Following the guidance set out in Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA), Mr. Justice W. Daniel Newton in Rockwater Construction Inc. v. Coppin et al, 2020 ONSC 7956 held that a settlement failed to qualify as a binding contract. Newton J. observed that it is “trite law that settlement agreements are contracts subject to the general law of contract” and that contract interpretation principles apply equally to deadlines in agreements. Significant post-settlement disagreements over key provisions demonstrated to Newton J. that neither party had initially contemplated or agreed on all essential terms. Newton J. held that waiver of timelines in a settlement “would require clear evidence that both parties agreed that there would be no deadline for completing” the disputed steps. Despite a settlement clause requiring mediation in case of disagreement over the settlement, Newton J. determined that it was “pointless” to require the parties to return to mediation.
Defendants applied for a declaration that April 2, 2019 minutes of settlement (“Minutes”) constituted a binding settlement reached between Plaintiff and Defendants and an order requiring Plaintiff to comply with the Minutes. Plaintiff resisted the application, arguing that the settlement documented by Minutes was an “unenforceable agreement to agree” and that Defendants had repudiated the Minutes by their delay.
A real estate development and construction management company, Plaintiff contracted in December 2016 with certain of Defendants – The Residence TBCC (“TBCC”) and one of the individual defendants CDC (“Owners”) – to supply services for a condominium/golf course project on lands owned by TBCC in return for fees and a fifteen (15) percent equity stake in the condominium and golf course (“Contract”).
The Owners gave Plaintiff notice in October 2018 terminating the Contract. Plaintiff replied by registering two (2) claims for liens against the project for an amount exceeding $1.5 million and sought $3 million representing its fifteen (15) percent equity stake.
The parties engaged in mediation on April 2, 201 and signed Minutes which provided various follow up steps set out at para. 5 of Newton J.’s reasons. Those steps included Owners’ issuance of a promissory note to Plaintiff, Plaintiff’s issuance of an invoice to Owners for an equivalent amount, the parties entering into a shareholders’ agreement providing Plaintiff its share equity in common shares and a full, final mutual release. The Minutes included a statement about the contents of the shareholders’ agreement.
“The shareholders’ agreement shall be in the usual form and shall contain provisions providing that any future share distribution shall be on a basis that is nondilutive to the interests of the plaintiff. The shareholders’ agreement shall also contain standard tag-along and drag-along provisions, rights of audit, and the right of the plaintiff to sell or assign his shares to a related company or a bona fide third-party purchaser, provided that the defendants are offered a right of first refusal in the standard terms. The shareholders’ agreement shall not contain a shotgun buy sell agreement”.
The Minutes provided that if there were “any issues with respect to these minutes of settlement or their implementation, including settling in terms of the shareholders’ agreement” the parties “agree to submit those issues to the mediator for resolution”.
Within days of the Minutes, Plaintiff issued its invoice and sent a draft release and unanimous shareholders’ agreement (“USHA”). Newton J. observed that the parties disagreed over the terms of the USHA and returned to mediation on July 30, 2019 subsequent to which other issues arose but were not resolved.
On June 12, 2020, Plaintiff gave the Owners notice that failing agreement by June 26, 2020, Plaintiff would terminate the settlement and proceed with litigation. On July 3, 2020 Plaintiff announced that “the settlement was over since it had not been finalized by the deadline”. After that date, on July 6, 2020, the Owners delivered a new draft USHA with terms not agreed to by Plaintiff. Plaintiff responded that the draft was unacceptable and that attempts to complete the settlement had ended.
The Owners then purported on July 6, 2020 to accept Plaintiff’s June 12, 2020 terms. “They executed the shareholder agreement as proposed by [Plaintiff] and delivered the executed shareholder agreement, promissory note, and mutual release as drafted and provided by [Plaintiff] on August 27, 2020”.
Newton J. identified three (3) components to the parties’ dispute regarding the binding nature of the Minutes: agreement to agree; delay; return to mediator. As preface to his analysis, Newton J. began “by acknowledging that litigants, the courts, and society in general all have an interest in resolving disputes by settlement if a settlement can be reached”.
(1) Agreement to agree – Newton J. referred to Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA) pp. 12-13 for its statement of an “agreement to agree”.
“As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. The parties may “contract to make a contract”, that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the “contract to make a contract” is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself. See, generally, Von Hatzfeld Wildenburg v. Alexander,  1 Ch. 284; Canada Square Corp. Ltd. et al. v. Versafood Services Ltd. et al. (1980), 1979 CanLII 2042 (ON SC), 25 O.R. (2d) 591 (H.Ct.), aff’d., (1981), 1981 CanLII 1893 (ON CA), 34 O.R. (2d) 250 (C.A.); Bahamaconsult Ltd. v. Kellogg Salad Canada Ltd. (1976), 1975 CanLII 379 (ON SC), 9 O.R. (2d) 630 (H.Ct.), rev’d, (1977), 1976 CanLII 554 (ON CA), 15 O.R. (2d) 276 (C.A.); Chitty on Contracts, 26th ed. (1990), at pp. 79-91; Corbin on Contracts, (1963), Vol. 1, s. 29-30; and Treitel, Law of Contract, 7th ed. (1987), at pp. 42-47”.
