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Contracts - Formation

. Farrell v. Riley

In Farrell v. Riley (Ont CA, 2024) the Ontario Court of Appeal dismisses an appeal, while considering the law of contract formation - here by way of an email exchange:
[22] The trial judge distinguished this situation from Bawitko Investments Ltd. v. Kernels Popcorn Limited (1991), 1991 CanLII 2734 (ON CA), 53 O.A.C. 314 (C.A.), where the essential terms were not clear from the oral agreement.

[23] The trial judge rejected Mr. Riley’s argument that the July 31 Email required that any agreement between the parties be set out in writing. He found that the July 31 Email was neither acknowledged nor accepted by Mr. Riley and that, in any event, it clearly stated it was “without prejudice”.

[24] As a result, the trial judge found that the September 27 offer was capable of acceptance, which occurred on October 4. He relied on the statement in Bawitko, at p. 12, that:
[w]hen [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 of the requisites for the formation of a contract. The fact that a formal written document to the same effect is thereafter prepared and signed does not alter the binding validity of the original contract.
[25] The trial judge also found that a reasonable person with knowledge of the material facts would conclude that the parties had agreed on the essential terms by an objective reading of the language, as opposed to an inquiry into the state of mind of the parties: Olivieri v. Sherman, 2007 ONCA 491, 86 O.R. (3d) 778, at para. 44.


[34] The issue of contract formation is an issue of mixed fact and law, reviewable for palpable and overriding error unless there is an extricable error of law: Angus v. CDRW Holdings Ltd., 2023 BCCA 330, 53 R.P.R. (6th) 173, at paras. 31-36.
. Frye v. Sylvestre

In Frye v. Sylvestre (Ont CA, 2023) the Court of Appeal dismisses an appeal where the appellant argued that a piecemeal email interchange had the necessary components for a contract:
[6] First, in the motion judge’s view, the manner in which the transaction would be structured, including the method of payment for the shares, was an essential term of the proposed purchase. It directly affected the amount of tax generated by the sale, and therefore the amount the respondent would have to receive to clear $10 million, net of taxes, for her shares, and that the trust for her brother would have to receive to clear $5 million, net of taxes, for its shares. Although BDO had suggested a structure in 2019 that would be a combination of capital dividend and cash, the emails did not record an agreement to that structure or method of payment and the respondent never agreed to it.

[7] Second, the motion judge found there was no concluded agreement as to the payment of dividends, which he also viewed as an essential term of the proposed purchase. There had been a history of quarterly dividends; the amounts specified in the October 19 emails represented the unpaid dividends to that date, but it was not clear that they were capped amounts regardless of how long the respondent and the trust remained shareholders.

[8] The appellant argues that the motion judge made palpable and overriding errors in coming to these conclusions. He submits that on an objective reading of the language of the October 19 emails, it was his responsibility to pay whatever was necessary so that the sellers of the shares received the “net of taxes” amounts, regardless of the structure chosen. Therefore, the structure of the transaction was not an essential term but a matter of implementation. Similarly, the amounts of the dividend payments were precise and fixed. The appellant submits that the motion judge placed undue reliance on surrounding circumstances, and especially on conduct after the October 19 emails, to detract from the clear meaning of their text.

[9] We do not accept these arguments. The October 19 email exchange contemplated that the parties would “work towards preparing the documents necessary to give effect to these sale transactions” and also contemplated further inquiries of BDO as to structure and method of payment. In Bawitko Investments Ltd. v. Kernels Popcorn Ltd. 1991 CanLII 2734 (ON CA), [1991] 79 D.L.R. (4th) 97 (Ont. C.A.), at pp. 103-4, Robins J.A. 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”.
. Lozon v. Lozon

In Lozon v. Lozon (Ont CA, 2023) the Court of Appeal considered the formation of a contract, here a settlement contract:
[15] As this court confirmed, a “determination as to whether a concluded agreement exists does not depend on an inquiry into the actual state of mind of one of the parties or on the parole evidence of one party’s subjective intention” but rather on “an objective reading of the language chosen by the parties to reflect their agreement”: Olivieri v. Sherman, 2007 ONCA 491, 86 O.R. (3d) 778, at para. 44. To decide whether an agreement was reached based on the subjective intent of one side of the bargain is “an error in principle”: Olivieri, at para. 45.
. Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga

In Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga (SCC, 2021) the Supreme Court of Canada considered basics of contract formation when assessing the standing of members of a religious organization to seek a declaration against their expulsion (unincorporated associations are often considered contract-based):
[21] The law concerning the formation of contractual relations embodies practical wisdom. Many informal agreements that people undertake do not result in a contract. There are, for example, mutual undertakings between friends (“in the new year, we’ll go to the gym together three times a week”) or between members of a household (“you do the groceries, I’ll clean the kitchen”).

[22] Without more, neither of these agreements creates a contract. What is missing is an objective intention to create legal relations. In neither of these examples do the parties (reasonably understood) intend to be subject to adjudication as to the performance of their commitments or to the imposition of remedies such as damages or specific performance.

[23] This is so not merely for individuals dealing with one another. It is also true for individuals coming together in voluntary associations. Such associations are vehicles to pursue shared goals. To this end, many such associations will have rules, sometimes even a constitution, bylaws and a “governing” body to adopt and apply the rules. These are practical measures by which to pursue shared goals. But, they do not in and of themselves give rise to contractual relations among the individuals who join. The members of the local minor hockey league, or a group formed to oppose development of green spaces, or a bible study group, for example, do not enter into enforceable legal obligations just because they have joined a group with rules that members are expected to follow.

[24] The practical wisdom embodied in the common law is that much of what we agree to in our day-to-day lives does not result in a contract. Where there is no contract, or other obligation known to law, there is no justiciable interest and no cause of action.


(1) The Conditions of Contract Formation

[34] As this Court held in Wall, at para. 29, “Where one party alleges that a contract exists, they would have to show that there was an intention to form contractual relations. While this may be more difficult to show in the religious context, the general principles of contract law would apply” (emphasis added). These principles are decisive of the present appeal.

[35] A contract is formed where there is “an offer by one party accepted by the other with the intention of creating a legal relationship, and supported by consideration”: Scotsburn Co‑operative Services Ltd. v. W. T. Goodwin Ltd., 1985 CanLII 57 (SCC), [1985] 1 S.C.R. 54, at p. 63. The common law holds to an objective theory of contract formation. This means that, in determining whether the parties’ conduct met the conditions for contract formation, the court is to examine “how each party’s conduct would appear to a reasonable person in the position of the other party”: Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29, at para. 33.

[36] For present purposes, it will suffice to focus on the requirement of intention to create legal relations. As G. H. L. Fridman explains, “the test of agreement for legal purposes is whether 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”: The Law of Contract in Canada (6th ed. 2011), at p. 15; see also S. M. Waddams, The Law of Contracts (7th ed. 2017), at p. 105. This requirement can be understood as an aspect of valid offer and acceptance, in the sense that a valid offer and acceptance must objectively manifest an intention to be legally bound: Crystal Square, at paras. 49‑50.

[37] The test for an intention to create legal relations is objective. The question is not what the parties subjectively had in mind but whether their conduct was such that a reasonable person would conclude that they intended to be bound: Kernwood Ltd. v. Renegade Capital Corp. (1997), 1997 CanLII 846 (ON CA), 97 O.A.C. 3; Smith v. Hughes (1871), L.R. 6 Q.B. 597, at p. 607. In answering this question, courts are not limited to the four corners of the purported agreement, but may consider the surrounding circumstances: Leemhuis v. Kardash Plumbing Ltd., 2020 BCCA 99, 34 B.C.L.R. (6th) 248, at para. 17; Crystal Square, at para. 37.

[38] Under the objective test, the nature of the relationship among the parties and the interests at stake may be relevant to the existence of an intention to create legal relations. For example, courts will often assume that such an intention is absent from an informal agreement among spouses or friends: Balfour v. Balfour, [1919] 2 K.B. 571 (C.A.); Eng v. Evans (1991), 1991 CanLII 5926 (AB QB), 83 Alta. L.R. (2d) 107 (Q.B.). The question in every case is what intention is objectively manifest in the parties’ conduct.
. Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp.

In Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp. (SCC, 2020) the Supreme Court of Canada refers to a BCCA leading case from 1987 on contract formation:
[36] My reaffirmation of traditional contract law principles does not, as my colleague suggests, differ from the Court of Appeal’s reasoning regarding its own jurisprudence, and in particular regarding Heinhuis v. Blacksheep Charters Ltd. (1987), 1987 CanLII 2491 (BC CA), 19 B.C.L.R. (2d) 239. In my respectful view, I do not read Heinhuis as a departure from the framework I reiterate here. Although McLachlin J.A. (as she then was) did not find it necessary to engage in an analysis in the traditional terms of offer, acceptance and consideration, she was prepared to do so: at pp. 244-45. There is no principled reason to exempt post-incorporation contracts from generally applicable contract law principles, nor do I read the Court of Appeal’s reference to Heinhuis as suggesting that they should be. The conventional approach to contract formation is to construe the parties’ course of conduct according to the traditional requirements of offer and acceptance: Gibson v. Manchester City Council, [1979] 1 W.L.R. 294 (H.L.), at p. 297, per Lord Diplock; Jedfro Investments (U.S.A.) Ltd. v. Jacyk, 2007 SCC 55, [2007] 3 S.C.R. 679, at para. 16.
. Nordlund Family Retreat Inc. v. Plominski

In Nordlund Family Retreat Inc. v. Plominski (Ont CA, 2014) the Court of Appeal comments on basic principles of contract formation, in particular when an 'agreement to agree' or a full contract exists:
[52] In Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 1991 CanLII 2734 (ON CA), 53 O.A.C. 314, Robins J.A. described the issue that confronts a court when deciding whether there is a binding agreement or simply an agreement to agree that lacks essential terms. He stated at paras. 20 and 21:
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.

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…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…
[53] The motion judge stated at paras. 60 to 64 of his reasons:
In interpreting a document, it must be assumed that the words in the document are intended by the parties to have a meaning. In determining whether the parties intended to enter into a binding agreement it is necessary to determine what the parties meant by the term “legal agreement”.

The term must be interpreted contextually, by looking at the context in which the word has been placed in the document and the context and the circumstances in which the document was drafted.

In this case, the parties had not yet obtained a survey which could be registered against the subject lands; neither had they obtained formal approval from the Ministry for an easement. Without a survey, and without formal approval, the parties were unable to enter into a final agreement which could be registered against the property.

The final paragraph of the Summary states that Mr. Nordlund was not obligated to pay for the easement until a “valid” easement agreement had been signed and delivered from Ben Plominski. The Summary therefore contemplates that a more formal agreement would be entered into after certain steps were taken and completed. Presumably, this agreement would be an agreement which could be registered and which would provide the parties with the security to move forward with the clearing of the land and construction of the roadway.

In my view, the Easement Summary was intended to be a preliminary agreement between the parties wherein they agreed that they would undertake certain steps, and assuming these steps were successfully completed they would then draft a final agreement which was capable of being registered against the property. Notwithstanding the fact that the Easement Summary was intended to be a preliminary agreement, there is no reason to believe that it was not intended to be a binding and enforceable agreement.
[54] I see no error in this reasoning. The conclusion that the parties had entered into a binding “preliminary” agreement that enabled them to take the necessary steps that they in fact undertook in the following months, was consistent with other aspects of the evidence, including the 2004 Agreement, which Mr. Plominski acknowledged was binding notwithstanding its reference to the need for an “official agreement”.

[55] I would also reject the appellant’s argument that the Easement Summary is not a binding agreement because it does not include the essential terms of a contract for an easement. The appellant relies on cases where a binding agreement for an easement was not recognized because some essential term was missing. In Pickering v. Harper Ranch Ltd., [1997] B.C.J. No. 1038 (S.C.), a document signed by the appellant purporting to give his neighbour “permission and easement” to locate a septic field on his property was not an enforceable agreement because the dimensions and location of the easement had not been sufficiently identified. In that case, the easement the respondents sought to enforce differed from the document the parties had signed with respect to the anticipated size, location and conditions attaching to the easement. Given the evidence in that case, the court concluded that no agreement had been reached.

