Supreme Court Confirms Common Law Approach to Contract Enforceability Applies to Post-Incorporation Contracts | Dickinson Wright

Background

On October 23, 2020, the Supreme Court of Canada (“CCS”) rendered its decision in The owners, Strata Plan LMS 3905 c. Crystal Square Parking Corporation (“crystal square”), an appeal on whether a pre-incorporation agreement was binding on the owner of an office tower.[1] The SCC decision in crystal square clarifies the requirements for finding that pre-incorporation contracts are binding on companies after incorporation, i.e. the enforceability of post-incorporation contracts.

The Supreme Court has held that the test for finding that a post-incorporation contract is enforceable is the same as for finding that any other agreement exists at common law. That is, the test is objective and that offer, acceptance, consideration, and terms can be inferred from the conduct of the parties and the surrounding circumstances.

Factual background

crystal square involves major development by Crystal Square Development Corporation (the “Developer”) in Burnaby, British Columbia. The development includes office and residential towers, hotel and shopping complexes and, at the heart of this dispute, a parking lot.

In March 1999, the developer and the City of Burnaby (the “City“) has entered into an airspace package agreement (the “ASP contract”). The ASP agreement contained certain provisions regarding the parking facility, including parking and access fees, parking fees and capital costs.

In 2002, the developer sold the parking lot to Crystal Square Parking Corporation (“CPSC”), the Respondent, and assigned the ASP Agreement to CSPC. Strata Plan LMS 3905 (“Layers”), the appellant and a condominium corporation, owns the office tower. Strata only came into existence in May 1999.[2]

Until 2012, Strata members used the parking lot, and Strata paid parking fees at the rate prescribed by the ASP agreement. A dispute then arose between Strata and CSPC, and CSPC demanded capital reserve payments from Strata, claiming it was owed under the ASP agreement. When Strata refused to pay more than its existing fee, the CSPC revoked Strata’s parking privileges.

Strata brought a civil action against CSPC, seeking either to invalidate the parking provisions of the ASP agreement or a declaration that the ASP agreement was unenforceable. Strata also argued that in any event it was not a party to the ASP Agreement since it predated Strata’s incorporation and was therefore not bound by the terms of the ASP Agreement.

History of the procedure

The Supreme Court of British Columbia (the “BCSC”) agreed with Strata that it was not bound by the ASP agreement. The BCSC found that Strata failed to demonstrate its intention to enter into a post-incorporation contract on the same terms as the ASP agreement.[3]

On appeal, the British Columbia Court of Appeal (“BCCA”) overturned the BCSC’s decision.[4] According to the BCCA, the trial judge erred in relying on the fact that Strata was not a party to the ASP agreement and that Strata had not ratified it.

The SCC decision

The majority in crystal square held that the payment obligations stipulated in the ASP agreement are enforceable against Strata on the ground that Strata demonstrated an objective intention to be bound by terms that replicated the terms of the ASP Agreement regarding parking.[5]

The test for determining whether a pre-incorporation contract is enforceable after incorporation is the same for concluding that any other agreement exists at common law.

According to the majority in crystal square, the criterion for concluding that there is a contract subsequent to the enforceable constitution is an “external manifestation of the assent of each party such as to induce a reasonable expectation in the other”. This test is objective and rooted in the general common law approach to contract formation.[6]

Therefore, to know whether pre-incorporation contracts are binding after incorporation, one must determine:

  • (1) whether a reasonable person in one party’s position would consider the other party’s conduct to constitute an offer; and
  • (2) whether a reasonable person in the other party’s position would consider the latter’s conduct to constitute acceptance.[7]

Strata has objectively demonstrated its intent to be bound by a post-incorporation contract on the relevant terms of the ASP Agreement.

According to the majority in crystal square, Strata objectively manifested its intention to be bound by a post-incorporation contract with CSPC after CSPC purchased the parking lot from the Developer. It did so on the basis of strong evidence regarding the offer and acceptance of a post-incorporation contract between Strata and CSPC.[8]

Specifically, CPSC has actively expressed its intention to offer Strata a contract under the terms of the ASP agreement.[9] For example, the CSPC has made available to Strata members parking passes in quantities corresponding to their share of parking spaces under the ASP agreement. In addition, the ASP agreement provided for the costs of maintaining and operating the parking lot in its definition of “operating costs”. These costs, per the ASP agreement, were factored into the fees charged by CSPC to Strata for the parking passes.[10]

In turn, Strata has objectively demonstrated its intention to accept CSPC’s offer.[11] Strata paid for the parking passes under the terms of the ASP agreement, and its members exercised their parking rights under the ASP agreement, which corresponded to those payments. Thus, from the perspective of the reasonable person, he would view Strata’s conduct as demonstrating his acceptance of the terms relating to the parking facility in the ASP agreement.

In concluding that Strata was bound by the terms of the ASP agreement regarding parking, the majority also noted that the existence of the ASP agreement was only one aspect of the objective circumstances that could be used to interpret the conduct of the parties after the incorporation of Strata.[12] Whether or not the ASP Agreement is invalid, the surrounding circumstances would lead a reasonable person to understand CSPC and Strata to be acting in a manner involving the offer and acceptance of terms replicating those found in the ASP Agreement regarding parking.[13]

Conclusion

The key to remember crystal square is that the traditional approach to contract formation applies to post-incorporation contracts. This means that the elements of a contract – offer, acceptance, consideration and terms – can be inferred from the conduct and circumstances surrounding the business arrangements of two or more parties.

It is therefore important for any business operating in Canada to consider how its informal or ad hoc business arrangements and conduct when dealing with one or more other parties might reasonably be perceived. Even though the company subjectively perceives some of their own business activities and arrangements as not legally binding, a court might consider some or all of their aspects enforceable in the event of a dispute.


[1] Owners, Strata Plan LMS 3905 v Crystal Square Parking Corporation2020 SCC 29.

[2] A condominium company is a legal person with all the powers of a natural person who has full capacity. In other jurisdictions, such as Ontario, strata are called condominiums.

[3] Owners, Strata Plan LMS 3905at para 12

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