Defendants and Plaintiff relied on the same cases: Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA), Di Gennaro v. BMO Nesbitt Burns Inc., 2013 ONSC 37 and Brager v. Ontario (Natural Resources), 2017 ONSC 1759. Defendants argued that the parties had agreed upon all the essential terms in the mediation and that the settlement bound them. Plaintiff argued that no agreement existed on the essential terms, adducing affidavit evidence setting out twenty (20) different terms for which no agreement existed. Those terms included those listed at para. 15.
Newton J. observed that, despite executing the Minutes in April 2019 and requiring that certain steps be completed within thirty (30) days, both parties continued to negotiate the USHA terms until Plaintiff imposed a deadline. Owners argued that the parties mutually waived the timelines and that Plaintiff caused the delays by refusing to comply with certain demands but that Owner eventually signed the documentation required by Plaintiff. Plaintiff argued that it had withdrawn from the settlement after giving reasonable notice requiring completion and that Defendants’ completion after the date set was not compliant.
Newton J. noted that neither party submitted authority to support their position. He referred to Struik v. Dixie Lee et al, 2017 ONSC 551 as source for “trite law that settlement agreements are contracts subject to the general law of contract” and to Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 as guidance that courts “should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity”. He added that those principles apply equally to deadlines.
Though he accepted that the parties had entered into the Minutes in good faith, he determined that it as “undisputed” that the Minutes did not address issues that “could and should have been addressed at the mediation” and which became “significant”. One such issues as Defendants’ requirement that Plaintiff’s representative provide a personal guarantee upon Plaintiff becoming a shareholder. Because the issue arose only after the mediation, Newton J. determined that the timing “supports the conclusion that this issue was not initially contemplated by the parties and of significance to both”.
“ As such, following [Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA)], as essential provisions were not agreed upon then, I conclude that there is no agreement. I agree with counsel for [Plaintiff] that this case is different than the cases in which only the terms of a release were in dispute. Material terms of the alleged agreement were not agreed upon. Therefore, the matter was only an agreement to agree”.
(2) Delay – Newton J. noted that the Minutes provided a set date for completion of identified steps. Despite post-delay attempts to resolve the impasse, Plaintiff “delivered an ultimatum and imposed a firm deadline” which Owners “ignored” and “continue[d] to act as if negotiations were ongoing”.
Newton J. interpreted Owners’ delayed signature in a manner different from the one urged by Owners. In order to determine that Plaintiff had waived the timelines, Newton J. held that he “would require clear evidence that both parties agreed that there would be no deadline for completing” the disputed steps.
“That the owners executed the shareholder agreement as demanded by [Plaintiff] two months after the deadline calls into question the Owners’ “good faith” and suggest that the Owners were continuing to advance their interests and extract from [Plaintiff] concessions that were not made at the time of the mediation”.
(3) Return to mediator – Owners argued that repudiation of the Minutes is in appropriate when the parties have agreed to return to the mediator for resolution of any disputes. Plaintiff argued that mediation was tried once and unsuccessfully and that, given the significant disagreements, mediation would be “pointless”.
Newton J. agreed that returning to the mediator would be “pointless”. The evidence adduced confirmed that the parties understood the outstanding issues and their importance.
“Further, there is nothing in the evidence to suggest that the Owners wanted or suggested that the parties return to the mediator. On the contrary, the evidence indicates that the parties were fully engaged in these protracted, but failed, negotiations”.
urbitral notes – First, for earlier instances in which the courts referenced Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA) and held that the settlement did demonstrate a binding agreement, see Olivieri v. Sherman, 2007 ONCA 491. In that decision, the Court of Appeal held that a settlement agreement is a contract.
“ A settlement agreement is a contract. Thus, it is subject to the general law of contract regarding offer and acceptance. For a concluded contract to exist, the court must find that the parties: (1) had a mutual intention to create a legally binding contract; and (2) reached agreement on all of the essential terms of the settlement: Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA),  O.J. No. 495, 79 D.L.R. (4th) 97 (C.A.), at pp. 103-04 D.L.R.”
For a more modest amount applying the same precedent and confirming the settlement as a contract, see Louis W. Bray Construction Ltd. v. Ottawa (City), 2018 CanLII 14351 (ON SCSM).
Second, in CabCom Network Inc. v. Strategic Media Outdoor Inc., 2012 ONSC 4148, the court held at para. 13 that “[a]s long as the parties have agreed on the essential terms of the settlement, the final documentation does not have to be executed in the form of a Release or Minutes of Settlement”. That statement should be read with the decision in Iofcea v. Dinoiu, 2018 ONSC 6882 in which the court, referring to Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CanLII 2734 (ON CA), held at para. 21 that where the parties do require a formal agreement, then the settlement remains only an “agreement to agree”.
Third, regarding the formation of an agreement to arbitrate contained in a disputed contract see Rhinehart v. Legend 3D Canada Inc., 2019 ONSC 3296 in which the court addressed a “flaw” in an agreement signed by only one (1) of the two (2) parties.
“ The August 2013 Arbitration Agreement suffers from a flaw: it is a bilateral agreement that is executed by only one of the two contracting parties – by [R] but not by Legend USA. [R] contends that it is invalid on its face. However, it is unlikely that this flaw prevented an agreement to arbitrate from forming between the parties. Nothing in the contract states that the contract is conditional on Legend USA’s signature. The Court of Appeal emphasized in Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 1991 CanLII 2734 (ON CA), 79 D.L.R. (4th) 97 (Ont. C.A.) at 104 that a formal written document does not create a contract – the agreement of the parties on all essential provisions does”.