Parties negotiating contracts frequently litigate whether they have a binding agreement. This guide provides advice to clients negotiating contracts to help you minimize the risk of disputes, in addition to highlighting actions or inactions that could put you at risk of inadvertently entering into an agreement. This risk is brought home by a recent Saskatchewan decision in which the Court held that one party had entered into a binding contract by responding to a text message with a thumbs up emoji.

The phrase “it’s a deal” may be commonly used when two negotiating parties are aligned on the high-level points of a deal – but (and this is an important but), the parties usually still need to agree on the details, conduct due diligence and enter into a definitive agreement in order to reflect the deal to which they think they have agreed. It may not seem appealing to have to say something along the lines of “We’ve agreed on the broad brushstrokes of a deal, but we are now going to have to engage our lawyers to paper the details in a binding agreement and any agreement is conditional upon formal documentation,” but this type of qualifying “legalese” is actually important.

Language that qualifies acceptance or agreement should be used in your verbal and written (including email and text messaging) communications with a counterparty when there are still open items. The use of phrases like “we agree” or “we have a deal” could (unintentionally) give rise to the establishment of a binding agreement without all the bells and whistles of formal, written contracts. This is because the three key elements of contract formation may already be present: (1) offer; (2) acceptance; and (3) consideration. As such, even a simple thumbs up emoji in an email (as recently litigated) may inadvertently bind parties. 

With this in mind, below is general guidance to consider when negotiating the basic terms of a business arrangement in which you anticipate having to enter into a more fulsome (and probably written) agreement once those basic terms are settled.

Do:

• Consider entering a non-binding letter of intent or memorandum of understanding, which should include a statement that the terms of the business arrangement are not binding until a definitive written agreement is negotiated, settled and executed by the parties.
• When agreeing to high-level deal terms, qualify such meeting of the minds (this applies to informal communications, such as text messages and emails). Qualifying language may include “subject to entering into a written agreement signed by both parties.”
• Ensure that the parties continue to negotiate under an existing non-binding letter of intent. If the terms materially change, then amend the non-binding letter of intent to evidence the intended new terms.
• Avoid using confirmatory language (or emojis) without qualification.
• Include “For Discussion Purposes Only” at the top of documents proposing to set out material terms until all terms of the agreement are settled between the parties.
• Ensure that those negotiating on your behalf are mindful not to confirm that the three pillars of an agreement (offer, acceptance and consideration) have been agreed to.
• Ensure you or those negotiating on your behalf, do not start to perform your obligations under the business arrangement before the written agreement is fully finalized and executed.

Don’t:

• Agree to the general or high-level terms to a deal (or say, “We have a deal”) without any qualifying language that the offer or acceptance, as applicable, is subject to the parties entering into a definitive agreement.
• Assume that a non-binding letter of intent (or similar indicative document) with one set of terms will remain non-binding and extend to future discussions between parties when the parties discuss commercial terms not reflected in such non-binding document.
• Assume that the lack of signature on a letter of intent or agreement means that there is no binding agreement.
• Start to perform any of your obligations under the business arrangement (e.g., receive or make payments, publicize the proposed transaction or start taking steps and fulfill conditions) before the written agreement is fully finalized and executed.

For more information on this topic, please contact Don Macintosh, Benjamin Iscoe, Chloe Snider or Camila Maldi.

Relevant cases:

• Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53
• Bawitko Investments Ltd. v. Kernels Popcorn Ltd., [1991] 79 D.L.R. (4th) 97 (Ont. C.A.)
• UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 2009 ONCA 328
• Ruparell v. J.H. Cochrane Investments Inc. et al., 2021 ONCA 880
• Frye v. Sylvestre, 2023 ONCA 796
• Jittalan v. Reflourish Capital Limited et al, 2023 ONSC 4863 (CanLII)