Recent SCC Decision on Pre-Incorporation Contracts Could Affect Ontario Not-for-Profits

Published on: January 2021 | What's Trending

Judge gavel with scales of justice, lawyer in suit with contract papers in courtroom

The recent decision by the Supreme Court of Canada in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29 (“Crystal Square”) provides a useful summary of basic contract principles applied in the context of a pre-incorporation contract. This decision is important for Ontario not-for-profit corporations (“NFPs”) and business corporations incorporated in Nova Scotia (even if they operate in Ontario).

At issue was the Crystal Square building complex in Burnaby, British Columbia, containing an office tower and parking garage among other buildings. In March 1999, the Crystal Square developer and the City of Burnaby entered into an agreement setting out various rights and obligations regarding the complex (the “Agreement”). The Agreement included terms for access to the parking facility and the fees payable.

The appellant, a strata corporation (in Ontario, a condominium corporation), was established in May 1999 for the owners of the office tower units (“Strata Co.”). The unit owners used the parking facility and paid for it. Strata Co. never assumed the Agreement.

In 2002, the developer sold the rights to the parking facility to the defendant, Crystal Square Parking Corporation (“CSPC”) and assigned the Agreement to CSPC. CSPC hired Impark to operate the parking facility and accept payment from the unit owners per the Agreement.

In 2006, the unit owners became concerned that the parking cost was too high. Per the Agreement, they had been paying an annual base rate plus a percentage of all “operating expenses” as calculated by Impark. When the owners realized Strata Co. had never formally signed the Agreement, they took the position that it was not bound by the Agreement and not required to pay certain expenses. CSPC argued Strata Co. had accepted the Agreement by following its terms and was required to make all payments calculated by Impark.

Strata Co. was successful at trial. The trial judge held that Strata Co. was not bound by the Agreement in part because Strata Co.’s conduct (through the unit owners) did not show a willingness to adopt the Agreement. In particular, the owners’ dispute over fee calculations indicated that they had not turned their mind to the terms of the Agreement when making payments for all the prior years.

The British Columbia Court of Appeal disagreed with the trial decision. The Court found that Strata Co. and CSPC had entered into a new contract on identical terms to the Agreement. In particular, the Court disagreed with the reliance on Strata Co.’s actions in 2006 and onward as they were merely the unit owners’ subjective understanding of their obligations.

In an 8-1 majority, the Supreme Court of Canada agreed with the Court of Appeal. At common law, a corporation cannot be bound by a contract that was created prior to its existence unless the contract is assigned to it. Most business corporation legislation such as Ontario’s Business Corporations Act (“OBCA”) contains explicit provisions ousting the common law and allowing the adoption of a pre-incorporation contract by any action or conduct signifying the corporation’s intention to be so bound. The legislation governing strata corporations in British Columbia did not contain the same explicit language and, accordingly, Strata Co. could only be bound by the terms of the Agreement if it entered into a new contract with CSPC on identical terms.

The Supreme Court applied the standard test for finding a contract to determine if Strata Co. and CSPC entered into an agreement. The test is not modified simply because a similar contract existed prior to one party’s incorporation. The majority and dissent agreed on this test; the dissent only disagreed on its application. The test is objective, requiring an offer, acceptance, and consideration. These requirements and the contractual terms do not need to be in writing and instead may be inferred from the parties’ conduct and from surrounding circumstances. Each party must display an outward manifestation of approval to induce a reasonable expectation in the other party. As a result, we must examine how each party’s conduct would appear to a reasonable person in the position of the other party.

The majority found that Strata Co. had manifested its intention, by way of its objective conduct, to be bound by a new contract with CSPC on the same terms of the Agreement. There was strong evidence of both offer and acceptance of the terms: CSPC made parking passes available to the unit owners, the owners used the parking spots assigned by such passes, and the owners paid the fees set out by CSPC (through Impark). The dissent disagreed that this was evidence of an offer and acceptance because it had not been characterized as such at trial. However, the majority, viewing the evidence from the reasonable perspective of a party in CSPC’s position, argued that explicit reference to offer and acceptance was not necessary. This is also consistent with general contract principles set out across many previous cases: there are no magic words or conduct required to form a contract; the test simply focuses on the objective conduct in each specific case. To that end, Strata Co.’s actions from 2006 onward were found to be irrelevant as they only showed the members’ subjective understanding of their obligations. A reasonable person in CSPC’s position would have looked to the conduct at the start of the relationship and seen that a contract was formed.

Neither the majority nor dissent considered whether Strata Co. agreed to the terms with CSPC under a mistaken belief that it was already bound by the Agreement. If it had, Strata Co. could have asked to be relieved of its obligations resulting from its mistaken belief. This issue had been bifurcated from the action that was before the Supreme Court so the justices could not consider it. The issue was left for the trial judge to decide. In any event, the Supreme Court confirmed that a contract was formed between Strata Co. and CSPC regardless of any mistake. If Strata Co. was found to be operating under a mistaken belief, this could only nullify the agreement after it was formed.

This decision is an important reminder of basic contractual principles at common law and is of general importance to anyone entering into contracts. In Ontario, it is particularly important for all provincially incorporated NFPs and any corporations incorporated in Nova Scotia (even if they operate primarily in Ontario).

Nova Scotia’s Companies Act is the only provincial business corporation legislation that does not contain adoption language as in the OBCA. Nova Scotia companies may, however, deal with pre-incorporation contracts in their articles of association. Ontario NFPs are currently regulated under the Corporations Act (Ontario), which also does not contain adoption language. Once the new Ontario Not-for-Profit Corporations Act, 2010 comes into force, it will replace the Corporations Act and contain the same OBCA adoption language. Until then, Ontario NFPs (and Nova Scotia incorporated companies) must ensure they have properly assigned any pre-incorporation contracts or entered into valid agreements on the same terms to maintain their rights.