For business owners venturing into complex real estate investment and development, contracts are the foundation of every venture. These agreements often include incentives, designed to attract crucial financing and align the interests of developers and investors. However, when these contractual terms—especially those governing incentives—are vaguely written or uncertain, the very foundation of the agreement can crumble, potentially leaving vital clauses void and rendering the agreement unenforceable. A recent British Columbia Court of Appeal decision sheds light on the critical importance of clarity and certainty in incentive clauses, particularly for business owners managing or investing in real estate development projects.

The Crucial Role of Incentives in Real Estate Development

In large-scale real estate development, such as mixed-use projects, the ability to pool capital from third-party investors is often vital. Developers, like Argo Ventures Inc. in the case of Kim v. Argo Ventures Inc., identify investment opportunities and manage the business for investors.

To secure the necessary funding, developers offer incentives to financial partners. In the Kim case examined here, an investor was offered a financial benefit for providing additional financing to a struggling project, referred to as the RSJV Liquidation Incentive. Such incentives are the “compensation” for assistance and the lure that enables the project to move forward or survive financial restructuring.

However, the value of an incentive is only as strong as the language that defines it.

When Good Incentives Go Bad: The Problem of Contractual Uncertainty

The challenge for business owners and investors arises when the language defining an incentive or an exclusion from an incentive is vague, unclear, or uncertain. The court in Kim v. Argo Ventures Inc. grappled with an Incentives Exclusionary Clause, which was intended to exclude certain investors “related to” specific other investment entities (AMF#3 and AMF#5) from receiving the incentive.

The Uncertainty of Exclusion

The trial judge, whose finding of this aspect of the contract was ultimately upheld by the Court of Appeal, found this exclusionary clause to be void for uncertainty because it was “entirely unclear” what was meant by the term “related”. The definition of who was excluded from the incentive—and thus, who was entitled to it—could not be determined.

For business owners, this is a critical takeaway: contractual terms, especially those that define who gets paid (the parties) and how much they get paid (the price), must be drafted with crystal-clear precision. Ambiguity here is not a minor drafting error; it’s a fundamental defect.

The Legal Test: Severance vs. Vitiation of the Entire Agreement

Once a term is found to be void for uncertainty, a court must decide how to proceed. The dispute centers on the doctrine of severance, which asks: Can the uncertain, defective term be cut out of the contract, leaving the rest of the agreement—including the incentive provisions—intact and enforceable?

The court’s approach to severance is highly constrained, prioritizing the preservation of the parties’ original intent.

The Doctrine of Severance

A vague or uncertain term can only be severed (removed) if it is considered meaningless, minor, or subsidiary to an otherwise enforceable agreement, or if it is in a divisible part of the agreement.

The court must be wary of altering the terms of the original contract, as severance, in any form, may materially change the agreement. The goal is to enforce the objective intentions of the parties, not to impose the court’s subjective view of what would be fair or reasonable – this is the error that the Court of Appeal corrected in the trial judge’s findings.

Conversely, vague or uncertain terms that the parties intended to govern a vital aspect of the parties’ relationship are not severable; they vitiate the entire agreement. An essential, or vital, term of a contract typically includes the parties, the subject property (or subject matter), and the price.

The Error: Severing an Essential Term

In the Kim case, the Court of Appeal found that the trial judge had erred in concluding the Incentives Exclusionary Clause was merely subsidiary (minor) and could be severed.

The Court’s reasoning was clear:

• Identity of Parties is Essential: The Exclusionary Clause determined the identity of the investors who were eligible for the two largest incentives, including the RSJV Liquidation Incentive. It essentially sorted investors into two different groups with different incentive schemes.
• Affecting Both “Parties” and “Price”: By removing the exclusionary clause, the incentive would become payable to all investors, even those the original agreement clearly intended to exclude, because they already risked losing their investment in the Olympic Village Project. This action fundamentally altered the incentive scheme, significantly increasing the cost of the incentives (price) to Argo and changing the recipients (parties).
• Creating a New Agreement: Severing the clause did not simply remove a minor term; it engaged in an impermissible “notional severance” by effectively rewriting the agreement to affect a new deal that Argo would not have accepted, as it violated the agreed-upon incentive structure.

Because the uncertain Exclusionary Clause was essential to determine the identity of the parties entitled to the incentive, it could not be severed from the incentive provisions.

The Final Consequence: Incentive Provisions Rendered Uncertain

The inescapable legal conclusion was that the judge’s finding of uncertainty in the Exclusionary Clause rendered all of the incentive provisions uncertain.

The Court of Appeal’s holding: the cross-appeal was allowed, and the original order requiring payment of the $34,542 incentive was set aside. The incentives were not payable.

For business owners, the lesson is stark: an essential term that is void for uncertainty can make the entire clause, or even a larger part of the contract, unenforceable.

A Note on Fairness and Partial Performance

The trial judge had considered factors like the unfairness of allowing Argo to receive the benefit of the financing “at no cost” and the fact that the agreement had been partially performed. However, the Court of Appeal rejected these considerations:

• Unfairness is Irrelevant: Unfairness is generally irrelevant when determining whether to apply severance to a term of a commercial contract. A court cannot rewrite an agreement to be “fair in the eyes of the court”.
• Partial Performance Cannot Cure Defects: The mere fact that the parties relied on the agreement and partially performed its terms—such as registering a mortgage to secure the financing—cannot remedy uncertain terms.

Certainty: A Business Imperative

As a business owner, securing financing through an incentives-based contract requires a relentless focus on certainty. You must ensure that the key elements are unambiguous:

1. Define the Parties: Clearly and unequivocally identify who is entitled to the incentive and who is excluded, avoiding vague relational terms like “related to”.
2. Define the Price/Calculation: Ensure the terms defining the incentive calculation (the “liquidation surplus,” the “absolute contribution ratio,” etc.) are precise and not dependent on variable, undefined hopes (e.g., hoping to raise $15 million).
3. Ensure Essential Terms are Not Fragmented: If a term, like an exclusion, is essential to the final economic bargain (the “price” or the “parties”), it must be as certain as the core promise itself.

The Kim decision serves as a powerful reminder: In business and law, clarity is currency. The high cost of uncertain drafting is the loss of the incentive itself, leading to a profound breakdown in the intended agreement. The effort spent ensuring the iron-clad certainty of your contract’s terms—especially those delicate incentive provisions—is one of the most critical investments a business owner can make.

Contact Roland Luo in Vancouver for Dynamic Advice in Real Estate Development Disputes

For the past two decades, we have specialized in cases involving real property disputes. Should you encounter such a claim or need to defend against a claim similar to this case, contact Roland Luo.

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential discussion, contact us online (the most efficient method) or by phone at 604-800-4628.