Given the prominent use of Letter of Intents ("LOI") in commercial transactions in Alberta, the lack of clarity over when they become binding agreements is surprising. Fortunately, a recent unreported summary judgment decision by Master Sandra L. Schulz, QC in 1561097 Alberta Ltd. v Parkland Industries Ltd. provides guidance to parties in commercial transactions as to when courts will consider a LOI binding rather than an agreement to agree.
Parkland Fuel Corporation ("Parkland") is Canada's largest independent fuel distributor, and is an active player in supplying fuel to fuel stations across Alberta. In addition to fuel, Parkland, like other fuel distributors, provides point of sale equipment and technology (POS), major fuel branding and signage, and other features designed to enhance consumer appeal and profitability of fuel stations.
In 2012, the Plaintiff 1561097 Alberta Ltd. ("156 Alberta") began negotiations with Parkland to acquire fuel, a POS and branding for its fuel station located in Alcurve, Alberta. At the outset, Parkland instructed 156 Alberta that in order for more in-depth negotiations to occur, it would require 156 Alberta to execute the following LOI:
156 Alberta did not consider the LOI to be binding. The LOI was considered to be the starting point of negotiations. By executing the LOI, 156 Alberta could assess whether the POS would meet the needs of its business, and firm out other terms for the final agreement. On this understanding, 156 Alberta executed the LOI, and implemented the POS provided by Parkland while it continued with negotiations. Revenues collected through the POS were held in trust by Parkland, and could be used for the purchase of fuel or released back to 156 Alberta.
However, after months of negotiations, 156 Alberta walked away from the deal upon being presented the finalized agreement, which contained key terms missing in the LOI. Chiefly, the requirement that 156 Alberta and its three Directors sign personal guarantees, and agree to a collateral mortgage on the property of the fuel station. Contrary to the terms of the LOI, Parkland did not attach a Standard Form Agreement as a schedule to the LOI, which would have provided 156 Alberta notice of these obligations at the start of negotiations. Only when 156 Alberta was presented with the finalized agreement did it become aware of these requirements and decided it was far too much liability to assume.
Parkland acknowledged that it failed to provide 156 Alberta a Standard Form Agreement with the LOI, but argued that the LOI was still binding and held accumulated revenues from the sales 156 Alberta made through the use of the POS as damages for its breach. 156 Alberta had received $133,418.21 in revenues through use of the POS, which Parkland refused to release.
As a result, 156 Alberta commenced an action by Statement of Claim against Parkland, followed by an Application for Summary Judgment that argued that the LOI was not binding upon the parties.
The law around LOIs, and when they become binding is underdeveloped in Alberta, although a clear framework has emerged.
Uniform in Substance
For a LOI to be binding, the subsequent formalized or finalized agreement must include terms that match the key provisions of the LOI. Courts will only enforce LOIs when the key terms bargained to by the parties also appear in the finalized agreement. In the event that these key terms fail to appear in the finalized agreement, a LOI could be considered unenforceable.
Conduct Establishing Intention to be Bound
The second part of the framework is whether the parties to the LOI conducted themselves in a manner that suggests that they considered themselves bound by the terms of the LOI. In the event that the key terms in the LOI are not found in the finalized agreement, an LOI will still be binding if the Court finds that there was an intention to be bound by the LOI through the conduct of the parties.
After reviewing the evidence and submissions of the parties, Master Schulz quickly determined that the LOI was not binding upon the parties. Master Schulz found that the terms of the LOI were clear on its face — a position agreed to by both parties — and that her interpretation of the document was limited to its four corners. In that review, Master Schulz determined that the inclusion of the personal guarantees and collateral mortgage in the finalized agreement were key terms that should have been set out in the LOI. There was no uniformity in substance between the LOI and finalized agreement. As a result, the LOI was not enforceable, resulting in Master Schulz granting 156 Alberta judgment in the sum of $133,418.21.
While Master Schulz did not not comment on whether the Court would have found the LOI enforceable had Parkland included a Standard Form Agreement that addressed both the personal guarantees and collateral mortgage, I imagine that this could have very likely been the case. There are, however, broader lessons that can be learned from the decision.
First, personal guarantees and collateral mortgages are essential terms to any agreement. This is uncontroversial, and rather quite apparent, but important to reiterate. Personal guarantees and collateral mortgages are highly regulated and impose significant liability on the parties executing them. In Alberta, guarantees must be explained by a notary public or lawyer to ensure that the guarantor is aware of their legal obligations. The inclusion of personal guarantees and collateral mortgages in any agreement makes them key and central terms that must be overviewed in an explicit and thorough manner. They cannot be imposed on parties as an adhesion to an already executed agreement.
Second, the drafting of the LOI matters, and that parties should be aware of the obligations imposed through its terms. LOIs that do not match oral representations, or what one party expects will appear in the finalized agreement, should not be signed. Neither should parties sign LOIs in order to start or continue negotiations. LOIs are documents that carry with them serious implications, and parties should read, consider and govern their conduct appropriately in relation to them.