Canada: BEWARE – Exchange Of E-Mails May Constitute A Binding Contract

Last Updated: March 27 2008
Article by John Longo

In a decision released in late 2006, the Honourable Mr. Justice Perell explained that an exchange of e-mails between two parties may constitute a binding contract depending on the specificity of the dialogue within the e-mails. Therefore, when parties enter into negotiations via e-mail, they must clearly indicate whether their intentions are to finalize a contract or agreement within the exchange of e-mails or if the e-mails are simply a tool to allow the parties to prepare an agreement to be completed at a future date.

In this particular case, two corporations (hereinafter "R-London" and "R-Toronto") entered into a partnership, merged their businesses and began to operate under the common name "Rehability." After a few years, R-London and R-Toronto decided that they wanted to expand the business in different directions. They split Rehability into two separate corporations in the same manner as prior to the merger. The only issue of contention was that both parties wanted to maintain the rights to the name "Rehability."

E-mail Correspondence Between The Contracting Parties Began

R-Toronto sent an e-mail to R-London, offering to buy the rights to the name "Rehability" for $70,000. R-Toronto stated in its e-mail:

"As per our discussion today, I would like to acquire the Rehability name. I offer $70,000 payable upon signing a legally binding agreement....The agreement will be in a form acceptable to both our lawyers."

R-London responded to this e-mail by also declaring its interest in the name "Rehability" and counter offered to purchase the rights to the name for $90,000. For the next month or so, a flurry of e-mails were sent back and forth in which both parties continued to make offers and counter offers.

Eventually R-London offered to pay R-Toronto $150,000 for the exclusive rights to the name "Rehability." R-Toronto accepted this offer and wrote the following:

"We accept your offer of $150,000 for the sole use of the Rehability name conditional upon resolution of some outstanding issues. I do not anticipate that there should be major problems. Obviously the final agreement has to be in a form acceptable to both our lawyers."

A few days later, R-London changed its position and informed R-Toronto that it was now only willing to pay $130,000 for the rights to the name. R-Toronto immediately objected and claimed that R-London was bound by its previous offer.

Did The Exchange Of E-mails Establish A Binding Agreement?

The court stated that when two parties are engaged in the negotiation of a contract, the parties are either:

  • negotiating all the terms of the contract, with the understanding that the contract will not become enforceable until a further document is executed by both parties; or
  • negotiating all the terms of the contract, and at the completion of the negotiation a legal contract would be formed. The signing of the formal contract would be a mere expression of the manner in which the transaction already agreed upon will proceed.

Mr. Justice Perell explained that in order to determine which of the two types of negotiations transpired, the court would have to determine the subjective intention of the parties during the negotiations. The court further explained that in determining the intent of the parties, the courts will look at:

  • the terms used in the e-mails by both parties;
  • the context in which the terms were used; and
  • the purpose of the parties in using such terms.

Mr. Justice Perell reviewed the exchange of e-mails between R-Toronto and R-London and determined that both parties had the intention to negotiate the terms of the agreement via e-mail. However, both parties believed that the negotiation within the e-mails would be subject to the execution of a final agreement. In support of his decision, Justice Perell referred to the first e-mail exchanged between the parties which stated that:

"As per our discussion today, I would like to acquire the Rehability name. I offer $70,000 payable upon signing a legally binding agreement....The agreement will be in a form acceptable to both our lawyers." (emphasis added)

The court also referred to one of the last e-mails exchanged between the parties which stated "Obviously the final agreement has to be in a form acceptable to both our lawyers," which reiterated the message of the initial e-mail. Justice Perell found that these words established a formality that could not be overlooked.

In summary, the court held that the bolded language noted above was a clear indication that it was never contemplated by the parties that the exchange of e-mails would constitute an enforceable agreement. Instead, the parties understood that a separate written agreement would need to be signed by both parties before an enforceable contract came into existence. The court concluded that because it was not the intention of both parties to form an enforceable agreement through the exchange of e-mails, no agreement was ever completed.

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.

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