Letter of Intent, Words and Actions

Letter of Intent, words and actions – be aware you may have entered into a binding deal

Enforceability is not always expressly stated in an agreement. Determining what makes a contract enforceable can present challenges in any business transaction. In its decision in Ruparell v. J.H. Cochrane Investments Inc., 2021 ONCA 880 (“Ruparell”), the Ontario Court of Appeal (“ONCA”) confirmed that contracts may be formed when parties agree on essential terms, even if those terms are later intended to be included in a formal written agreement.

Facts

This case involved the proposed share sale of a Volkswagen dealership and the land on which it was located (“Volkswagen”) to the plaintiff, Ruparell. The parties negotiated over several months in 2020 and agreed on several terms. However, Volkswagen later received an unsolicited higher offer from a third party, accepted it, and Ruparell commenced an action for breach of contract seeking specific performance.

In February 2020, Volkswagen signed a binding Letter of Intent (“LOI”) outlining:

Terms for legal and financial due diligence
Expectations for closing
Purchase price
A deposit of $1 million
An exclusivity period preventing negotiations with others until April 15, 2020

The LOI also required “definitive, written and executed” Share Purchase Agreements (“SPAs”).

In April, Ruparell submitted a lower offer due to the effects of COVID-19, including a proposed vendor take-back mortgage. Negotiations continued through texts and telephone conversations. On April 24, a Volkswagen representative left a voicemail stating, “We have a deal.” A new term sheet was prepared and SPAs revised between April 26 and 28, 2020.

Before the execution of the SPAs, Volkswagen accepted the third-party offer on April 28. Ruparell was later invited to improve his offer but declined, insisting Volkswagen close the transaction.

Trial Court

The trial judge considered two issues:

Whether there was an enforceable agreement, and
If so, the appropriate remedy for breach.

Volkswagen argued:

SPAs were not finalized or executed.
The exclusivity period had expired when it accepted the third-party offer, and
The April discussions did not form a complete agreement on essential terms.

Ruparell argued:

The April 24 offer was a new deal.
The voicemail confirmed acceptance, and
Essential terms had been agreed upon, creating a binding agreement.

The court rejected Volkswagen’s position and reiterated key contract principles: when parties agree on essential terms with the intention to be bound, even where a formal agreement is to follow,they have formed a contract. A later formal written agreement does not change the binding nature of the deal (Canadian Northern Shield v. 2421593 Canadian Inc., 2018 ONSC 3627; Bawitko).

Regarding remedy, the trial judge held that specific performance was not appropriate, partly due to the need for third-party consent from Volkswagen Canada and the complexity of supervising SPA finalization. Damages were preferred, calculated based on the principle of lost opportunity: the difference between the third-party sale price and the plaintiff’s offering price.

Appeal Decision

Volkswagen appealed, arguing errors on both the finding of a binding agreement and the calculation of damages. The ONCA dismissed the appeal, confirming that:

A contract may be formed when parties agree on essential terms before a formal written agreement is executed; and
Whether an enforceable agreement exists depends on the circumstances and the parties’ intentions.

Conclusion

A binding agreement can arise once parties agree on the essential terms of a transaction. What is considered “essential” depends on the nature of the deal and the parties’ communications and intentions. Informal words, whether written or verbal, may be determinative in establishing a binding and enforceable agreement even in the absence of a formal written contract. If you are negotiating a business transaction or are uncertain whether your Letter of Intent or communications may already form a binding contract, Kalfa Law Firm can help. Our business and corporate lawyers assist clients across the GTA with contract drafting, negotiation, and dispute resolution.

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

FAQs:

Can a Letter of Intent be legally binding in Ontario?

Yes. An LOI may be binding if the parties intend to be bound and agree on the essential terms, even if a formal agreement is to be executed later.

Do verbal statements or texts create a binding contract?

They can. Courts look at the parties’ intentions and agreement on essential terms, regardless of whether communications were informal.

Are contracts enforceable without a signed written agreement?

Yes. An enforceable agreement can exist when essential terms are agreed upon, even if the parties later intend to formalize the terms in writing.

What remedy is available if a seller accepts a higher offer?

Damages may be awarded based on the lost opportunity, such as the difference between the third-party sale price and the plaintiff’s offering price.

Why was specific performance not granted in this case?

The court found damages more appropriate due to the need for third-party consent and the complexity of overseeing finalization of the SPAs.

-Ghazal Hamedani, Associate Lawyer

Ghazal’s practice is focused on corporate-commercial law, including business formations, corporate reorganizations, shareholder agreements, commercial contracts, the purchase and sale of businesses, as well as secured and unsecured lending transactions. After graduating from University of Toronto with distinction, Ghazal completed her law studies with honours at Cardiff Law in 2017. Ghazal is a lawyer licenced to practice law by the Law Society of Ontario. She is also a member of the Canadian Bar Association and Canadian Corporate Counsel Association Ontario.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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