A lot of us can think of that movie scene where two business persons, at the time deprived of a notepad or laptop, transcribed their deal on a square napkin and called it a contract. (Some of us might have even done so ourselves!) Happily, many of those situations involved parties in agreement over their intention to make a deal.
But suppose the two negotiators had a falling out and one decided he or she was no longer going to perform his end of the bargain. Would their agreement be legally enforceable in court? Regardless of the shape, size, or format of the agreement, the answer is “it depends”!
Offer, acceptance, consideration, consent, and legality
A contract is legally enforceable if all the essentials of a contract are present:
-
- there is an offer from one party to another;
-
- there is an acceptance of that offer by the other party;
-
- there is consideration, that is something of value, flowing between the parties (and an exchange of promises would do);
-
- a “meeting of the minds” exists, i.e., the parties agree and are not confused about the essential terms of the agreement;
-
- both parties have consented to entering into the agreement (without undue influence or duress); and
-
- the agreement complies with any legislative and statutory requirements of the relevant jurisdiction.
The Instrument
As long as the requirements of an enforceable contract exist, the instrument that parties use to execute an agreement is usually immaterial—but note that different jurisdictions can have legislation that demands a specific form for enforceable contracts.
If no such requirements exist, even an exchange of communications, verbally or via email, can result in a finding that parties have made a binding deal.
Legal Formalities
In Ontario, the Statute of Frauds (R.S.O. 1990, c. S. 19) requires that certain agreements be made in writing to be enforceable. It requires, most notably, agreements for the sale and purchase of land to be written. If they are not, they may be rendered void. Historically (and presently) land has been/is the most valuable asset held by individuals and therefore a higher level of contract scrutiny has been placed on these items. A higher level of scrutiny is also placed upon trust agreements, powers of attorney and personal wills. More details on the Statute of Frauds will be the subject of a future article on Clausehound.
Despite important developments in the common law that have made it possible for parties to an oral agreement to satisfy the statute’s writing requirement, namely by partially performing the undertaking, it is unclear in exactly which situations the doctrine will, and will not, oust application of the statute.
The Ontario Court of Appeal revisited the law on part performance in Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd. (2009) (ONCA). The court kept with the Supreme Court of Canada’s reasons for developing the doctrine by broadening the cases where strict compliance with the writing requirements would be unjust.
What do you need to know?
For business counterparties, a good degree of care in signing an agreement would be to source a standard commercial agreement, negotiate the terms with lawyers (who make each party aware of the risks they are entering into), to have the final agreement signed by each party along with initials on each page, and to have this agreement witnessed signatures (as well as their initials on each page). A counterparts clause would allow for the parties to sign this document in separate locations (i.e., to not have to be in the same room for signing) and/or to have this agreement signed by scan and PDF.
Is this level of care required for all legal agreements?
Well, actually, any agreement that is made between parties is potentially enforceable, whether it is verbal, jotted on a napkin, or formally drafted with lawyers, however, the degree of care put into contracting will become an evidentiary factor when enforcing the agreement (in court or otherwise). A contract negotiated with lawyers representing each parties has a high degree of evidence pointing towards the awareness and understanding of the negotiated terms, so arguments advanced to a lack of understanding or “no meeting of the minds” would be difficult to prove. Conversely, a verbal agreement or back-of-napkin document would be more difficult to prove, which means a lot more time (and money) spent in lawyer discoveries to prove/disprove the basic elements of the contract.
Before hastily jotting down their agreement in writing, parties should first deliberate the precise terms and language of the agreement. Why? Because courts prefer to give effect to agreements entered into by willful parties, especially when one party can point to a written form of the agreement and say, “Hey—here is evidence of our intention to be bound!”
If you and another party made a deal and wrote it down on paper, as long as the essentials of a contract are present, be ready to have it enforced by courts. Take comfort in the fact that that means you might have a case against a party who has defaulted on his or her obligations. Of course, the flipside of that means that the contract can also be enforced against you should you decide you no longer want to uphold your end of the deal.
And never forget to ensure that your agreement complies with all other statutory and legal requirements in your relevant jurisdiction.