Before contracts are documented in a written agreement that is signed by all parties, the terms of the agreement are often negotiated verbally or by email. If the written agreement never gets finalized and signed, a dispute could arise as to whether those preliminary communications resulted in a binding, enforceable contract. That was the issue in two recent cases, which serve as a useful reminder that if an agreement is subject to the execution of a formal written document (or anything else), this should be clearly communicated during the negotiation stage.
In this case, the British Columbia Supreme Court had to decide, among other things, whether a series of emails detailing the terms of an agreement amounted to a binding contract.
Two related limited partnerships, Vancouver Canucks Limited Partnership and Vancouver Arena Limited Partnership (collectively the “Canucks”) were in the process of negotiating two separate contracts with Canon Canada Inc. (“Canon”). The first contract related to the lease of certain Canon office equipment (the “equipment contract”) and the second contract was for Canucks sponsorship benefits (the “sponsorship contract”). The two contracts were connected and the parties negotiated on the basis that both contracts would be entered into simultaneously.
The parties came to a consensus on the terms of the sponsorship contract over several emails, and intended to produce a written agreement with more detailed contractual terms. But months later, after the equipment contract was finalized and executed, a dispute arose as to whether the parties had a binding sponsorship contract. The Canucks claimed that the exchange of emails resulted in a formal sponsorship agreement. Canon disagreed, arguing that there was no enforceable contract because the parties had not reached an agreement on all essential terms and any legal obligations were specifically subject to approval of both parties’ legal counsel and the execution of the formal contract.
The BC Supreme Court decided that the emails created an enforceable contract because they contained all of the essential terms required to form a binding agreement. The key terms of the agreement, including the parties, the price and the sponsorship inventory, were settled. The fact that some of the details still had to be agreed to was not critical because this would happen when the formal agreement was drafted. The court also looked at the circumstances surrounding the email exchange and found that the parties showed an intention to be bound. Among other things, the Court was influenced by the fact that the parties continued to work hard to finalize the equipment contract which indicated they thought a deal had been reached with respect to sponsorship.
The Court also found that the agreement was not subject to the execution of a formal contract and was therefore not “an agreement to agree”. There was no express provision in the emails that provided that the agreement was subject to formal documentation or approval by legal counsel. The conclusion of the equipment deal was the only condition subsequent to the sponsorship deal. Accordingly, the Court concluded that Canon breached the sponsorship contract by refusing to perform its obligations under the agreement.
This case involved a settlement agreement that was negotiated between solicitors for Terra Nova Royalty Corporation (“Terra Nova”) and Alan Hartslief after Mr. Hartslief’s employment with the company was terminated. The solicitors exchanged several drafts of the settlement agreement and eventually agreed over the phone that the most recent draft was acceptable. However, Terra Nova argued that no binding contract was created because the agreement was subject to the parties signing a formal agreement and Terra Nova being satisfied with certain information and records to be provided by Mr. Hartslief.
The issue was whether the negotiations and communications between the lawyers resulted in a binding contract between their clients.
The Court of Appeal decided that a binding agreement had been reached between the parties. The Court confirmed that lawyers negotiating on behalf of their clients are assumed to have the authority required to bind their client to an agreement.
In light of this decision, if a lawyer does not have the required authority, they need to clearly communicate to the other side that any negotiations are subject to them confirming instructions with their client. In the present instance, it was found that neither solicitor communicated to the other that acceptance of the agreement was conditional on formal approval from their respective clients. Further, neither solicitor indicated that the written agreement had to be finalized and signed in order for the agreement to be binding.
The courts in these decisions have reminded us that a signed written agreement is not necessary to form a binding contract. Accordingly, if your intention is not to be bound until a formal agreement is signed by all parties, that intention should be clearly communicated, preferably in writing, at the outset of negotiations.