Cancel culture: Clear language preserves cancellation clause in lending contract

4 minute read
11 August 2021

The recent Marshallzehr decision emphasizes the importance of careful contract drafting as the Ontario Court of Appeal upholds a cancellation clause in a lending agreement. The court studiously considered the exact wording of the cancellation clause, which raises the possibility that less stringent wording could fail to protect a lender.

The clause provided that "the lender may at any time, for any reason and without notice, cancel the undrawn portion of the loan." When a loan financing a residential real estate project failed to close, the plaintiff notified the defendants that it was ending the commitment letter pursuant to this provision.

The appeal comes from an agreement between the lender, Marshallzehr Group Inc. ("Marshallzehr", "the plaintiff", or "the lender"), and the real estate developer companies recognized as Ideal (BC) Developments Inc. et al. ("Ideal", "the defendants", or "the borrower"). The dispute centred on a commitment letter confirming the terms of the lender's agreement to finance the developer's project. Since the lender's obligation to syndicate the loan was conditional upon the borrower satisfying certain funding criteria, the lender was able to rely on the contractual cancellation clause when they felt those preconditions were not met. The plaintiff commenced the action to recover various fees and expenses, while the defendants counterclaimed for damages for wrongful termination, addressing the cancellation clause in their arguments. The Court upheld the clause – both at trial and on appeal.

The decision represents a win for lenders. Marshallzehr reinforces the contractual right of lenders to terminate a loan commitment if they wish, but they need to be crafty drafters. Using straightforward and non-archaic language will aid the court should the matter reach litigation. Risks and their associated limits should also be reflected in any clauses or conditions. When it comes to contractual interpretation, courts will place a great deal of focus on language, so it is crucial to be clear and comprehensive.

The appeal judge broke down the words in the contractual provision. Their stringent analysis demonstrates the importance of strong contract drafting skills. In dismissing the appeal and upholding the cancellation provision, the Court reaffirmed that provisions of the commitment letter clearly stated that the lender was not required to advance any funds prior to the borrower fulfilling stipulated preconditions to the lender's satisfaction. When the motion judge's reasons are read against that background, his interpretation gives effect to the terms of the commitment letter and to the basic bargain agreed to by the parties. For example, Part VI of the commitment letter states that "the execution of this letter does not obligate the Lender to advance any of the agreed funds unless all of the conditions to such advances have been satisfied to the satisfaction of the Lender and its solicitors." The agreement was not necessarily "plainly written," but rather was written in a "commercially reasonable" way that allowed the motion judge's interpretation to give practical meaning to its terms.

The high threshold level of analysis that the Court determined in Marshallzehr not only reminds lenders of their rights, but also of the importance of their legal team. Careful contract drafting lends itself to the power of a skillfully written provision.

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