Whether Electronic Communication Forms a Legally Binding Contract
Forms a Legally Binding Contract
By Simon Garfinkel
Technology has become an inescapable part of our reality. It continues to pervade our lives, influence our behavior, sway our decisions, and modulate our view of the world. It is also inevitably becoming a primary mode of communication for individuals in the fields of business and law.
Contractual and other business matters are being discussed via text message, email, or even on social media. Negotiations are taking place on these mediums as well. While the ability to negotiate a contract via text message is certainly convenient, it ultimately raises the question of whether or not agreements entered into via electronic communication are legally binding.
This article will explore some recent Canadian case law which has considered these situations.
Vancouver Canucks Limited Partnership v Canon Canada Inc, 2015 BCCA 144
In Canucks, the British Columbia Court of Appeal was asked to review a decision from the Supreme Court of British Columbia, which held that through a series of emails, the parties had entered into a multi-year sponsorship agreement.
At trial, the Vancouver Canucks successfully argued that Canon had entered into a five-year sponsorship agreement with them.
Canon had been a long-standing sponsor and office equipment supplier of the Canucks, and in the course of the parties negotiating a renewal, they exchanged numerous emails setting out the terms of the renewal.
The lower court held that the emails created a legally binding contract to renew the sponsorship arrangement despite Canon’s argument that the “Contract Emails” were subject to review by legal counsel, had not been formally signed, and not all of the terms of the contract were settled as the negotiations were ongoing.
The Court of Appeal held that a binding contract arose because the “Contract Emails” exchanged between the parties satisfied the three-part test set out below:
- A reasonable bystander would conclude the parties intended to be bound by the terms of the “Contract Emails”;
- That the emails included all essential terms; and
- Whether the agreement was conditional on subsequent review and approval, including the execution of a formal contract, or whether the execution was just a formality.
With regard to the first of the three elements discussed above (the intention of the parties), the Canucks decision stated, ‘ In Smith v. Hughes (1871), L.R. 6 Q.B. 597, in a widely-cited passage at 607, Blackburn J. formulated the test applicable to the question of whether parties have effectively agreed to enter into binding legal relations:
- If whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and that the other party, upon that belief, enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.
 In G.H.L. Fridman, The Law of Contract in Canada, 5th ed (Toronto: Thomson Canada Limited, 2006), the learned author notes at 15, ‘Constantly reiterated in the judgments is the idea that the test of agreement for legal purposes is whether the 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 is concerned not with the parties’ intentions but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other party said or did …; it is whether a reasonable [person] in the situation of that party would have believed and understood that the other party was consenting to the identical terms. [Footnotes omitted.]’
With regard to the second element (whether the essential terms are agreed to), it was suggested in Canucks that what is an essential term will depend upon the context and nature of the agreement between the parties.
There is case law to support the notion that in relatively simple transactions, the essential terms are the price, parties and property. For example, in Imagepath Printing Solutions Inc. v. Inspired Architecture Inc., 2021 BCPC 22, it was suggested that the essential terms were not agreed to due to the complexity of the transaction. However, in saying this, the Court seems to suggest that price, property and parties are the key elements in a simple transaction. The decision stated:
- What is more important is that this is not a simple transaction such as, for example, the one-time purchase of clothing or food where an agreement on price, parties and property will suffice. This was a lease lasting 60-months. In my view, the defendants are entitled to know or have the opportunity to know about the terms that will govern a relationship of that length…
Additionally, the Canucks decision made reference to an older Supreme Court case to highlight the test to consider for whether a contract is subject to execution of a formal agreement. The Court of Appeal wrote:
- 76 As the trial judge noted, the traditional test for determining whether a contract is subject to execution of a formal agreement is set out in Von Hatzfeldt and was affirmed by the Supreme Court of Canada in Calvan Consolidated Oil & Gas Co. v. Manning,  S.C.R. 253 (S.C.C.) at 261, a case in which the Court found an agreement in place because the parties had not expressed in writing an intention to defer the legal effect of the documents and had substantially performed the contract:
- Whether the parties intend to hold themselves bound until the execution of a formal agreement is a question of construction, and I have no doubt in this case. The principle is well stated by Parker J. in Hatzfeldt-Wildenburg v. Alexander in these terms:
- It appears to be well settled by the authorities that if the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition or term of the bargain, or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will, in fact, go through…
In Canucks, The Court of Appeal upheld the trial judge’s decision who found that:
- Key emails between the parties contained the essential terms of the new sponsorship agreement.
- While it was clear that it was understood by the parties that a formal written agreement would be executed by the parties after review by each party’s legal department, such execution was a mere formality rather than the condition of reaching a final agreement.
- The parties intended to be bound by the agreement reached by way of the emails, without the need for the formal written agreement.
Ruparell v. J.H. Cochrane Investments Inc. et al., 2020 ONSC 7466
Ruparell was an Ontario Superior Court decision which contemplated similar issues. The parties signed a non-binding letter of intent (LOI) respecting the plaintiff’s purchase of the defendants’ automobile dealership and associated land.
The LOI required definitive, written and executed share purchase agreements (SPAs). The parties drafted SPAs that would complete the expected transaction. Due to Covid-19, the plaintiff considered withdrawing its offer, but he made a new offer with a lower price and financing with a vendor take-back mortgage.
The parties exchanged terms in a series of texts, telephone conversations and in an informal term sheet.
Before the final SPAs could be signed, the defendants received a better offer from another dealer. The plaintiff insisted that the defendants close the transaction, but the defendants agreed to sell to the higher offer.
The plaintiff brought an action seeking specific performance.
The plaintiff successfully established that there was an enforceable agreement between the parties. The Ontario Superior Court explained that through the lens of the objective observer, the parties came to an agreement on the essential terms of a new transaction. The decision explained that for this particular transaction, the essential terms were price, share sale, financing, security, timing of payment, asset valuation and post-closing adjustment, and retaining a general manager to work for the new company.
When the defendants received a superior offer, they sought to improve the price agreed to by the plaintiff. When the plaintiff declined, the defendants were found to have broken the agreement by agreeing to sell to the higher offer.
Ruparell went to the Court of Appeal where the Court of Appeal sided with the Superior Court. The Court of Appeal did not accept the appellants’ submission that the trial judge misapprehended the evidence or otherwise made a palpable and overriding error. The Court of Appeal also did not accept the appellants’ arguments that the contract was not sufficiently certain or that the parties did not intend to be bound.
In considering whether an agreement has been created via electronic communication, it firstly needs to be considered whether the electronic communication includes all essential terms.
It would also be important to consider whether an agreement was conditional on subsequent review and approval, including the execution of a formal contract, or whether the execution was just a formality.
With regard to the “reasonable bystander” test, it is difficult to determine what exactly a reasonable bystander entails in the circumstances. As technology rapidly changes, it is possible that the expectation of what exactly a “reasonable bystander” is may change as well.
As communication increasingly takes place via electronic means, it will be interesting to see how the Courts adapt, and how they treat electronic communication for contractual purposes.
Simon Garfinkel practices in the Advocacy, Litigation and Dispute Resolution department at Taylor McCaffrey LLP in Winnipeg. He obtained his Juris Doctor from the University of Manitoba – Robson Hall Faculty of Law in 2020. Prior to that, he completed a Bachelor of Arts (with distinction) at the University of Manitoba. Simon’s priority as a lawyer is to obtain the best outcomes for his clients as efficiently and empathetically as possible.