What's New?

Here's what we've been up to lately.

Go Back

Binding or Non-Binding? Enforceability of Letters of Intent and Similar Initial Agreements (Concord Pacific Acquisitions v. Oei)

Binding or Non-Binding? Enforceability of Letters of Intent and Similar Initial Agreements (Concord Pacific Acquisitions v. Oei)

Business Law

by Jennifer MacGregor-Greer

In many complex business arrangements such as joint ventures, parties sometimes choose to setout the basic terms of the transaction in an initial agreement before preparing further, more detailed documents.  Such initial agreements are sometimes referred to as umbrella agreements, heads of terms or letters of intent, and are usually intended to be legally binding upon the parties.  This practice is somewhat different from entering into a non-binding memorandum of understanding, term sheet or letter of intent, which involve other types of transactions such as corporate acquisitions.

The practice of using binding initial agreements was recently examined by the British Columbia Court of Appeal in Concord Pacific Acquisitions Inc. v. Oei, 2022 BCCA 16 (“Concord Pacific”), in which the Court of Appeal upheld the trial court’s finding that an initial agreement which was stated to be legally binding in accordance with its terms, was in fact not a legally enforceable agreement at all.

The Facts

In this case, Concord Pacific Acquisitions Inc. (“Concord”) entered into a two-page document called a “Heads of Agreement” (the “Heads”) with the defendants, Mr. Oei and Hong Kong Expo Holdings Ltd. (“H.K. Expo”).  The Heads was intended to govern a joint venture between the parties pursuant to which Concord would purchase fifty percent of the shares of H.K. Expo from Mr. Oei, and the parties would then jointly develop certain lands indirectly held by H.K. Expo.  This was a very significant transaction because it involved the multi-year, billion-dollar development of thirteen acres of prime real estate in downtown Vancouver.

The Heads specifically provided that it was a legally binding document and set out some basic obligations of the parties relating to the share purchase and stated that it was intended to form the basis of further formal agreements.  There was never any dispute between the parties as to whether the Heads was intended to be enforceable against them.

Subsequently, after further negotiations and the preparation of various ancillary agreements, a dispute arose between the parties, and H.K. Expo took the position that the Heads had been terminated as a result of an alleged breach by Concord.

The BC Supreme Court Judgment

It fell to the Honourable Mr. Justice Voith of the Supreme Court of British Columbia to determine whether the Heads had in fact been terminated. In his judgment (Concord Pacific Acquisitions Inc. v. Oei, 2019 BCSC 1190), Mr. Justice Voith found that despite the parties’ intention that the Heads be enforceable, three terms that were essential to their agreement (namely, how to deal with future capital gains tax, community amenity contributions by the parties, and the service fees payable to Concord) were absent from it.  The absence of these matters meant the parties had not agreed on essential terms and that therefore the Heads was not an enforceable agreement.

Mr. Justice Voith considered the principle of contractual interpretation whereby a court should strive to interpret an agreement as binding.  However, he determined that this principle applies where the issue is whether the language used by the parties is sufficiently certain to render the agreement enforceable.  He took the view that in this particular case, the issue was, rather, the complete absence of terms, and that therefore the appropriate question was whether a contract had even been formed.  In considering this question, he found that contract formation requires that (a) an agreement contain an objective intention of the parties to form a contract, and (b) the parties have reached agreement on essential terms that are sufficiently certain.  Here, the second element was in question.  Mr. Justice Voith commented that “absent agreement on the essential terms of a contract, no contract can exist.  Though a court will make “every effort” to find meaning in a contract, it is not open to a court to create a contract for the parties” [par. 339].

This being the case, Mr. Justice Voith then went on to find that certain terms which the parties themselves had identified, in the course of their negotiations, as being critical to the joint venture, had not been addressed in the Heads, and that the absence of those terms meant that no contract had been formed.  He specifically differentiated, here, between “important” and “essential” terms.  In particular, he noted that Concord’s purchase of an interest in H.K. Expo was intrinsically interwoven with the future development of the lands [par. 343] given that the purchase price for the shares was linked with the treatment of deferred capital gains taxes, community amenity contributions and service fees in connection with the development. Separately, these issues were also essential to the preparation of a shareholders’ agreement and a tax structure for the development.  He determined that with these essential terms being absent, the Heads could not be enforced as a legally binding agreement.

The Court of Appeal Decision

Concord challenged this finding in the BC Court of Appeal on the basis that a court should strive to interpret the agreement to render it binding, and that Mr. Justice Voith erred in not doing so. The majority of the Court of Appeal upheld the BC Supreme Court’s decision, quoting with approval large portions of Mr. Justice Voith’s judgment.

However, the Honourable Madam Justice Stromberg-Stein dissented, noting that Mr. Justice Voith should not have relied on his own business sense in determining whether essential terms were missing from the Heads. She stated that “It is not for the judge to determine whether the agreement was commercially wise, and such a conclusion should have no bearing on finding whether the contract contained all essential terms” [par. 63].  She further noted that “parties working on complex, multi-million/billion-dollar, multi-year deals often start with a narrow contract that contemplates future incremental contracts.  The majority’s decision in this case could render such agreements, which serve a vital commercial purpose, meaningless or, at the very least, uncertain, and frustrate complex deals or arrangements” [par.74].

Implications

The significant resources of the parties in this case, Madam Justice Stromberg-Stein’s dissent, and the importance of the questions raised in this case to transactional practice, make it likely in our view that Concord will seek leave to appeal to the Supreme Court of Canada.  As at the date of writing, no application for appeal has been granted.  However, we will be following this case closely as it has potentially significant impacts on corporate transactional practice.  

In the meantime, Mr. Justice Voith’s judgment and the majority decision at the Court of Appeal suggest the following as a prudent course of action in joint venture transactions and other types of business arrangements where an initial umbrella agreement is used:

1.      Consider whether an initial binding agreement is necessary, or whether it may be sufficient for the parties to enter into a non-binding Letter of Intent while negotiating further details.  Unless there is a particular reason for wishing to bind the parties to a particular course of action, a non-binding Letter of Intent may be acceptable.

2.      If the parties wish to proceed with a binding initial agreement, ensure it contains all “essential” terms.  The question of which terms are essential to a binding agreement is highly contextual and fact-specific.  In determining what terms are essential to the agreement, a court will look at the purpose of the transaction as a whole, and also at the issues that the parties themselves identified in the course of negotiations.

3.      Ensure to address essential terms in the initial agreement with sufficient certainty that the parties’ intentions are clear and any outstanding issues can be finalized later.  It is better to express essential terms incompletely, rather than to leave them out of the agreement entirely.

This case review is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.  If you wish more information or assistance regarding the negotiation of transactions or the preparation of transactional agreements, please contact any member of our Business Law Group. 

Author: Jennifer MacGregor-Greer, phone: 778.331.0281, email: jgreer@meplaw.ca

 

MICHAEL, EVRENSEL & PAWAR LLP