As parties work out the terms of a deal, many letters of intent and other commercial documents come with warning labels as to the non-binding nature of the terms set out in that document. "This letter is not to serve as a legal agreement but as a summary of the understanding of A and B," is one such warning and seems clear enough. However, a recent decision of the Ontario Court of Appeal demonstrates that in some situations, the statement of the parties' intentions as expressed in such a warning label will not prevail. Contracting parties need to take care  to ensure that their actions do not speak louder than the words in the warning. 

In Nordlund Retreat1, the Court addressed a dispute between two neighbours of real property in Northern Ontario. One neighbour (Plominski) was landlocked, and the other (Nordlund) had water access only. They struck a deal in principle to provide Nordlund with a road access easement, and to sever a portion of the waterfront property to give Plominski some water access. They converted their understanding as to the terms of their arrangements into two documents called an Easement Summary and a Severance Summary, each with its own warning label as to its intended status as a non-binding agreement. However, when Plominski kept trying to sweeten the arrangements with his neighbour by demanding that additional terms for his own benefit be satisfied before he would grant the easement, Nordlund brought an action for specific performance of the Easement Summary as a valid and enforceable agreement. 

The Ontario Court of Appeal rejected Plominski's contention that the Easement Summary with its warning label was nothing more than an "agreement to agree" and that the parties were continuing to negotiate. The Court concluded that notwithstanding the warning label, the neighbours had both intended to enter into a binding "preliminary" agreement for the provision of an easement. In confirming the motion judge's finding that the Easement Summary was an enforceable contract, the Court focussed on several key factors:

  • The Easement Summary contained all of the essential terms in connection with the dimensions, location and construction of the easement2
  • The parties had acted for a period of one year as if the agreement was in place in terms of contacting provincial government ministries and other third parties to obtain consents and in authorizing surveyors to act as agents to obtain the consents3
  • Nordlund had paid to Plominski $45,000 in advance as the purchase price for the easement, and Plominski accepted that payment even though Nordlund was not obligated to make it until a valid easement agreement had been signed and delivered4
  • In preparing letters to certain provincial government ministries seeking consent and in completing government forms, Plominski confirmed that he had agreed to grant the easement to Nordlund and that "official documents evidencing the easement" would be prepared as soon as accurate legal descriptions were available
  • The increasing demands of Plominski in attempting to negotiate better terms than those set out in the Easement Summary were not viewed as evidence that the agreement was still being negotiated, but rather as efforts to obtain additional consideration for an easement Plominski had already agreed to provide5
  • At the time he acquired his property, Plominski had acknowledged an earlier preliminary agreement granted by one of his predecessors on title in connection with the granting of an easement6

Although the decision in Nordlund Retreat relates to real property easements, it is a decision of the Ontario Court of Appeal and another indication of the Court's desire to give effect to the reasonable expectations of the contracting parties. 

Lenders should still of course ensure that any term sheets, letters of intent or other preliminary documents they issue are supported with strongly worded warnings as to their non-binding nature. However, they must also ensure that the actions in dealing with the proposed borrower and third parties after issuing the non-binding document concerning a proposed loan are consistent with those non-binding intentions until such time as a definitive agreement is executed. 

Footnotes

1 Nordlund Family Retreat Inc. v. Plominski, 2014 ONCA 444 [Nordlund Retreat].

2 Nordlund Retreat, at para 59.

3 Nordlund Retreat, at para 62.

4 Nordlund Retreat, at paras 64 and 65.

5 Nordlund Retreat, at para 66.

6 Nordlund Retreat, at para 54.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.