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Contract to Make a Contract

October 27, 2021

Ontario

,

Canada

Issue

Are oral contracts regarding personal property enforceable?

Conclusion

If the parties have been found to reach an oral contract, and that contract constitutes a completed contract, where the parties had manifested an intention to be bound thereby, it could readily be concluded that they had entered into an identifiable and legally enforceable oral contract. (Bawitko Investments Ltd. v. Kernels Popcorn Ltd.)

As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. 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. (Bawitko Investments Ltd. v. Kernels Popcorn Ltd.)

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. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself. (Bawitko Investments Ltd. v. Kernels Popcorn Ltd.)

When a trial judge finds - as a matter of fact - that the parties had entered into a binding oral agreement for the sale of shares in which the essential terms of the agreement -- number of shares, price per share and settlement date -- are settled, such a determination is not to be reversed absent palpable and overriding error. (Erie Sand and Gravel Limited v. Tri-B Acres Inc)

In UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd. the parties had concluded an oral agreement and were ad idem on the parties, the purchase price, the absence of any material event out clause, and the date of closing. The trial judge concluded that the oral agreement was binding, and the Ontario Court of Appeal upheld the trial decision. Specific performance was ordered.

In Dovbush v. Mouzitchka the relationship between the parties fell apart, but the trial judge found that an oral agreement for the purchase and sale of shares had been reached. However, the Court of Appeal concluded that the trial judgement had to be set aside. As the trial judge's reasons were not indicative of the pathway to the decision, a new trial was ordered.

Law

In Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA) the Ontario Court of Appeal articulated general principles applicable to formation of oral contracts:

As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. 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.

[Page 13]

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. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself. See, generally, Von Hatzfeld Wildenburq v. Alexander, [1912] 1 Ch. 284; Canada Square Corp. Ltd. et al. v. Versafood Services Ltd. et al. (1980), 1979 CanLII 2042 (ON SC), 25 O.R. (2d) 591 (H.Ct.), aff'd., (1981), 1981 CanLII 1893 (ON CA), 34 O.R. (2d) 250 (C.A.); Bahamaconsult Ltd. v. Kellogg Salad Canada Ltd. (1976), 1975 CanLII 379 (ON SC), 9 O.R. (2d) 630 (H.Ct.), rev'd, (1977), 1976 CanLII 554 (ON CA), 15 O.R. (2d) 276 (C.A.); Chitty on Contracts, 26th ed. (1990), at pp.79-91; Corbin on Contracts, (1963), Vol. 1, § 29-30; and Treitel, Law of Contract, 7th ed. (1987), at pp.42-47.

In this case, the parties clearly contemplated the signing of a formal written contract. Given this fact, can the oral contract they were found to have reached constitute in law a

[Page 14]

completed contract which took effect immediately after it was agreed to on April 18? In determining this question, it is plainly necessary to examine what transpired at that time. In doing so, it must be borne in mind that the franchise agreement which formed the subject-matter of the negotiations was intended to govern a lengthy franchisor-franchisee relationship. The precise terms under which a business relationship of this nature is to be governed are manifestly essential to the formation of a binding contract. If no agreement in respect to essential terms has been reached or the terms have not been agreed to with reasonable certainty, it can only be concluded that such terms were to be agreed upon at a later date and until that time there would be no completed agreement.

It is to be borne in mind that to succeed in this action the respondent was required to prove that a complete agreement was entered into on April 18. The plaintiff's claim proceeded entirely on the legal basis that the parties had agreed on that date that the final written document granting the franchise was to be in accordance with the terms and conditions set out in the appellant's draft agreement as then amended. If that were established, and the parties manifested an intention to be bound thereby, it could readily be concluded that they had entered into an identifiable and legally enforceable oral contract. In so far as it is contended that the oral contract would be unenforceable by virtue of the Statute of Frauds, I may. say that I agree with the trial judge that the respondent's acts following April 18, without detailing them,

[Page 15]

constituted part performance sufficient to take the oral contract out of Statute of Frauds.

In UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 2009 ONCA 328 (CanLII) the parties had concluded an oral agreement and were ad idem on the parties, the purchase price, the absence of any material event out clause, and the date of closing. The trial judge concluded that the oral agreement was binding, and the Ontario Court of Appeal upheld the trial decision. Specific performance was ordered:

[1] GILLESE J.A.: -- When have parties entered into a binding agreement for the purchase and sale of shares? Ought specific [page96 ]performance to be ordered for an anticipatory breach of such an agreement? This appeal addresses those questions.

[...]

[81] Contrary to Sands Canada's contention, the trial judge did not conflate these two things. Rather, she found [at para. 54] that the parties had concluded an oral agreement and were "ad idem on the parties, the purchase price, the absence of any material event out clause, and the date of closing". The trial judge offered cogent reasons for accepting Mr. Lalani's evidence and rejecting the alternative version of events put forward by Mr. Sands. Those credibility assessments are entitled to considerable deference on appeal.

[...]

