In an ideal situation, parties to agreements should sign contracts spelling out each other’s obligations in full.
However, that doesn’t always happen. Sometimes, terms of agreements are made first through conversations or with emails with the intent to formalize matters at a later date. Other times, agreements between two parties might have a standing history of being made with only handshakes.
What happens when these non-contracted agreements go awry?
In a 2021 Ontario case, Ruparell v. J.H. Cochrane Investments Inc., the purchase and sale of a Volkswagen dealership and the land it occupied was initially agreed with a non-binding letter of intent that included an exclusivity clause, accompanied by a significant deposit. As described by Natalia Sidlar of WeirFoulds LLP, “over the course of several months…an agreement was reached on a number of terms.”
Sildar describes how after these back and forth discussions, “a representative for Volkswagen left a message for Ruparell which stated the parties had a deal.”
That same day, the parties exchanged terms of the finalized offer through a series of text messages, telephone conversations and an informal Term Sheet setting out the final price and various terms under a vendor take-back mortgage.
At the last minute, however, a better offer was received and accepted by Volkswagen. Ruparell was given the opportunity to match or exceed that offer but declined. Instead, they initiated an action for specific performance.
While Volkswagen argued the deal was too complex to be finalized through texts and messages, the court disagreed and found the agreement made between the original parties was enforceable.
Sildar writes, “The trial judge determined that the content and tone of the communications between the parties suggested that both parties were anxious to agree on essential terms of the transaction and that the parties behaved as if they had reached an agreement.”
Volkswagen appealed. “The Court of Appeal dismissed Volkswagen’s appeal,” writes Sildar, “and found that commercial contracts can be formed by agreement on essential terms before such terms are incorporated into a formal written document.”
Contrast that case with the Manitoba dispute between general contractor North Perimeter Construction Limited (NPCL) and Russ Patterson.
Sharyne Hamm and Kosta Vartsakis of Thompson Dorfman Sweatman LLP describe Patterson as, “the owner of various companies associated with Northern Meat Services” who had “a long, mutually beneficial commercial relationship” with NPCL.
When Patterson wanted to build a cold storage facility for his numbered company, he turned to NPCL and made a “handshake agreement” as he had in the past.
Patterson was a very hands-on client, so when the project began to experience difficulties and delays, NPCL claimed they were caused by Patterson’s poor management. He in turn blamed NPCL.
“By the end of the project, the relationship between the parties had completely broken down,” write Hamm and Vartsakis. Patterson refused to pay NPCL’s final billing. Both Patterson and NPCL made claims to the court, “mainly for alleged deficiencies and loss of revenue.”
The court decided that, in the absence of a written agreement, the conduct of the two parties was used to determine that Patterson was the real general contractor and therefore responsible for the delays and extra costs, aside from a certain electrical deficiency.”
Although unique in their own circumstances, outcomes in the absence of written contracts can work both ways.
In NPCL v. Patterson, Hamm and Vartsakis note that, “Written contracts are important to define essential terms such as the roles of the parties, the completion date of the project, and the rights and remedies available to each party on the other party’s default.”
At the same time, agreements made prior to contract formalization can also hold up in court.
As Sidlar points out in Ruparell v. Cochrane, “The written and verbal words and actions of parties to commercial transactions can be determinative as to whether the parties have reached a binding agreement, even where no formal written document exists.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.