Supreme Court Confirms Common Law Approach to Enforceability of Contracts Applies to Post-Incorporation Contracts – Corporate / Commercial Law


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Background

On October 23, 2020, the Supreme Court of Canada (“CSC”) 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 CSC’s decision in Crystal square clarifies the requirements for finding binding pre-incorporation contracts for companies after incorporation, i.e. the applicability of post-incorporation contracts.

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

Factual history

Crystal square involves a large development by Crystal Square Development Corporation (the “Developer”) In Burnaby, British Columbia. The development includes office and residential towers, hotel and commercial 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 Agreement“). The ASP agreement contained certain provisions regarding the parking lot, including parking and access fees, parking fees and capital costs.

In 2002, the developer sold the parking lot to Crystal Square Parking Corporation (“CSPC”), The Respondent, and assigned the ASP agreement to CSPC. Strata Plan LMS 3905 (“Layers”), The appellant and strata corporation, owns the office tower. Strata didn’t see the light of day until 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, alleging that these payments were owed to it under the ASP agreement. When Strata refused to pay more than its existing fees, the CSPC revoked Strata’s parking privileges.

Strata brought a civil action against CSPC, seeking either to invalidate the provisions of the ASP agreement regarding the parking lot, or to declare that the ASP agreement was inapplicable. Strata also argued that, in any event, it was not a party to the ASP cartel since it predated the formation of Strata and therefore was not bound by the terms of the ASP cartel.

History of the procedure

The Supreme Court of British Columbia (the “BCSC”) Agreed with Strata that it was not bound by the SPA Agreement. The BCSC concluded that Strata had not demonstrated 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 CSC’s decision

The majority in Crystal square has ruled that the payment obligations stipulated in the SPA Agreement are enforceable against Strata on the basis that Strata demonstrated an objective intention to be bound by terms that reproduced the terms of the SPA Agreement concerning parking.5

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

According to the majority in Crystal square, the criterion for concluding the existence of a contract subsequent to the binding constitution is an “external manifestation of the assent of each party so as to induce a reasonable expectation on the other”. This test is objective and rooted in the general common law approach to the formation of contracts.6

Therefore, if the pre-incorporation contracts are binding after incorporation, it is necessary to determine:

  • (1) whether a reasonable person in the position of one party would consider the conduct of the other party to constitute an offer; and
  • (2) whether a reasonable person in the position of the other party would consider the conduct of the first to constitute an acceptance.7

Strata has objectively demonstrated its intention to be bound by a post-incorporation contract under the relevant terms of the SPA Agreement.

According to the majority in Crystal square, Strata objectively expressed its intention to be bound by a post-incorporation contract with CSPC after CSPC purchased the parking lot from the developer. It did so because of the strong evidence regarding the offer and acceptance of a post-incorporation contract between Strata and CSPC.8

Specifically, The CSPC has actively expressed its intention to offer Strata a contract under the SPA Agreement.9 For example, the CSPC 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 maintenance and operating costs of the car park in its definition of “operating costs”. These costs, in accordance with the ASP agreement, were factored into the fees charged by CSPC to Strata for parking passes.ten

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 in accordance with the ASP Agreement, which corresponded to these payments. Thus, from the point of view of the reasonable person, the latter would consider Strata’s conduct as proof of acceptance of the conditions concerning the installation of parking 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. parties after the formation of Strata.12 Whether the ASP Agreement is invalid or not, the surrounding circumstances would cause a reasonable person to understand that CSPC and Strata are acting in a manner involving an offer and acceptance of conditions reproducing 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 trade agreements of two or more parties.

It is therefore important for any business operating in Canada to consider how its informal or ad hoc trade arrangements and conduct when dealing with one or more other parties could reasonably be perceived. Even if the company subjectively perceives some of their own business activities and arrangements to be non-legally binding, a court might consider some or all of their aspects to be enforceable in the event of a dispute.

HOW WE CAN HELP

Paying attention to detail and adapting quickly to changing circumstances is what we do at Dickinson Wright, both in Canada and the United States. While this should not be construed as legal advice, if you need any assistance, please do not hesitate to contact us.

Footnotes

1 Owners, Strata Plan LMS 3905 vs. Crystal Square Parking Corporation, 2020 SCC 29.

2 A strata corporation is a legal person endowed with all the powers of a natural person having full capacity. In other jurisdictions, such as Ontario, strata are referred to as condominiums.

3 Owners, Strata Plan LMS 3905, in paragraph 12

4 Same in paragraph 13.

5 Same at paragraph 53.

6 Same in paragraph 33.

7 Same.

8 Same in paragraph 47.

9 Same at paragraph 49.

ten Same.

11 Same in paragraph 50.

12 Same at paragraph 52.

13 Same.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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