24 February 2016

How effective are your agreements?

In all of the management positions I have held, there was responsibility for examining and reviewing a fair bit of corporate documentation either for research or for assessment as to how it would impact decisions to be taken. In addition to documents prepared in Ontario and notarial acts « en minute » from Quebec!, there have been many documents prepared in the USA, the UK France and Belgium! That's given me an interest in keeping up to date with what's going on in the area of commercial law.

I've been gathering a bit of a "cheat sheet" as to what to keep in mind for B2B (business to business) contracts. First of all, we need to remind ourselves as to what a contract is, and Halsbury's Laws of England gives a basic definition, much of which is still applicable in Ontario. Here's the 1909 edition, at paragraph 740:

In brief:
  • a contract may be made either verbally or in writing;
  • if it is in writing, either under hand only or under seal; but
  • certain contracts must be in writing, and of these some must be in the form of a deed (ie, under seal).
The area is horrendously complex, so let's focus on those that need to be in writing between corporations. However, there are certain other statutes that will come up.

The contract is formed when:
  • an offer is made by one person to another, and it is accepted by the person to whom it is made;
  • there has been valid consent by both parties, without duress, undue influence or fraud; 
  • both parties have the capacity to enter into the contract;
  • it is either sealed, or valuable consideration is given by the promisee to the promiser.
The rules governing the use of seals are fairly rigid. The one that can really trip up users is the "sealed contract rule", which states that when it is executed under seal, an undisclosed principal can neither sue nor be sued upon the contract. That's because only the named parties acquire rights and obligations under it. In a simple contract (ie, one with valuable consideration) an undisclosed principal is able to sue and be sued under contracts entered into by his agent. The Supreme Court of Canada confirmed this in Friedmann Equity Developments Inc v Final Note Ltd in 2000.

What, then, constitutes a deed? It is a written instrument that must be sealed and delivered. Signing and witnessing are not strictly required, but are encouraged for purposes of proof.

At common law it is necessary for:
  • the conveyance between living persons of incorporeal hereditaments (eg, rents or rights of way);
  • any power of attorney which authorizes the attorney to execute a deed;
  • gifts or gratuitous assignments of tangible goods (where not accompanied by delivery of possession); and
  • rendering enforceable any gratuitous promise.
In equity, a deed must be employed "whenever any claim is made in a court of equitable jurisdiction of any assurance or alleged assurance made gratuitously of any legal estate, interest or right." This applies with respect to any real or personal property, or any other right.

There are three statutes in Ontario that have modified the application of deeds. The first is the Conveyancing and Law of Property Act, which provided for the following:
  • effectively requiring a deed to be used for any transfer of rights in land; and
  • an execution of a power of appointment by deed must be witnessed by two or more witnesses.
In addition, there is the Statute of Frauds, which reinforces the CLPA's deed requirements, as well as stating that most leases must be under deed as well.

Finally, we have the Land Registration Reform Act, which notably provides that "a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal."

Now that is quite a broad change, but it does not completely displace the requirements for deeds.They are still useful where it is necessary to declare that the parties are conclusively bound by its terms (subject to the discussion in Friedmann above), or where there are questions of the adequacy of any consideration. Guarantees and indemnities come to mind, as well as conferring rights upon third parties, and deeds conferring a power of appointment by a corporation for executing a deed has certainly not disappeared. Seals may still be necessary on occasion, unless Ontario finally decides to follow the UK's Law of Property (Miscellaneous Provisions) Act 1989. I'm not holding my breath.

Quebec is quite different. Their Civil Code only recognizes contracts, and consideration is not a requirement for validity. Instead, their definition is quite succinct:
1385. A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties subject the formation of the contract to a solemn form.

It is also of the essence of a contract that it have a cause and an object. 
They can be expressed as authentic acts (the solemn form, in article 2813 et seq.) or private writings (most contracts, in article 2826 et seq.), for purposes of proof. The rules are quite straightforward, and we can learn a lot from their approach. That's a discussion for another day, though.

How does all of this impact the internal administration of a corporation? I haven't even discussed tax consequences, and they do exist in multiple circumstances. The question of intercompany agreements for the handling of goods, services and cost-sharing is another sprawling area as well. However, it is necessary to understand how agreements are formed and become valid, before we can worry about the other myriad details that arise!

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