Thursday, 26 July 2018

Email Communication and Formation of Contract

Author: Peter Major, Q.C. and Cesar Agudelo, Summer Student

Electronic communication continues to grow and, by most observations, it is becoming indispensable in our social discourse. The advantages of instantaneous communication allow for people to connect quicker and expand their circle of contacts. At the same time, this access to instantaneous communication carries risk. A flippant or ill-tempered remark sent in the course of a speedy exchange could later prove embarrassing or destructive to a relationship. Should the same cautionary tale apply to business negotiations? Can a careless or poorly considered email or text bind you to an agreement that you did not intend?
 
In two recent cases, appellate courts closely scrutinized the role that email exchanges played in business relationships. The first case, Cana v Standard Innovation, 2018 ONCA 145, was heard by the Ontario Court of Appeal and it had to decide if two separate agreements were created amid several email exchanges between the parties. The Defendant, Standard Innovation, was the patent holder of a popular sex toy called “We-Vibe”. The Plaintiff, Cana, was a distributor of adult sex health and wellness products. The parties entered negotiations for Cana’s exclusive distribution of the We-Vibe. The relationship eventually soured and Cana sued Standard Innovation for breach of contract, among others claims. In that claim, Cana alleged that three different agreements formed, only two of which are of concern here: 
  1. A Mainstream Agreement whereby Cana would be the exclusive distributor of the We-Vibe in mainstream stores such as drug stores; and
  2. An Adult Stream Agreement whereby Cana would be the sole distributor of the popular toy through adult sex shops and websites.

In analyzing the Mainstream Agreement, the facts identified that between August and September 2009, Cana signed one copy of the Mainstream Agreement while Standard signed an identical yet separate copy. There was no one document that could be clearly identified as the one contract for the Mainstream Agreement. Subsequently, the parties exchanged emails discussing and modifying some of the terms of the documents that had been signed. Cana argued that the Mainstream Agreement was formed when both parties signed a copy of the document. Standard Innovation, pointed to the subsequent email exchanges and discussion of the terms as proof that there was no agreement, but rather an ongoing negotiation.

In the Adult Stream Agreement, the parties signed different copies of the document held out as the agreement while continuing to negotiate the terms of that agreement. These negotiations also continued well into 2010. Notwithstanding these negotiations, Cana argued that the email exchange was proof that an agreement had been reached, while the Standard Innovation argued that the emails proved that these were mere negotiations so no agreement was ever finalized.

The Ontario Supreme Court held that there was no Mainstream Agreement or Adult Stream Agreement established and dismissed the claim. The Ontario Court of Appeal reversed the trial court’s decision regarding the Mainstream Agreement but upheld its findings regarding the Adult Stream Agreement. The difference in the Court of Appeal’s findings illustrate what the Court considers important when analyzing the role that email communications play in contract formation and interpretation.

The Court of Appeal agreed with the trial court on the approach for analyzing contract formation and interpretation. Implicit in their decisions are the principles established by the Supreme Court of Canada in Sattva Capital Corp. v Creston Moly Corp. 2014 SCC 53. A contract should be interpreted by objectively determining the intention of the parties at the time that they entered into the contract in light of the factual matrix of the surrounding circumstances. In the Cana case, the two courts arrived at different conclusions. Each court agreed that the main factors to determine contract formation are: the wording and content of the contract, where one exists; the conduct of the parties; the factual or business context at the time of formation; and lastly, and less importantly, other evidence that may help solve uncertainties.
 
The difference in their conclusions and the palpable error of the trial court was not in finding that the email exchange overcame the written contract, but in forgetting to apply the principle of agreements signed by counterpart. The trial judge characterized the email exchanges of partially signed copies as “two unique offers.” The Court of Appeal disagreed and found there to be one, executed agreement signed in counterpart. The Court noted that the parties “conducted themselves in this manner until the relationship broke down in May 2010.” The Court also considered the subsequent email exchange as “negotiations concerned with relatively minor matters of the kind that would be expected to arise within the framework of a long-term exclusive distribution agreement.”
 
