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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 built into an agreement. Struggling to determine what makes a contract enforceable can cause problems in any business transaction.  In its recent decision in Ruparell v. J.H. Cochrane Investments Inc., 2021 ONCA 880 (“Ruparell”), the Ontario Court of Appeal (“ONCA”), confirmed that contracts can be formed where there is an agreement on essential and salient terms, whether or not such terms have later been incorporated into a formal written document.

Facts

Letter of Intent

This case involved a share sale of a Volkswagen dealership and the land it was situated on (the defendants, collectively referred to herein as “Volkswagen”), to the plaintiff, Ruparell. Negotiations took place over the course of several months in 2020 and the parties reached an agreement on several terms. Volkswagen then received an unsolicited offer from a third party for a higher purchase price which they accepted. Ruparell, sued for breach of contract and sought specific performance.

On February 2020, Volkswagen signed a binding letter of intent (the “LOI”), which described the terms of engagement for legal and financial due diligence, expectations on closing, purchase price, and deposit of $1Million together with an exclusivity period which contemplated that Volkswagen shall not enter into negotiations with other parties until April 15, 2020. The LOI required “definitive, written and executed” Share Purchase Agreements (“SPAs”).

In April, Ruparell made an offer that was lower in purchase price than the LOI. The new offer contemplated a vendor take-back mortgage due to global effects of Covid-19. On April 24, 2020, the negotiations continued between the parties through series of texts and telephone conversations with a representative of Volkswagens leaving a voicemail for Ruparell stating that the parties had a deal (“we have a deal”). In accordance thereto, a new term sheet was prepared and the SPAs were revised sometimes between April 26- 28, 2020.

On April 28, 2020 prior to execution of the SPAs, Volkswagen accepted the third party offer with a higher purchase price. On May 5, 2020, Ruparell was invited to improve his offer which he did not and insisted that Volkswagen close the transaction.

Trial Court

The primary issues at trial were first, whether there was an enforceable agreement between the parties and if so, second, what is the appropriate remedy for a breach of the agreement.

Volkswagen argued that the SPAs were never finalized or executed and that Ruparell could not sue for specific performance. Relying on the LOI, Volkswagen argued that the exclusivity period had passed at the time were it accepted the third party offer. Ruparell, on the other hand, argued that the offer reached on April 24, 2020 was a “new deal” and the acceptance of the new deal was further affirmed by the voicemail left by the Volkswagen’s representative. However, Volkswagen, argued that the April discussions did not represent a full agreement on all the essential elements of the share purchase and a complex transaction such as the one in question cannot be finalized by way of telephone calls and a brief memo.

The trial judge in rejecting Volkswagen’s arguments, restated some of the essential principles of contract formation, inter alia, when parties agree on the essential provisions to be incorporated later in a formal agreement with the intention that their agreement is binding, they will have fulfilled all the requisites for a contract. The fact that a formal written agreement will be prepared and signed after, does not alter the binding nature of the agreement (Canadian Northern Shield v. 2421593 Canadian Inc. 2018 ONSC 3627 (CanLII): Bawitko at p. 12).  The trial judge further found that the remedy of specific performance was not appropriate and that an award for damages is more favoured. The factors leading to this decision included the requirement for a third party consent from Volkswagen Canada and court supervisions of the SPA finalization process which was rather complex. In considering the adequacy and availability of damages, the trial judge highlighted that an award of damages at the value of the third-party sale, less the offering price by a plaintiff, is justified under the principle of lost opportunity.

Appeal Decision

On appeal, Volkswagen argued that the trial judge erred in finding that the parties had reached an agreement and further erred in calculation of damages. However, the ONCA dismissed Volkswagen’s appeal reiterating that contracts can be formed by agreement on essential terms before such terms are put into a formal, definitive, written document.  The legal question that whether an enforceable agreement has been reached is dependent on the circumstances of the case, and the intention of the parties.

Conclusion

A binding agreement can be reached where the parties have reached an agreement on essential terms of a deal. What is considered essential is largely dependent on the nature of the deal, the communications and intentions of the parties. Written and verbal words, albeit informal, can be determinative factors in whether a binding enforceable agreement has been reached absence a formal written contract.

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


-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.

© Kalfa Law 2022

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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