[90] A true condition precedent is one that is agreed to by the parties and is about a "future uncertain event, the happening of which depends entirely on the will of a third party": see Turney v. Zhilka, 1959 CanLII 12 (SCC), [1959] S.C.R. 578, [1959] S.C.J. No. 37, at p. 583 S.C.R. When determining whether a contractual term is a "true condition precedent", the intentions of the parties must be considered. It is a question of construction whether the obligations of a contract are absolute and immediately binding or are contingent on an external event: Wu Estate v. Zurich Life Insurance Co., 2006 CanLII 16344 (ON CA), [2006] O.J. No. 1939, 268 D.L.R. (4th) 670 (C.A.), at para. 22, leave to appeal to S.C.C. refused 2006 CanLII 41271 (SCC), [2006] S.C.C.A. No. 289, 228 O.A.C. 398n, citing Kempling v. Hearthstone Manor Corp., 1996 ABCA 254 (CanLII), [1996] A.J. No. 654, 184 A.R. 321 (C.A.), at para. 32.

[...]

[105] By ordering specific performance, UBS was placed in the position that it would have been had the Agreement been performed. As I have already explained, the trial judge was fully justified in concluding that damages were inadequate in the circumstances of this case. Consequently, I do not view UBS as having received a windfall, despite what has occurred as a result of the merger of Bourse and the Toronto Stock Exchange. The [page117] fact that UBS is no longer constrained by the 10 per cent limit does not mean the Third Party Sale is not enforceable. However, the enforceability of the Third Party Sale agreement is a matter between UBS and the third party, not UBS and Sands Canada.

In Dovbush v. Mouzitchka, 2016 ONCA 381 (CanLII) the relationship between the parties fell apart, but the trial judge found that an oral agreement for the purchase and sale of shares had been reached. However, the Court of Appeal concluded that the trial judgement had to be set aside. As the trial judge's reasons were not indicative of the pathway to the decision, a new trial was ordered:

[6] At the end of the day, however – after the exchange of various draft letters of intent and at least one meeting of the parties alone – the relationship between the parties fell apart. The trial judge found that an oral agreement for the purchase and sale of shares had been reached. In the course of their dealings, the appellants paid the respondents a total of $600,000 on the potential payment of $1,000,000 for a 25% interest.

[...]

[34] On the bases outlined above, we conclude that the judgment below must be set aside. The trial judge may have mischaracterized the central issue that he was to determine and this mischaracterization may have undermined his ultimate determination. We cannot tell on the record, however, because the reasons provided do not show us the pathway taken through the conflicting evidence to arrive at his result or provide an adequate explanation for the “why” of the result. In the same way, the reasons do not show that the trial judge came to grips with the other important issues dividing the parties, including the central credibility issues. In the end, they do not permit us to conduct a meaningful and effective appellate review.

[35] For those reasons, the appeal must be allowed, the judgment below set aside in its entirety, and a new trial ordered.

In Erie Sand and Gravel Limited v. Tri-B Acres Inc, 2009 ONCA 709 (CanLII) the Court of Appeal held that when a trial judge finds - as a matter of fact - that the parties had entered into a binding oral agreement for the sale of shares in which the essential terms of the agreement -- number of shares, price per share and settlement date -- are settled, such a determination is not to be reversed absent palpable and overriding error:

[42] In finding that an agreement had been reached, the trial judge relied on Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA), [1991] O.J. No. 495, 79 D.L.R. (4th) 97 (C.A.). In Bawitko, this court held that where parties have agreed on all the essential provisions [See Note 2 below] to be incorporated into a formal document and they intend the agreement to be binding, a valid and binding agreement exists -- the existence of the agreement does not depend on the formal written document. The fact that a formal written document is to be prepared and signed does not alter the binding validity of the original contract.

[43] The same issue was recently considered by this court in UBS Securities Canada, Inc. v. Sands Brothers Canada Ltd. (2009), 2009 ONCA 328 (CanLII), 95 O.R. (3d) 93, [2009] O.J. No. 1606 (C.A.). In UBS Securities, the parties had discussions about the purchase and sale of 100,000 shares of the Bourse de Montréal Inc. The trial judge found that a binding oral agreement for the sale of shares was made in a telephone call in which the essential terms of the agreement -- number of shares, price per share and settlement date -- were settled. She held that an objective, reasonable bystander would conclude, in all the circumstances, that the parties had intended to contract. In finding that a binding agreement was reached in the oral discussions between the parties, the trial judge rejected the appellant's contention that the discussions were only negotiations and that a written share purchase agreement was necessary for the formation of a contract.

[44] On appeal, this court upheld the trial decision. It held that the trial judge made a finding of fact when she determined that the parties did not intend a written agreement to be a condition of the bargain. Consequently, such a determination is not to be reversed absent palpable and overriding error: see UBS Securities, at paras. 60 and 71.

[45] In the present case, it cannot be said that the trial judge made a palpable and overriding error in finding that as of January 8, 2003, Erie and Seres' Farms had come to an agreement. There was no suggestion by either Erie or Seres' Farms that they intended that a written document was necessary in order for a binding agreement to come into existence. To the contrary. The witnesses for both Erie and Seres' Farms testified that an agreement had been reached for the sale of the south side property by January 8, 2003, and that Erie would lose the property [page252] only if, on presentation of the Offer, Tri-B exercised the right of first refusal. Indeed, Seres' Farms' statement of defence admits the agreement.

[46] Further, not only did both Erie and Seres' Farms testify that they understood an agreement had been reached by January 8, 2003, both acted on the basis of that agreement. As Erie promised, it prepared the Offer in accordance with the agreed terms and delivered it to Seres' Farms. As Seres' Farms promised, it took the Offer to Tri-B and made it clear that the property would be sold to Erie unless Tri-B matched the Offer.

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