Contracts Written on the Back of a Napkin
People routinely reach commercial agreements that are not set out in a carefully written contract prepared by a lawyer. Many times, notes written on the "back of a napkin" are the best evidence of what the parties intended. These days, a tersely worded email is just as likely to be used to set out the basis of an agreement. Whether or not the parties intend to have those notes or emails expanded into a more formal and comprehensive legal document with the assistance of legal counsel, the notes themselves may constitute an enforceable contract.
A recent decision of the BC Court of Appeal (Hoban Construction Ltd. v. Alexander) dealt with what the court described as "a handwritten document hastily drafted and signed in a gravel pit", finding it to be a binding agreement and awarded damages of almost $1 million. The decision sets out the approach to be followed by courts in BC when faced with such a situation.
The agreement before the court dealt with the sale of shares of a closely held company by two of the shareholders to a third shareholder. It appeared to contemplate the parties giving instructions to their respective lawyers to draw up the necessary documents to give effect to the sale. The Court of Appeal stated that the "inelegantly and inartistically drafted" document, while omitting some details and containing mistakes as to the facts, was sufficient to disclose the substance of the parties' intention. The parties intended that the document be binding, even though some material terms needed to be defined at a later time. However, the essential terms of their agreement were sufficiently identified so that the court could enforce the document as written. In other words, the court determined that the document, as brief and as inexact as it was, was capable of interpretation so as to give rise to legal obligations.
The real point of the decision is to stress that the court should make every effort to find meaning in the words of documents that the parties, at least at the time the document was prepared, intended to set out their agreement. It is only in cases where a document is so vague or uncertain concerning an essential term as to be meaningless will a court decline to enforce it.
People who set out their understandings on napkins or in brief emails should be aware that, if the intention is to create a binding contract only when a formal document is signed, that intention should be clearly stated. Otherwise, subsequent attempts to walk away from or to modify the original understanding once lawyers get involved may be considered to be a repudiation or breach of the contract and could lead to damages.
The comments in this article are intended as general information only and are not to be relied on as legal advice or an opinion applicable to your particular situation. For further information, please contact Bruce Farrend at Farrend Law.