Canada: Deal Or No Deal? - The Importance Of Knowing When You Have An Agreement

When negotiating a deal, it is critical for parties to be aware of when they have reached an agreement.

Recently, in Proton Energy Group SA v. Public Company Orlen Lietuva, [2013] EWHC 334 (Comm), the English High Court found in a preliminary motion that it was "plausible" that an email with the word "confirmed" was sufficient to constitute the acceptance of an offer even though several terms remained subject to further negotiations.

In Proton, rapid back-and-forth email correspondence relating to the sale of crude oil mix culminated in a "firm offer" email from the seller, and a reply email from the would-be purchaser stating "confirmed". The seller argued that the real-time exchange indicated that a binding agreement had been reached on the essential terms of the sale, subject to the negotiation of other (minor) terms. The Court placed emphasis on the email exchange and subsequent conduct of the parties (the seller sent the buyer a draft contract for the sale and the parties corresponded about remaining terms in the contract).

In Canada, the legal test for determining whether two parties have made a binding contract that is to be reduced to writing at a later time, as opposed to an unenforceable "agreement to agree," has been summarised as follows by the Ontario Court of Appeal:

The parties may "contract to make a contract," that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions.  When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.

However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract.   Bawitko Investments Ltd. v. Kernels Popcorn Ltd. 1991 CanLII 2734 at paras. 20-1 (Ont. C.A.).

Takeaway

In an age where fluid negotiations over electronic devices is the norm, you would be wise to consider the extent of your potential liability to the counterparty in circumstances where all terms of the agreement may not be finalized. The law pertaining to this issue varies by jurisdiction and therefore seeking legal advice is strongly recommended.

Stay tuned for our follow up post on practical tips to potentially avoid the issues that rose in Proton.

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