Overview
A recent (and ongoing) case before the
Binding and enforceable agreements can be formed in the absence of signatures on the execution version of a contract. Parties should be cautious about the language used in meetings and email exchanges during the course of negotiations.
In
Background Facts
Orion and LRC again entered negotiations in
Following this videoconference, LRC's president sent an email to Orion's representative, stating:
We accept your offer of
Orion's representative replied via email, "OK, sounds good."
A term sheet was sent to Orion by LRC for comment, which was marked-up and returned by Orion.
A few days later, a third party company,
Two days later, LRC returned the term sheet that Orion had revised, but Orion did not sign it. Instead, Orion entered a deal with Trident, selling a 60% interest in the Royalty.
Procedural History
LRC commenced an application in the
The Jurisdiction Motion:
Before the matter proceeded to trial, LRC sought to add Trident as a respondent to the proceeding, as Trident had acquired an interest in the Royalty that infringed upon the 85% interest that LRC claimed through the proceeding.
Trident resisted being added on the basis that the
The Liability Trial:
LRC's application was converted to an action and the parties agreed to bifurcate the issue of liability and remedies. The liability trial proceeded in
The main factual disagreement as to whether an enforceable contract was formed between Orion and LRC related to whether Orion made a counteroffer to LRC during the
LRC claimed that following the
Orion took the position that LRC misconstrued Orion's intentions amid ongoing discussions, that the parties never agreed on the essential terms, and that in any event, a comprehensive signed contract is an essential term of any royalty agreement, as per customary industry practice.
Considering the surrounding circumstances and the testimony of individual witnesses, the Court found that a binding and enforceable contract was formed. LRC's email sent after the
The fact that the initial term sheet that was circulated contained conditions and other clauses counter to the deal the Court found to be stuck was not prohibitive - the essential terms were correctly stated, and "the balance of the terms were essentially boilerplate terms" (para 216). Likewise, a clause in the term-sheet stipulating that the underlying agreement would become effective upon delivery of Orion's signed copy of same was given little weight as it was a standard contractual term inserted by counsel, and not reviewed by LRC's representative in the haste of completing the deal. The time-sensitive nature of the deal was a significant factor. Notably, Orion's fund holding the Royalty was nearing maturity, and there were two prior failed bids that predated the 2021 negotiations. These were an external motivating factors for Orion to sell the Royalty interest in a timely manner. The speed of the transaction and resulting lack of formalized terms were found to be understandable from a commercial efficacy perspective given the circumstances. The Court reviewed conflicting expert evidence on customary practices in the sale of royalty interests, but found that evidence to be of little assistance in resolving the issue.
The fact that Orion ultimately did not sign the term sheet was inconsequential because the essential terms were concluded in the prior email from LRC accepting Orion's offer and evidenced by Orion's response confirming LRC's acceptance. The binding term sheet was revised by Orion and accepted by LRC, without change or conditions, demonstrating a meeting of the minds not only on the essential terms but the standard non-essential terms as well. The comprehensive written agreement and related transactional documents were to follow, but their execution was not itself part of the essential terms of the contract.
Finally, the Court considered whether the contract was actually enforceable under
The Stay of Appeal Motion:
Following the liability decision (but prior to the commencement of the remedies hearing), Orion brought a motion for a stay of the proceedings pending their appeal of the liability decision. The Court of Appeal granted a partial stay of proceedings, which permitted the action to continue, but prevented enforcement of the action against two of the Orion entities.
Why This Case Matters
The trial decision reinforces the principles of contract formation as they are applied to the increasingly digitized business world. Companies negotiating such contracts should be mindful of statements made in such negotiations (and in follow-up email correspondence). This is especially true when transactions are being negotiated under tight time constraints (as they often are). Perhaps akin to a "thumbs-up emoji", the Court was prepared to accept an email of "OK, sounds good" as binding acceptance of material terms.
This case also serves as an important reminder that a final signed set of contractual documents may not be necessary for an enforceable contract, and that seemingly inconsistent terms arising within a negotiation may be given little weight if they are found to be mere boilerplate or otherwise non-essential. It will be a highly fact-specific analysis in each case, and parties are wise to have their legal counsel involved in such negotiations.
Still to come is the determination of remedies, which will raise interesting questions over the appropriate remedy where specific performance of a royalty was sought, but where that interest has, at least in part, been sold to a third party that the Court has no jurisdiction over.
Stay tuned for more updates as this proceeding continues to unfold.
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