Getting To “Yes” Too Soon: When Negotiations Create Obligations

December 12, 2013

Lawyers who conduct negotiations conduct them as agents of their clients. As the recent British Columbia Court of Appeal decision in Hartslief v. Terra Nova Royalty Corp., 2013 BCCA 417 (CanLII) shows, this seemingly academic point can have important real-world consequences. The case concerned the negotiation of a settlement package for a terminated executive. Drafts were exchanged between counsel for the two sides over a period of several weeks until, finally, the two solicitors agreed over the phone that the most recent draft terms were acceptable.

So far, so good. The problem was that the solicitor who was acting for the company intended that the deal would be final and binding only after his client had satisfied itself, by means of an exit interview, that certain representations made by its ex-employee in the agreement were accurate. Unfortunately for him and his client, the B.C. Supreme Court found that he had not made this intention clear to the other side. This left the court with no choice but to apply the usual test respecting the coming into existence of binding obligations, i.e. that legal obligations arise when agreement is reached on the essential provisions of the contract. The fact that, in this case, that point had been reached in the course of dealings between the parties’ respective solicitors – without ratification by the clients themselves and before anyone had signed anything – did not matter. The principles of agency state that agents stand in the shoes of those whom they represent. The situation was therefore no different in principle than it would have been had the parties themselves conducted the negotiations. In either case, the mutual affirmation of the proposed terms in the phone call would have sufficed to create an enforceable agreement.

At the Court of Appeal, counsel for the company argued that the company and the solicitor conducting the negotiations on its behalf had intended the deal to be a “sign and close” transaction, meaning that there was no deal prior to execution of the final agreement. He further urged the court to consider the fact that, at several earlier points in the negotiations, the lawyer had had to go back to the company for approval of proposed terms. He also argued that the Supreme Court’s ruling failed to take into account established commercial practice and could thus adversely affect the practice of commercial law.

The Court of Appeal rejected each of these contentions. Firstly, it stated, solicitors understand how the principles of agency work: there is no reason to exempt them from an elementary principle of law that applies to all agents. Secondly, the fact that, weeks before, the company’s solicitor had responded to certain draft terms by stating that he had to check with his client first did not – contrary to counsel’s argument – put the other side “on notice” that the solicitor acting for the company did not have the authority to bind it. (To the contrary, the court noted that the fact that he had not responded in the same fashion later in the negotiations, and specifically at the time of the fateful phone call, might well have suggested to the other side that such consultations were no longer required.) Finally, one party’s understanding or intention that negotiations are to proceed on a “sign and close” basis will not ordinarily displace the law with respect to the formation of binding obligations unless all parties share that understanding or intention. This last point was strongly supported by the Ontario case of Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.), a ruling that the B.C. courts have subsequently accepted as representing the law of British Columbia. Because the company’s intention that this would be a “sign and close” deal was not clearly communicated to the other side, the required mutual understanding or intention had not been created, the Court of Appeal held in affirming the lower court’s decision.

While it agreed with counsel for the appellant that the issue is important, in the end the decision to affirm the B.C. Supreme Court’s ruling was not a difficult one. As Madam Justice Newbury wrote:

[T]he law in my view is clear and well-understood: unless a solicitor clearly communicates the contrary to those with whom he or she is negotiating, a solicitor is the agent of his or her client and thus may bind the client to an agreement such as this. After all, a solicitor “acts for” the client.

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