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

When negotiating a deal, it is critical for parties to know when they have reached an agreement. This issue frequently arises in the commercial context and has been litigated in several mining cases.

In the well-known dispute between International Corona Resources Ltd. (Corona) and Lac Minerals Ltd. (Lac),¹ Corona alleged that Lac acquired mineral claims to the exclusion of Corona in breach of a joint venture agreement (and Lac's fiduciary duty and duty of confidence). The trial judge determined that the parties had not entered into a binding contract. Although Lac sent Corona a written proposal with options to jointly develop the subject property, and Corona expressed interest in Lac's proposal, the Court found that "[t]he most that can be said is that the parties came to an informal oral understanding as to how each would conduct itself in anticipation of a joint venture or some other business arrangement."²

Fast-forward 20 years to an Alberta Court of Appeal case involving the plaintiff Klemke Mining Corporation (Klemke) and various defendants, including Shell Canada Limited and Chevron Canada Resources Limited.³ The Court agreed that there was a binding contract for Klemke to perform mining and consulting work for the defendants despite the absence of a formal signed agreement, or an agreement as to the final price or precise scope of work to be completed under the project.

The Court considered the "commercial and industrial context, which was known to all the participants" when determining whether the terms of the agreement were "sufficiently certain."⁴ For instance, the Court determined that it was not essential for the final price to be precisely established when the agreement formed because the parties referred to "cost" and to "market rates" in various documents, which provided "for an effective mechanism to determine the price, namely benchmarking."⁵

Last year, in Proton Energy Group SA v. Public Company Orlen Lietuva,⁶ the English High Court grappled, in a preliminary motion, with facts involving 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 determined that an agreement was "plausible" and 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 summarized 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 thereaft er 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.⁷

How this plays out in any given negotiation will depend on the specific facts and circumstances of the case. However, in an age where fluid and rapid negotiations over electronic devices is increasingly the norm, negotiating parties would be well-advised to consider the state of the negotiation — the existence of a deal or no deal — and the extent of potential liability to the counterparty in circumstances where all terms of the agreement may not be finalized. Parties may be able to protect their interests by advising the counterparty that they do not consider a binding agreement to exist yet, or by making use of letters of intent that clearly stipulate whether a deal has, or has not, been finally made.

The law pertaining to this issue varies by jurisdiction and may be highly fact-driven. Legal advice is strongly recommended.

Footnotes

1. International Corona Resources Ltd. v. Lac Minerals Ltd., [1986] O.J. No. 2372 (H.C.J.).

2. Ibid. at para. 149.

3. Klemke Mining Corporation v. Shell Canada Limited, 2008 ABCA 257.

4. Ibid. at para. 18.

5. Ibid. at para. 19.

6. Proton Energy Group SA v. Public Company Orlen Lietuva, [2013] EWHC 334 (Comm.).

7. Bawitko Investments Ltd. v. Kernels Popcorn Ltd. 1991 CanLII 2734 at paras. 20-1 (Ont. C.A.). This summary has also been cited with approval by the British Columbia Court of Appeal. See, for example, Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd., 2000 BCCA 365.

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