The Ontario Court of Appeal recently affirmed the decision of the Ontario Superior Court in Ruparell v. J.H. Cochrane Investments Inc. et al., 2020 ONSC 7466, which held that the plaintiff and defendant had an enforceable agreement of purchase and sale notwithstanding that the parties’ letter of intent had expired and that definitive written agreements had not been executed. The decision illustrates the risks of continuing to negotiate the terms of a proposed transaction after the letter of intent governing those negotiations has expired.

The decision

The plaintiff, Deepak Ruparell, made an unsolicited offer to purchase an automotive dealership from the defendants, the owners of Town and Country Volkswagen. The plaintiff and the defendant signed a non-binding letter of intent (LOI) respecting the plaintiff's purchase of the defendants' automobile dealership and associated land. The terms of the LOI required “definitive, written and executed” share purchase agreements (SPAs) to be entered into. As well, the LOI required the parties to use their reasonable commercial efforts to close the proposed transaction by April 15, 2020, and contained an exclusivity clause prohibiting the defendant from negotiating with other parties that would expire on April 15, 2020.

The parties drafted SPAs and exchanged several versions throughout March and early April. Around April 13, the plaintiff advised the defendants that he was considering withdrawing from the proposed transaction because of the economic impacts of the pandemic on his business interests. However on April 16, the plaintiff made a revised offer to purchase the dealership and associated land from the defendants at a lower purchase price, with financing by way of a vendor take back mortgage. The plaintiff and defendants subsequently exchanged revised terms in a series of texts, telephone conversations and even an informal term sheet. Legal counsel for the parties revised the SPAs in accordance with these negotiations.

On April 28, before the revised SPAs were signed, the defendants received a higher offer from another Volkswagen dealer. The plaintiff insisted that the defendants close the transaction on the terms that were reflected in the as-yet-unsigned SPAs but, after giving the plaintiff a chance to respond with a better offer (which he declined to do), the defendants decided to move ahead with the superior offer from the new purchaser. The plaintiff commenced an action to enforce the agreement that he allegedly had.

The court ruled in favour of the plaintiff and held that the plaintiff had established, on a balance of probabilities, that there was an enforceable agreement between the plaintiff and defendants even though the SPAs and vendor take back mortgage had not been finalized and executed.

In reaching its decision, the court relied on the following principles established in prior case law:

• When parties agree on the essential provisions to be incorporated into a formal document with the intention that their agreement is binding, they have fulfilled all the requisites for a contract.
• The intention of the parties at the time of the agreement must be determined by examining the words, the nature of the purported agreement, and their course of conduct. This is an objective test, as seen through the eyes of a “hypothetical onlooker” rather than based on the subjective impressions of the parties after the fact.

Applying this test, the court concluded that, through the lens of an objective observer, the parties had agreed on the essential terms of the new transaction. The court highlighted that after the parties had gone back and forth on the revised terms of the deal, one of the defendants’ transactional advisors (who worked at a major accounting firm) left a voicemail for the plaintiff saying “we have a deal”. The plaintiff’s evidence on this point was that “when a guy who is an experienced person like [this], after going back and forth for eight days, with his client and comes back to me, because he is going back and forth on the numbers says that “we have a deal”, I take that as we have a deal.” The court stated, “This was how Mr. Ruparell saw it. More importantly, it is how an objective observer, viewing the history, the nature of the parties and reviewing the communications between them would also see it.”

Further, the trial judge found that following the further negotiations, the parties behaved as though they had reached an agreement. This included legal counsel for the parties revising the share purchase agreements in accordance with the recent texts, telephone conversations and the informal term sheet.

But what about that LOI? As noted above, it expressly stated that “definitive, written and executed” agreements were required. The other significant finding the court made here was that, following April 15, 2020, the parties had entered into a new phase of negotiations and were no longer bound by their original LOI. The court added that the parties could have amended the LOI to remain in force but did not. The LOI was therefore “effectively spent” by the time the new agreement was reached on April 24. As a result, the requirement for “definitive, written and executed” agreements no longer applied.

The court awarded the plaintiff CA$5 million in damages, being the difference between his offer of CA$19 million and the third party’s offer of CA$24 million.

Recommendations

In light of this decision, what are some practical steps that parties and their representatives can take to bring certainty to their commercial negotiations and to ensure that there is no binding agreement until the terms of the transaction are reduced to writing and signed by both parties?

To begin with, parties should ensure that their letter of intent includes language to that effect.

Parties should also take care to ensure that their letter of intent remains in force throughout the entire course of negotiations. Be mindful of those expiration dates!

As additional protection, parties should consider including language in their letter of intent to the effect that the requirement for a formal, written and executed agreement is binding and survives the expiration of the letter of intent, and that no subsequent discussions, negotiations, or exchange of terms (regardless of whether they are fundamentally different than the original terms) relating to the purchase of the subject assets will constitute a binding agreement between the parties unless a formal, written agreement prepared by the parties’ respective legal counsel is executed. If properly crafted, a clause to that effect could reduce the risk of negotiating with an expired letter of intent.

Regardless of what the letter of intent may (or may not) say, parties and their representatives must be mindful that their communications and behaviour can potentially bind them to an agreement, even in the absence of a signed written document. Parties to a transaction should therefore exercise caution during negotiations and conduct themselves in a way that will not lead to such a determination being made. Communications should indicate that the agreement remains subject to execution of a formal written agreement or final written approval of the parties, and parties and their representatives should refrain from stating that a deal exists before negotiations are concluded and a definitive written agreement is executed.

Lastly, parties should involve their legal counsel in the negotiation of their letter of intent, even if it is intended to be a short, non-binding document. Your legal counsel can help you ensure that your document does not inadvertently create binding legal obligations, that the parties’ conditions precedent are properly-crafted and that condition dates are properly-extended as may be required.

Get in touch with us today. Whatever the position you need to protect, or risks you need to manage, Dentons Canada’s National Real Estate group can help.