Case Entry – 1800677 Alberta Ltd v 1800674 Alberta Ltd

Case Reporter

Written by Xiyuan Feng

Parties may consent to include provisions that include “to the satisfaction of each party” or “as may reasonably be required” in an agreement. However, in a recent case, 1800677 Alberta Ltd v 1800674 Alberta Ltd., [1] decided by the Court of Queen’s Bench of Alberta, the Court confirmed such wording choices may render an agreement unenforceable.

In this case, the applicants intended to purchase all of the shares of Otis Excavating Ltd. (the “Company”) and the units of Otis Partnership (the “Partnership”) that were legally and beneficially owned by the respondents.[2] The applicants delivered on an offer to purchase (“OTP”) in January 2020:[3] The closing date was February 28, 2020.[4] In addition to the various  obligations that must be fulfilled by the parties[5], the applicants placed the deposits $250,000 with their lawyers which would be  credited the toward the purchase-price in competiom.[6] However, the transactions did not close on time, and the parties’ lawyers simply entered into negotiations where they did not reach an agreement.[7]

Paragraph 16 of the judgment reads as follows:[8]

Clause 3 of the OTP provided that:

The obligation of Attila, Christina, VargaCo, Shaun and ShaunCo (Varga Transaction Parties) to close the Varga Transaction shall be subject to the completion of the following conditions and/or provision of the following documents, at or before the Varga Closing, to the satisfaction of each of the Varga Transaction Parties: [Emphasis added.]

Thereafter, conflicts between parties grew more and more severe, from blaming each other for being dilatory in communications and in fulfilling the obligations of producing documents,[9] to the respondents setting unreasonable deadline for the final draft of the definitive agreement and threatening that they would liquidate the company.[10] Finally, on April 14, 2020, the applicants believed there was a breakdown in communication and called off the transaction.[11]

The question before the Court was who was entitled to the deposits. The applicants claimed that the OTP is an agreement to agree on the essential terms,  which makes the OTP unenforceable. [12] Thus, they argued that the deposits should be returned. The respondents disagreed and contended that the OTP is a finalized contract which sets timelines and parameters for key events to follow.[13]

The Court declared that the OTP constituted an agreement to agree, and thus the deposits ought to be returned to the applicants.[14] Quoting from the judgment of Lord Denning MR in British Bank of Foreign Trade Ltd v Novimex Ltd, [15] the Court commented as follows:[16]

The principle to be deduced from the cases is that if there is an essential term which has yet to be agreed and there is no express or implied provision for its solution, the result in point of law is that there is no binding contract.

In the OTP, the provisions about documents and conditions needed to be fulfilled are addressed in an uncertain manner; for instance, the negotiation, execution and delivery of a definitive agreement of purchase and sale.[17] Thus, parties might not even know what all those documents would be when signing the OTP.[18] Besides the documents to be agreed, the OTP does not provide solutions for the potential disputes in interpreting the vague terms, such as arbitration.[19] Thus, the OTP was only an expression of intention to complete the deal.[20]

In addition, the Court continued analyzing in virtue of conditions precedents in the event that the OTP is more than agreement to agree.[21] The OTP would then be an agreement subject to conditions precedent where the conditions have never been fulfilled and documents have never been prepared.[22] One of the reasons for the failure of fulfilling the conditions is that the criteria, such as to the satisfaction of each of parties and as may reasonably be required, leaves too much room to parties’ subjective business judgment and satisfaction.[23] In this sense, the condition precedents may be hard to be fulfilled[24] without a mechanism for deciding the meaning of the terms in the conditions.[25] Thus, the OTP is still unenforceable, and the deposits should be returned to the applicants.[26]

It is not uncommon for parties to initially come to an agreement to agree, especially when parties are eager to pursue a deal but have not considered the provisions / requirements of the transaction agreement in detail. In such a situation, including a mechanism for solving disputes in interpreting the agreement, such as arbitration, in the contract may help to ensure that the contract is enforceable. Additionally, a severability clause may save the enforceability of a contract when some clauses are unenforceable.  

[1] 2022 ABQB 238 [1800677].

[2] Ibid at paras 7-8.

[3] Ibid at para 7.

[4] Ibid at para 11.

[5] Ibid at paras 12-15.

[6] Ibid at paras 12-13.

[7] Ibid at paras 22-23.

[8] Ibid at para 16.

[9] Ibid at para 22.

[10] Ibid at paras 26-27.

[11] Ibid at para 28.

[12] Ibid at para 32.

[13] Ibid at para 36.

[14] Ibid at para 41.

[15] British Bank of Foreign Trade Ltd v Novimex Ltd, [1949] 1 KB 623 (CA),

[16] 1800677, supra note 1 at para 33.

[17] Ibid, at paras 14-15.

[18] Ibid at para 39.

[19] Ibid at paras 39-40.  Machinery to make functional what would otherwise be an agreement to agree has been found to be effective in a number of cases.  See Foley v. Classique Coaches Ltd., [1934] 2 KB 1 (CA); A. G. v. Barker Bros. Ltd. [1976] 2 NZLR 495 (CA); and Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 AC 444 (HL).  However, an arbitration clause will not always render enforceable what appears to be an agreement to agree.  On this point, see May & Butcher Ltd. v. Reg. [1934] 2 KB 17n.

[20] 1800677, supra note 1, at para 40.

[21] Ibid at para 42.

[22] Ibid at para 49.

[23] Ibid at para 50. For a case that discusses subjectivity in conditions precedent, see for example. Wiebe v. Bobsien (1984), 14 D.L.R. (4th) 754 (B.C.S.C.), aff’d (1985), 64 B.C.L.R. 295 (C.A.).

[24] Ibid at para 49.

[25] Ibid.  

[26] Ibid at para 53.

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