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Contracts - Interpretation - Oral Contracts. Berkel v. Fleischmann
In Berkel v. Fleischmann (Div Ct, 2026) the Divisional Court dismissed a defendant's Small Claims Court appeal, here brought against an order for damages awarded for breach of contract.
The court applied the 'objective' interpretive principle of contract formation - here in a 'verbal contract' context, argued as an unenforceable 'agreement to agree':B. Finding the Existence of an Agreement
[23] The appellant’s central complaint is that the trial judge erred in finding that a contract existed between him and the respondent. He submits that the Document was no more than an “agreement to agree,” and as such unenforceable.
[24] The appellant is correct that courts will not enforce an “agreement to agree”: Gallant v. Johnson, 2024 ONSC 5777, at para. 15. The difficulty for the appellant is that the trial judge did not find that there had been merely an “agreement to agree.” He found that there had been an actual agreement. It was open to him to do so.
[25] The requirements for a finding that a contract existed between parties was explained in Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga, 2021 SCC 22, 459 D.L.R. (4th) 425, at paras. 35-38: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.
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.
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.
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.
Significantly, a contract need not be reduced to writing: Mountain v. Mountain Estate, 2012 ONCA 806, 112 O.R. (3d) 721, at para. 66. ....
D. Consideration of Subjective Intention
[31] The appellant also submits that the trial judge erred by considering the subjective intentions of the parties and relies on Dumbrell v. Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 49-51 and Eli-Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras. 52-56. Both cases deal with the interpretation of written contracts and hold that it is the objective meaning of the written contract rather than the subjective intentions of the parties that determines the terms of the agreement.
[32] As noted earlier, there was no written contract in this case. That said, the test for the formation of a binding agreement is objective regardless of whether the agreement is written: Ethiopian Orthodox Tewahedo Church, at para. 37. Thus, the issue is not what the parties subjectively intended, but what a reasonable person would conclude based on the conduct of the parties. In considering this, a trier of fact is entitled to consider all of the surrounding circumstances, including what the parties said and did: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 59-60.
[33] The trial judge considered all of the surrounding circumstances, including the relationship between the parties, the Document, communications between them, and their conduct and concluded that a contract existed. There is nothing in his reasons to suggest that he based his conclusion on the subjective intentions of the parties or otherwise erred in his analysis. . S & J Gareri Trucking Ltd. v. Onyx Corporation
In S & J Gareri Trucking Ltd. v. Onyx Corporation (Ont CA, 2016) the Court of Appeal commented on principles applied in the interpretation of oral contracts:[7] The trial judge applied the correct principles applicable to the interpretation of contracts in general and to oral contracts in particular. He held that when dealing with contracts which are substantially or wholly oral: (i) it is necessary to distill from the words and actions of the parties what they intended: see G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011) at 16; (ii) evidence of the parties’ subjective intentions has no independent place in determining the terms of their bargain: Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129 at para. 54; (iii) the test of what the parties agreed to requires an objective determination; and (iv) the contract must include the requisite elements of offer, acceptance and consideration. . Cook v Joyce
In Cook v Joyce (Ont CA, 2017) 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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