there is a need for mediators, counsel and parties to be aware of physical dynamics in order to reduce a party’s perception of threat and thereby increase the chances of a successful resolution.