An Agreement of Purchase and Sale (APS) for a real estate transaction may sometimes have a condition that allows for review of the APS by a lawyer.

Depending on the wording of the condition, the buyer or seller (or both) may have a time-limited right to terminate a transaction if their lawyer is not satisfied with the terms of the APS.

If one side terminates the transaction under this condition, the other side may understandably wish to know why the party’s lawyer recommended that the condition not be waived. 

Ordinarily, however, communications between a party and their own lawyer are protected by solicitor-client privilege and do not have to be disclosed.

In 1824120 Ontario Limited v. Matich, the Ontario Divisional Court addressed an appeal of a decision upholding a party’s refusal to disclose their lawyer’s file in relation to a real estate transaction.

Property sale

The litigation action arose from a transaction for the sale of 37 acres of land that used to be the sellers’ family farm. Two of the sellers were in their 80s when they were approached by a real estate agent to sell the farmland. They signed a listing agreement and eventually agreed to sell the property for $16.5 million.

The APS included a lawyer’s approval clause stating: “This Offer is conditional upon the approval of the terms hereof by the Seller’s Solicitor.” 

The sellers were required to give the buyer notice in writing within three days that the condition was fulfilled; otherwise, the offer was null and void. 

Solicitor-client privilege

The condition was expressly stated to be for the benefit of the sellers and could be waived at their sole option by notice in writing to the buyer within three days.

The sellers retained a lawyer who reviewed the APS. After discussing the APS with their lawyer, the sellers were not prepared to waive the condition. In an email notifying the buyer’s lawyer that the condition was not waived, the sellers’ lawyer stated that they were not waiving solicitor-client privilege.

The buyer sued, alleging that the sellers had an obligation to exercise their rights under the approval condition reasonably, honestly and in good faith and that their actions were the opposite—unreasonable, dishonest and in bad faith. 

The sellers’ statement of defence pleaded that they retained a real estate lawyer to review the APS in good faith per the approval clause and then decided not to waive the condition.

The buyer brought a motion for an order requiring the sellers to produce their lawyers’ file on the basis that they impliedly waived their solicitor-client privilege. The motions judge concluded that privilege had not been waived. 

The buyer obtained leave to appeal to the Divisional Court on the issues concerning privilege and the real estate lawyer’s file. The buyer argued that the motion judge erred in the application of the legal principles regarding the implied waiver.

“Quasi-constitutional importance”

Solicitor and client privilege in Canada is regarded as having quasi-constitutional importance to the administration of justice. It is a principle of fundamental justice and a cornerstone of the justice system. 

The Supreme Court of Canada has stated that solicitor-client privilege “must be as close to absolute as possible to ensure public confidence and retain relevance. As such, it will yield in only certain, clearly defined circumstances.”

Waiver of privilege may be established where it is shown that the possessor of the privilege (i) knows of the existence of the privilege and (ii) voluntarily evinces an intention to waive that privilege.

Waiver of solicitor-client privilege

In the case at hand, the buyer argued that there was an implied waiver resulting from the sellers’ stated position that they sought, received, and relied upon legal advice in good faith. 

Waiver of privilege may occur in the absence of an intention to waive, where fairness and consistency so require. The buyer argued that the sellers had crossed the line and that their statements amounted to an implied waiver. 

The Divisional Court did not agree. Rather, the sellers’ pleadings and other statements amounted to saying, in response to an allegation of dishonesty and bad faith concerning the use of their lawyer’s approval clause, that they took the steps required to exercise their rights under the approval clause, did exercise that right, and did so in good faith. 

In the appellate court’s view, this did not amount to implied waiver over their communications with their lawyer.

It was the buyer who raised the issue of the sellers acting in bad faith, and the sellers were entitled to respond to those allegations without waiving privilege.

Other arguments

One of the issues raised by the buyer was the revelation that the sellers’ lawyer had received a higher offer from a third party before giving his opinion. 

However, while the information about receiving another offer could be used by the buyer in the claim, it did not lead to a requirement for the sellers to produce their lawyer’s file.

The buyer also argued that the lawyer’s review clause did not allow for the consideration of other offers as a reason not to waive the condition. Therefore, the buyer argued the reasons why the sellers waived the condition were relevant. 

However, the appellate court did not agree since the approval clause in the APS referred to the lawyer’s approval of “terms” and did not expressly exclude the consideration of the agreed-upon price as being one such term.

Lastly, the buyer argued that the duty of good faith outlined by the Supreme Court of Canada in Bhasin v. Hyrnew required the sellers to disclose the concerns that caused their lawyer not to approve the transaction and give the buyer an opportunity to address those concerns. 

No implied waiver of privilege

The Divisional Court noted, however, that the wording of the approval clause did not require such steps. Bhasin requires good faith performance of contractual obligations but does not require additional obligations to be added to an APS by implication.

The Divisional Court, therefore, concluded that there was no implied waiver of privilege and dismissed the appeal. The buyer may still pursue the bad faith argument against the sellers, but not with the production of their real estate lawyer’s file. 

The underlying dispute between the parties regarding whether or not the sellers were entitled to terminate the transaction remains to be determined on another day.

James R.G. Cook

James Cook is a partner at Gardiner Roberts in Toronto and has been with the firm since he articled there in 2002. As a litigator in the firm’s Dispute Resolution Group, he has experience in a broad range of commercial, real estate and professional liability litigation. Phone 416-865-6628; email jcook@grllp.com. This article is provided for educational purposes only and does not necessarily reflect the views of Gardiner Roberts LLP.