When Negotiations Become Binding: The 'I' In 'LOI'

It is not uncommon for parties in a commercial transaction to get involved in lengthy, complicated negotiations with numerous draft agreements going back and forth. They may even come to terms on many, if not all, of the substantive aspects of the deal. What happens if negotiations break down or terminate before a formal agreement is signed? In the recent decision of Hartslief v Terra Nova Royalty Corporation, the British Columbia Court of Appeal confirmed that the execution of a formal written agreement is not always necessary for parties to be bound.1 In addition, the court confirmed that, absent a clear understanding to the contrary, solicitors negotiating on behalf of their clients can bind their clients to an agreement.

Although the Hartslief case arises in the context of a termination of employment, its relevance in any commercial negotiations illustrates the merits of clearly setting out the parties' intentions at the outset of negotiations, in a letter of intent ("LOI"), term sheet or other similar document, to avoid unintended consequences.

What Happened

The facts of the case are fairly straightforward. Alan Hartslief (the "Plaintiff") brought an action against his former employer, Terra Nova Royalty Corporation (the "Defendant"), seeking a declaration that a binding settlement agreement had been reached by the parties following extensive negotiations between their respective solicitors. The Defendant disputed the existence of a binding agreement and argued that it was the parties' joint intention that a binding settlement would only arise upon the signing of a formal document. The Defendant also claimed that its solicitors did not have authority to bind it to an agreement.

The Decision

On the question of a lawyer's ability to bind his or her client, the court reaffirmed that the law is clear and well-understood: "unless a solicitor clearly communicates the contrary to those with whom he or she is negotiating, a solicitor is the agent of his or her client and thus may bind the client to an agreement ... [a]fter all, a solicitor "acts for" the client."2 Furthermore, there is no obligation on the parties to make enquiries regarding a solicitor's authority to bind a client, and the mere fact that a solicitor seeks instructions from a client is not enough to rebut this presumption.

With respect to the question of when negotiations lead to a binding agreement, the court relied on the general principles set out by the Ontario Court of...