[56] In Georgian Windpower Corporation v. Stelco Inc., 2012 ONSC 3759, [2012] O.J. No. 6037, the court considered, among other things, whether a document referred to as a “land lease/easement agreement” constituted a binding easement agreement. Patillo J. concluded that the document lacked the essential terms necessary to constitute either an enforceable lease or easement. It failed to provide a description of the demised premises to be leased or the land over which the easement was to run, when the term of either was to commence and certain other material terms. It was also unclear whether the parties would be entering into a lease, an easement or both.

[57] Patillo J. noted at para. 124 that in order for there to be a binding contract, the parties must agree on all of the essential terms of the agreement, and that “what constitutes ‘essential terms’ depends on the subject matter of the contract and what transpired at the time of the alleged agreement.”

[58] In United Gulf Developments Ltd. v. Iskandar, 2008 NSCA 71, [2008] N.S.J. No. 317, at para. 14, Cromwell J.A. (as he then was) noted: “Determining what terms are ‘essential’ in a particular case is…more difficult than stating the principle. The sort of terms that are considered essential varies with the nature of the transaction and the context in which the agreement is made.”
. Neophytou v Fraser

In Neophytou v Fraser (Ont CA, 2015) the Court of Appeal decided where a contract, negotiated across geographical jurisdictions, was made:
[4] A contract is made where the offeror receives confirmation of acceptance by the offeree. The only reasonable inference on all of the evidence in the record is that the respondent was in Ontario when she offered by telephone to lend funds to her son and the appellant, and she was also in Ontario when she received confirmation, again by telephone of their acceptance of her offer. Although the appellant’s husband had asked his mother for financial assistance when they were in Florida together, it was not until the respondent returned to Ontario that she decided to advance $500,000 and communicated this, as well as the terms, to her son by telephone. She then proceeded on the basis of their agreement to cash in certain investments to fund two advances that were made well before the written memorandum of agreement was signed.

[5] A contract connected with the dispute was therefore made in Ontario. This is a presumptive factor as recognized in Van Breda.
. Cook v Joyce

In Cook v Joyce the Court of Appeal comments usefully as follows on basic issues of contract formation and interpretation, the latter with respect to both written and oral contracts:
[65] A settlement agreement is subject to the general law of contract. For a settlement agreement to exist, the court must find the parties (i) had a mutual intention to create a legally binding contract and (ii) reached agreement on all of the essential terms of the settlement: Olivieri v. Sherman (2007), 2007 ONCA 491 (CanLII), 86 O.R. (3d) 778 (C.A.), at para. 41. Whether the parties have manifested mutual assent to specific terms usually is determined from their overt acts: Bogue v. Bogue (1999), 1999 CanLII 3284 (ON CA), 46 O.R. (3d) 1 (C.A.), at para. 17. Or, as described by this court in McLean v. McLean, 2013 ONCA 788 (CanLII), 118 O.R. (3d) 216, at para. 10, a court must employ an objective approach to the evidence, determining “what a reasonable observer would have believed the parties intended, taking into consideration the evidence of all the parties as well as the surrounding documentary evidence.”

[66] Where the parties reduce their bargain to writing, a court determines the parties’ intentions in accordance with the language used in the written document, having regard to the objective evidence of the factual matrix: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 (CanLII), 268 O.A.C. 276, at para. 16.

[67] Oral contracts, such as the one at issue in the present case, present different challenges regarding the issues of formation and interpretation. As put by Angela Swan and Jakub Adamski in Canadian Contract Law, 3rd ed. (Markham, ON: LexisNexis, 2012), at §2.27:
There is no general rule against the enforcement of oral promises, but the fact that a promise is oral suggests that its making may not have been accompanied by anything that sufficiently brought home to the parties the significance of what they were doing and, of course, the terms of an oral promise are no more certain than the parties’ recollections of them.


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Last modified: 07-06-24
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