A party who holds a subject clause must use it for its intended purpose, not as an excuse to leave a deal. Many British Columbia purchase and sale contracts are “subject to” a condition, also called a subject clause, such as financing, an inspection or lawyer approval. The party who holds the condition decides whether it is satisfied, but British Columbia courts do not allow that decision to be made for any reason at all. This article provides a general overview. It is not legal advice.
Does the wording of a subject clause affect its legal effect?
The wording determines the legal effect. British Columbia courts recognize three kinds of subject clause, depending on the wording read in the context of the whole contract (Davidson v. Merrick, 2021 BCSC 1847 at paras. 22–24):
- Entirely subjective (“subject to the whim of the purchaser”). There is no binding contract until the condition is removed, and either side can walk away (paras. 23, 44).
- Clear, precise and objective (“subject to John Smith being elected mayor”). The contract binds, and both sides must act in good faith to bring it to fruition (para. 23).
- Partly subjective and partly objective (satisfactory financing or inspection). Most B.C. subject clauses fall here. The party must take all reasonable steps to fulfil the condition, and a court can assess those efforts (paras. 23, 30–31).
What does the duty of good faith require when a party relies on a subject clause?
Good faith requires a party to use a contractual right for the purpose it was given. The Supreme Court of Canada has said that parties “generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily” (Bhasin v. Hrynew, 2014 SCC 71 at para. 63). A party may still pursue its own self-interest (para. 70).
The British Columbia Court of Appeal asks whether the exercise of discretion was “unconnected to the purpose for which the contract granted discretion.” A court first interprets the contract to find that purpose. A right used for a purpose “ulterior or extraneous” to the parties’ intentions is exercised in bad faith, and even a discretion described in absolute terms cannot be used in a manner unrelated to its purpose (Dhanesar v. Pandher, 2026 BCCA 63 at paras. 60, 67, 73).
How have British Columbia courts applied the duty of good faith to subject clauses?
Courts have not accepted a better offer or regret about the bargain as a proper reason to rely on a condition.
- Zhang v. Amaral-Gurgel, 2017 BCSC 1561. A sale was subject to the seller’s lawyer approving “the terms and conditions of the contract.” The seller received a higher offer after signing and declined to remove the condition. She identified no concern specific to the contract (para. 20). She “failed to act in good faith and was in breach of her contract” (para. 56).
- Mason v. Freedman, [1958] S.C.R. 483. A vendor who regretted the bargain relied on a clause allowing him to cancel if he was “unable or unwilling” to remove a title objection, but made no genuine effort to do so (at 486). The Supreme Court of Canada held that a vendor who relies on such a clause “must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner” (at 487).
Both cases involved sellers. The rule applies to whichever party holds the condition.
Dhanesar v. Pandher, 2026 BCCA 63, shows how the issue arises for a buyer. The sellers argued that the buyer relied on a condition “as a pretext to terminate the Contract for other reasons.” She acknowledged that doing so would breach the duty of good faith. The British Columbia Court of Appeal did not decide the point and ordered a new trial because the trial judge applied the wrong legal principles (paras. 75, 84–86).
What should buyers and sellers do when a contract has a subject clause?
- Read the wording of the condition. A condition tied to something that can be checked requires reasonable steps (Davidson v. Merrick, 2021 BCSC 1847 at paras. 30–31).
- Be ready to name the specific concern (Zhang v. Amaral-Gurgel, 2017 BCSC 1561 at para. 20).
- Write important matters into the contract as conditions. The contract is the first source of the parties’ obligations (Dhanesar v. Pandher, 2026 BCCA 63 at para. 67(d)).
If you have questions about a subject clause in a purchase or sale, please contact one of our lawyers, who will be able to assist.
This post is current as of November 2026.
By: Daniel T. Patterson