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A contract is formed when the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract, and the surrounding circumstances may be considered

British Columbia

,

Canada

The Memorandum of Understanding Was a Binding and Enforceable Contract

In Oswald v. Start Up SRL, 2021 BCCA 352, the BCCA upheld the trial judge’s finding that the Memorandum of Understanding was a binding and enforceable contract in respect of the sale of shares to the appellant by the respondents.The respondents faced a corporate reorganization that would effectively eliminate the value of their shareholdings. The principal of the appellant corporation wanted the respondents to continue to be involved in the reorganized corporate structure and needed their cooperation with the restructuring.

The respondents were willing to negotiate about an arrangement that would, if successful, see them continue to be involved. However, they wanted assurances that would mitigate the risks of the loss of value of their shareholdings if those negotiations were unsuccessful and the reorganization occurred. Accordingly, the purpose of the MOU, as admitted by the appellant’s principal, was to assuage the respondents’ concerns by guaranteeing a minimum price for the respondents’ shares in the event the negotiations failed, and they left the organization.

The MOU stated as its purpose to provide comfort & a binding obligation of minimum assurance of value. It also stated that the parties agreed to be bound by its terms. The MOU provided, among other things, that Start Up was in the process of buying out the shares of all other shareholders apart from those of Mr. Oswald and Mr. Mhamunkar; that Start Up was obliged not to execute an agreement with Mr. Oswald and Mr. Mhamunkar prior to the share transfer process with the other shareholders; and that the parties wished to continue working together to expand the business.

Legal Principles of a Binding and Enforceable Contract

A contract is formed when the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract, and the surrounding circumstances may be considered (para 33). The court must consider how each party’s conduct would appear to a reasonable person in the position of the other party (para 33). The question in every case is what intention is objectively manifest in the parties’ conduct (para 33).

The applicable legal principles are:

  1. there must be an intention to contract;
  2. the essential terms must be agreed to by the parties;
  3. the essential terms must be sufficiently certain;
  4. whether the requirements of a binding contract are met must be determined from the perspective of an objective reasonable bystander, not the subjective intentions of the parties; and
  5. the determination is contextual and must take into account all material facts, including the communications between the parties and the conduct of the parties both before and after the agreement is made (para 34).

The BCCA held that the judge made no legal error in the test applied by the judge. The judge reviewed the wording of the MOU and the factual context in which it was entered, as well as the conduct of the parties both leading up to and following its execution. There was no error in the judge’s reliance on the wording of the MOU, which expressly says it create a “binding obligation” (para 43).

It was not a palpable and overriding error for the judge to conclude that a completion date or a minimum value of the shares were not essential terms of the contract (paras 46-48).

Misapprehension of Evidence of Subsequent Conduct

The judge did not make a palpable or overriding error in his conclusions on the significance of the subsequent conduct of the parties. It was open to the judge to conclude that the negotiations concerned only Option A (where the respondents would stay) and not in relation to Option B (where the respondents would leave). The existing of a binding obligation Option B was not undermined by those negotiations nor by the fact that they extended beyond the seven-day period contemplated in the MOU (paras 50-52).

April 14, 2022
Oswald v. Start Up SRL, 2021 BCCA 352