The Second Opinion: To Agree or Not to Agree; When do Discontinued Negotiations lead to a Binding Contract?

When negotiations between two parties terminate before a formal, written agreement is signed, a common question is whether or not a binding contract has nevertheless come into existence.  An interesting variant on this question was recently considered in Hartslief v. Terra Nova Royalty Corp., 2013 BCCA 417.  The added variable was the fact that the negotiations took place exclusively between the parties' solicitors, thereby raising additional uncertainty as to the authority of the solicitors to bind their clients.

The case arose from the termination of the plaintiff's employment with the defendant corporation.  The solicitors for the two parties had discussed a settlement of the plaintiff's claim, and appeared to have reached a binding agreement.   The employer disputed this, however, and argued that (i) it was the parties' joint intention that there would be no binding contract without a formal settlement agreement, and (ii) there was an outstanding issue between the parties (relating to a mandatory "exit interview" with the plaintiff) which had not yet been settled.

The case raises at least three interesting points:

  • First, the trial judge (with the approval of the Court of Appeal) spent a great deal of time assessing the record of the parties' negotiations and the draft forms of agreement that passed back and forth.  As a general rule, of course, such evidence is not properly considered in the exercise of interpreting a contract.  However, this prohibition is liberalized where the issue is not one of interpretation, but rather concerns the very existence of a disputed agreement.
  • Secondly, the Court of Appeal agreed that, in both British Columbia and Ontario, the governing principles to be used in determining whether or not negotiations have led to a binding agreement are those set out by the Ontario Court of Appeal in Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97:

.... When [the parties] 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 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....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 ...

  • Thirdly, in the absence of evidence to the contrary, solicitors negotiating on behalf of their clients are assumed to possess the requisite authority to create a final contract binding on their clients.  Although the record indicated that, at certain moments, one solicitor had excused himself to seek further instructions from his client, this was insufficient to displace the foregoing presumption.

On the facts of the case, the Court of Appeal affirmed the trial judgment, and concluded that the solicitors possessed full authority to reach a binding agreement, there was no mutual understanding that a formal written agreement was a prerequisite to a binding contract, and (assessed objectively) there were no outstanding issues between the parties.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.

Contracts; Employment law; Settlements; Barristers and Solicitors; Agency; Authority

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