Corporate Law

Author: Mike Weber & Andrew Hennigar

As business lawyers, we spend a lot of our time putting to paper the intentions of our clients and drafting complex written agreements used to close their transactions.  The sheer volume and detail of which can be mindboggling (and let’s face it, perhaps mind-numbing) for many.  In a perfect world, we are able to support our clients at the beginning of negotiations by preparing the letters of intent which are used to set out key terms and guide the process.  However, for various reasons, whether it’s the desire to mitigate legal costs or the lack of adequate time, businesses sometimes choose to engage their legal counsel later in the process.  In either event, an important question which is all too often unclear to both businesses and their lawyers, which can have costly implications, is: At what point in the process is an agreement actually formed and legally binding on the parties?

The General Rule

  • In British Columbia, the legal rule is that, in the usual course and subject to certain exceptions, formal documents do not need to be signed in order for a binding contract to be formed. In fact, an agreement between parties can be communicated by any behavior that either expressly or implicitly demonstrates to the world that the parties intend to be bound.
  • Parties proposing to enter into a formal document to express their agreement often negotiate the key terms before the document is actually drafted. These terms can be expressed verbally, in a letter of intent, emails or other less formal communications. However, once the parties agree to the key terms to be included in a formal agreement and they intend that these terms are binding at that time, they have met all the prerequisites for the formation of a contract. In this case, it does not matter that a formal written agreement setting out the terms has not been prepared or signed yet, nor does it affect the binding nature of the agreement made.
  • It is also clear law in British Columbia that unless an agent, such as a lawyer, clearly communicates the contrary to those that they are negotiating with, the agent acts for and on behalf of the client and has the authority to bind their client to an agreement. As a consequence, a lawyer’s confirmation that the terms of an agreement have been settled can suffice in forming a contract which is binding on their client.

The Exceptions

  • The general rule does not hold true where negotiating parties clearly indicate their intention not to be bound until a formal contract is signed, even in cases where there is no ambiguity as to the key terms of the agreement. In this circumstance, the creation of a formal written contract is not merely intended to memorialize the key terms the parties agreed to but is a critical element to the actual formation of the contract.
  • As a result, if the intention of the parties is to impose legal obligations only after a written contract is executed, a well drafted letter of intent or similar document should include an express statement to this effect.

The Take-Aways

When businesses begin negotiating contracts, they or their legal counsel should articulate at what stage they will consider themselves bound. Generally speaking, the three stages at which parties may consider themselves bound are:

  • immediately upon finalizing the key terms, with the parties subsequently signing a formal contract with no changes to the agreed upon terms;
  • immediately upon finalizing the key terms but understand that they will enter into a formal agreement which will include some additional terms; and
  • not until they approve and sign a formal agreement.

Not surprisingly, misunderstandings on when an agreement is settled and when the parties are expected to perform their obligations can lead to an erosion of business relationships and, in some cases, costly litigation. To avoid these pitfalls, it is all too important to clearly express your intentions at the outset of negotiations, preferably in a clearly worded letter of intent, of exactly when the agreement will be formed and upon what terms.

This post is for informational purposes only and does not constitute legal advice or an opinion on any issue.  If you are interested in receiving additional details on the topic above or advice about specific circumstances, please contact MEP Business Counsel at 604-669-1119.