Meadows v Sward Estate 2023 BCSC 1369 involved a claim for $62,000 pursuant to a loan agreement/contract that was denied as having made a binding contract.
The case reviews the role of the court in attempting to uphold contractual obligations.
There is no legal requirement for a loan agreement to be set out in a written document. While it is obviously prudent to set down the terms of in writing, the law recognizes agreements reached orally or through conduct establishing an intention to be bound. As Justice Dickson (then of this Court) stated in Soleil Hotel & Suites Ltd. v. Soleil Management Inc., 2009 BCSC 1303:
Courts strive to uphold contractual obligations solemnly and freely undertaken. They do not, however, impose them upon parties who have not reached agreement on all essential terms: Catalyst Paper Corp. v. Companhia de Navegacao Norsul, 2008 BCCA 336.
For parties to be bound in a contractual relationship there must be a manifest meeting of the minds. They must express themselves outwardly in a manner that indicates both an intention to be bound and reasonably certain mutually agreed terms: Klemke Mining Corporation v. Shell Canada Limited, 2007 ABQB 176, affirmed 2008 ABCA 257 (CanLII).
These fundamental principles of contract law enable commercial life to operate in a fair, predictable and efficient manner. They apply whether the purported contract in question is concluded in writing, orally, by conduct, or by a combination thereof. The key question in all cases is whether an agreement has been reached on all essential terms, regardless of its form: Catalyst Paper Corp. supra; Periscan Financial Services Inc. v. 519090 B.C. Ltd., 2007 BCSC 707; Leong & Associates Actuaries & Consultants Inc. v. Watt, 2003 BCSC 1885.
The test for determining whether there was an intention to create legal relations is objective. The question is whether the parties “indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract”: Berthin v. Berthin, 2016 BCCA 104 at para. 46, citing G.H.L. Fridman, The Law of Contract in Canada (6th ed., 2011) at 15.
Evidence of the parties’ actual subjective state of mind is not relevant: Hammerton v. MGM Ford-Lincoln Sales Ltd., 2007 BCCA 188 at para. 23. As Justice Blackburn stated in Smith v. Hughes (1871), L.R. 6 Q.B. 597 (Q.B.), the leading English decision on the issue:
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 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.
Or, as it was put in Osorio v. Cardona 1984 364 BCSC at paras. 32 and 34, evidence establishing that one party had a “secret mental reservation about performing the agreement” does not mean a contract was not concluded.
The intention of the parties must be manifested before or when the contract is made. However, evidence of the parties’ subsequent conduct may be looked to in determining whether a contract was formed: Hoisington v. Johnson & Johnson Inc. 2015 BCSC 1582 at para. 52; Hoban Construction Ltd. v. Alexander, 2012 BCCA 75 at paras. 39 and 43-44 [Hoban Construction Ltd].
Finally, there is a distinction between a concluded agreement that has not been successfully “papered over” and a failure to conclude an agreement. In Hoban Construction Ltd., the Court of Appeal (per Bennett J.A.) wrote:
In [Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd., 2000 BCCA 365] at para. 76, this Court referred to Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 1991 CanLII 2734 (ON CA), 79 D.L.R. (4th) 97 (Ont. C.A.), setting out the following excerpt from 103-104:
As a matter of normal business practice, parties planning to make a formal written document [of] the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange or correspondence, or other informal writings. The parties may “contract to make a contract”, that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the “contract to make a contract” is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself…
