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Closing conditions are a key element of every M&A transaction that does not close upon signing. A "Time is of the Essence" clause (ToE clause) is a common contractual clause that triggers an immediate termination right where a contractual duty is not timely performed. The recent decision in Nova Fish Farms highlights the uncertainty that can arise around the termination rights of M&A parties if fixed dates for the satisfaction of closing conditions and/or an outside closing date are not specified in an M&A agreement with a ToE clause.
We review the ruling and its drafting and risk allocation lessons for Canadian M&A. Dealmakers in Canada should also continue to watch this space. The Supreme Court of Canada (SCC) has recently granted leave to hear the dispute, and its ruling will guide how closing conditions and ToE clauses interact in M&A going forward.
Key Practical Takeaways for Closing Conditions and ToE Clauses
- Use Set Deadlines: Always consider setting fixed dates for the satisfaction of closing conditions and/or a fixed outside date for closing the transaction. This is particularly the case for closing conditions that involve third-party approvals (i.e., over which the parties have no control).
- ToE Clauses Do Not Cure Open-Ended Timing: ToE clauses create certainty regarding fixed dates and times by making any failure to meet the specified date or time a breach that allows the innocent party to terminate the contract no matter how immaterial the delay. However, ToE clauses will not, in and of themselves, set a time limit: one must be specified.
- Drafting and Risk Allocation: M&A parties should consider whether they are better off with a ToE clause and, if so, whether it should apply to all fixed dates in the M&A agreement or only to certain specified dates. In other words, ToE clauses should not be automatically adopted: they should be scrutinized on a deal-by-deal, clause-by-clause basis.
- Pending SCC Ruling: In January 2026, the SCC granted leave to hear the case. The SCC's ruling should inform how M&A parties should approach closing conditions and ToE clauses going forward.
For more Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe. For more analysis of closing conditions and ToE clauses in M&A, see Fasken's Private M&A in Canada: Transactions & Litigation (LexisNexis).
Why the Absence of a Fixed Closing Date and Outside Date Mattered
The dispute in Nova Fish Farms arose from the sale of several trout farms that required certain provincial and federal government approvals for the transaction to close. The parties agreed to pursue these approvals "as promptly as practicable" and using "commercially reasonable efforts". However, the parties did not set a fixed closing date or an outside date by which the closing conditions had to be met: the agreement only stated that the closing date would be seven days after all the closing conditions had been satisfied. The agreement also included a generic ToE clause.1
How the Buyer's Delay in Seeking Regulatory Approval Triggered the Dispute
The agreement was signed in February 2020, just shortly before the onset of the COVID-19 pandemic. Neither of the parties took any meaningful steps to obtain the necessary regulatory approvals over the next 16 months. The buyer eventually submitted the approval applications in June 2021, and the required government approvals were granted in October 2021. The buyer notified the seller of this in December 2021, and the buyer confirmed that it was ready to close. Relying on the buyer's extended delay in seeking the approvals, the seller took the position that its performance obligations had ended and that it was not required to close. The buyer responded by suing for specific performance.
The Trial Judge Applied the ToE Clause to the Buyer's Open-Ended Obligations
The trial judge held that the buyer had breached the agreement by failing to act promptly and to use commercially reasonable efforts to get the required approvals. The judge also held that the ToE clause applied to these obligations. While there were no set timelines attached to obtaining the approvals, the judge reasoned that the parties could not have meant that the buyer doing essentially nothing for 16 months would satisfy these efforts standards. The result was that the ToE clause had entitled the seller to terminate the agreement and that the buyer's claim for specific performance could not succeed.
The Court of Appeal Ruled that ToE Clauses Only Apply to Fixed Dates and Times
The Court of Appeal upheld the trial judge's ruling that the buyer had breached its efforts undertakings regarding the required approvals. However, the Court disagreed that the ToE clause applied to the effort's undertakings. The Court explained that M&A parties use ToE clauses to provide certainty around the consequence of failing to meet a fixed date in an M&A transaction: that the other party will be able to terminate if that timeline is not timely met. The Court then explained that this goal of certainty would be greatly undermined if ToE clauses applied to contractual obligations without fixed timelines. It would make it unclear whether a party was complying with its obligations and when the other party might be able to terminate. The result for the Court was that, even though the buyer had been in breach, the seller had not become entitled to terminate. The buyer could therefore be awarded specific performance.
What The Supreme Court of Canada Might Clarify About ToE Clauses
The SCC's upcoming ruling will no doubt provide key guidance on how M&A parties should approach the interaction of closing conditions and ToE clauses going forward. That said, there are several different points on which the SCC could decide the dispute. One point worth watching closely is whether the SCC modifies the rule that a ToE clause makes any failure to meet a fixed date or time in an agreement – no matter how immaterial the delay – a breach that entitles the other party to terminate, or whether the SCC might adopt a more situation-specific approach.
Concluding Comments: Closing Conditions and ToE Clauses after Nova Fish Farms
Subject to the SCC's pending guidance, Nova Fish Farms suggests it is best practice for M&A parties to set fixed dates by which their closing conditions must be satisfied and/or a fixed outside date for the closing of the transaction. This is particularly the case for closing conditions that involve third-party approvals (i.e., over which the parties have no control). M&A parties should also ask themselves whether a ToE clause, and its associated termination right, should be included in their M&A agreement and, if so, whether it should apply to all fixed dates in the agreement or only to certain specified dates. In other words, ToE clauses should not be automatically adopted in the ordinary course: they should be scrutinized on a deal-by-deal, clause-by-clause basis. M&A parties can also consider tying express cure periods and associated termination rights to one or more closing conditions.
Footnote
1 This simply stated, as many ToE clauses do, that “Time shall be of the essence of this agreement”.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
