In December 2023, the Court of Appeal for Ontario reinforced the principle that parties must agree on all essential terms in order to enter into a binding agreement. In Frye v. Sylvestre, 2023 ONCA 796, the court held that an alleged agreement for the sale of shares in a family corporation was not binding because the parties had not agreed on the structure of the transaction and the method of payment, which were essential terms of the alleged agreement.
Background
The plaintiff brought an action to enforce an alleged agreement to acquire shares held by the defendant in a family corporation. The plaintiff argued that the alleged agreement had been reached through an exchange of emails between counsel.
In that exchange, the defendant’s lawyer confirmed that the defendant had agreed to sell her shares for CA$10 million net of taxes in addition to CA$400,000 for outstanding dividends.
The plaintiff’s lawyer responded confirming the agreement and asked if the parties should seek an accounting firm to confirm the amount net of taxes (the same accounting firm that had previously prepared an analysis as to values and structure).
The motion judge found that those emails did not constitute a binding agreement because the manner in which the transaction would be structured, including the method of payment for the shares, was an essential term which had not been agreed upon.
Decision
On appeal, the plaintiff/appellant argued that the transaction structure was not an essential term but a matter of implementation, and that the quantum of dividend payments were precise and fixed.
However, the Court of Appeal rejected these arguments, holding that, having regard to the underlying correspondence between counsel, the parties still needed to work on preparing the necessary documents to give effect to the sale and make further inquiries to an accounting firm in order to structure the alleged deal.
The court cited its prior decision in Bawitko Investments Ltd. v. Kernels Popcorn Ltd. [1991] 79 D.L.R. (4th) 97 (Ont. C.A.), where it explained that “an exchange of correspondence agreeing on terms to be incorporated into a more formal document will not amount to an enforceable contract in certain circumstances, including where ‘essential provisions intended to govern the contractual relationship have not been settled or agreed upon’.”
Notably, the amount that would have to be paid to achieve CA$10 million net of taxes varied according to the structure and method of payment chosen by the parties.
The parties’ subsequent conduct was also relevant to ascertain whether, objectively, a binding and enforceable contract had been formed. Here, the plaintiff/appellant had refused to agree to undertake responsibility for any taxes if the CRA reassessed what was payable because of the sale. His refusal made the method of payment and structure highly relevant to what the taxes would be.
Furthermore, the court noted that there had been a history of quarterly dividends and the amounts specified in correspondence between counsel represented the unpaid dividends to that date, but it was not clear that the dividends were capped amounts regardless of how long the defendant remained a shareholder.
Key takeaways
This decision follows a series of important cases deciding on the issue of contract formation and whether the essential terms have been agreed, including at the appellate level. The answer to what the essential terms to an agreement are is clearly fact dependent.
While in this case, the Court of Appeal held that the structure of the transaction and method of payment were essential terms that the parties had not agreed upon, in the leading case UBS Securities Canada, Inc. v. Sands Brothers Canada Ltd., 2009 ONCA 328, the Court of Appeal held that the parties had entered into an agreement for the sale of stocks in the securities industry where the number of shares, price and closing date (the only essential terms in that case) had been agreed.
Likewise, in Ruparell v. J.H. Cochrane Investments Inc. et al., 2021 ONCA 880, the Court of Appeal held that the essential terms of a share purchase agreement were price, share sale, financing, security, timing of payment, asset valuation and post closing adjustment and retaining the general manager to work for the new company. The court found that those terms were agreed between the parties in a letter of intention and that a signed share purchase agreement was not required.
By contrast, in this case, the Court of Appeal applied the same foundation principles of contract formation to find that no deal had been reached.
This brings home the importance of parties clearly setting out in writing all essential terms of a transaction before concluding that they have “reached a deal.” Even though email exchanges can create binding agreements, reliance upon those exchanges as giving rise to an agreement is risky if it is potentially unclear that all essential terms of the transaction have been agreed to by the parties.
If the parties’ intention is to agree to terms in principle and later enter into a definitive agreement, it would be prudent for them to use non-binding instruments (often term sheets or letters of intent) to set out the fundamental terms of the transaction and clearly identify within the instrument that such terms are non-binding and are intended to be superseded by a definitive agreement to be entered into between the parties.
For more information, please contact the authors, Chloe Snider, Ben Iscoe and Camila Maldi.