The Court did not ignore the email evidence, but relied on it mainly to clear up uncertainties. For example, it highlighted an email where the Standard Innovation said “I look forward to growing the mainstream market with you,” as evidence confirming the existence of an agreement while noting that they could now do a term for the sex toy industry. The Court also relied on the Standard Innovation’s internal emails to interpret their intention and understanding the relevant events dealing with formation and intention. The emails indicated that Standard Innovation considered the Mainstream Agreement as ‘done’. The email evidence supported the Court’s interpretation of the written contract, the conduct of the parties and the factual context.
 
The Adult Stream Agreement was resolved differently. Ironically, there was a fully executed document, but in Cana’s own emails they requested a clean copy after this executed copy was signed. The negotiations on major terms, contained in some of these emails, continued. The Court took this, and other evidence to mean, that Cana themselves did not consider it an enforceable agreement. Also, and unlike the Mainstream Agreement, the parties did not conduct their business in accordance to the agreement.
 
At the end of this analysis, the Court concluded that there was no written contract, no conduct to support an agreement and the factual context evidenced an ongoing negotiation. Furthermore, the Court found that the email exchange was too uncertain to support the formation of an agreement and no one email accidentally bound the parties.
 
The second case, Skylink Express Inc. v Innotech Aviation, 2018 NSCA 32 was heard by the Nova Scotia Court of Appeal. The Plaintiff, Skylink and the Defendant, Innotech had a long business relationship dating back to 1998. Their relationship was grounded on a lease where Skylink became Innotech’s tenant for hangar space with accompanying office and parking space. Over the years, the parties renewed and amended their agreement and they had a specific process for amendments where they would negotiate an addendum to the original lease.
 
In 2014 the parties negotiated a renewal. Innotech offered Skylink three options, a one, three and five year lease. The longer the lease, the lower the rate of rent. Skylink chose the five year lease with the lowest rent. Before executing the addendum, however, Skylink sent an email asking Innotech: “If the need arose, and Skylink needed additional space or to change the type and number of aircraft they had, would they be able to do so via an Ad Hoc Addendum?” Innotech confirmed that this would be agreeable. After this confirmation, the parties executed the addendum to their original agreement.
 
A few months later, Skylink lost a major deal, resulting in a reduction of business. In turn, Skylink attempted to rely on its email exchange with Innotech to reduce the amount of space it rented and to ultimately terminate the agreement. After Skylink failed to pay rent, Innotech made an application for a declaration that Skylink was in breach of their lease.
 
Skylink argued that the email exchange before the execution of the addendum to the original lease constituted a collateral agreement. Both, the trial court and the Court of Appeal disagreed.
 
First, the parties had a long history of doing business and their established method of amending the agreement weighed heavily. If anything, the email exchange supported this practice. Secondly, Skylink’s argument would allow it to unilaterally modify the contract and pass its business losses to Innotech. Thirdly, the intention of the parties was clear from the evidence. Skylink chose the longer of the leases when it had the option of a one year term, plus witnesses for Skylink testified that they had not anticipated a reduction in business.
 
Like the Court in Cana, the Nova Scotia Court of Appeal put more weight on the written contract, the conduct of the parties and the factual or business context.
 
The take away from these two cases is that emails and presumably other electronic exchanges during business negotiations can be an important part of the factual matrix courts will look to in determining whether a contract is formed, enforceable or left open. Emails and texts are just as useful as any other evidence the courts are required to review to find out what the parties intended, if a contract was formed and when it was formed. If you are engaged in electronic communications in business, think twice before you send the flippant or ill-tempered remark. There is a good chance a judge won’t see your comment in the same light you thought when you sent it and when reviewed years later.
 
With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the best advice and representation. If you have any questions or concerns about this or any other matter, please contact any member of our Commercial Litigation Team 

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