A recent case from the Ontario Court of Appeal highlights that commercial parties must take care to ensure that their contracts are certain on essential terms when dealing with unsophisticated counterparties.
In Corridor Transport Inc. v. Vittorio Junior Lentini, 2024 ONCA 773, a corporation was set up to carry on business transporting steel products (the “Venture”). 50% of the shares in the Venture were held by a sophisticated businessman (“JH”), and the other 50% were held by a trucking company that operated a separate business from the Venture (“Lentini”). Lentini’s principal left school after the fifth grade and immigrated to Canada from Italy as a young adult.
The Venture claimed that JH would provide its startup and expansion capital , and Lentini would manage its day-to-day operations as an independent contractor. The parties agreed that Lentini could continue to operate its separate trucking business while participating in the Venture. These terms, among others, were reflected in a detailed Memorandum of Understanding (the “MOU”) that was prepared and signed by JH, but not by Lentini.
The Venture selected an operating name that was close to Lentini’s other business, which managed the insurance and licensing of the trucks that the Venture would use. This name eventually led to the confusion giving rise to this dispute.
The Venture never came to fruition and the parties’ relationship broke down shortly after its commencement. Prior to this, Lentini was depositing cheques from its their other business (bearing a similar name to the Venture) into an account in the Venture’s name, on the understanding that it was a shared account between both companies rather than a partnership account. After the breakdown, Lentini started depositing these cheques in a separate account. JH accused Lentini of misappropriating funds from the Venture, including funds earned from Lentini’s other business. The Venture sued Lentini for breach of contract and conversion to recover these funds, claiming they were property of the Venture.
The trial judge found that the parties had not formed a contractual agreement on the division of these funds. In making this finding, the trial judge repeated the following principles for determining an enforceable contract:
[48] The central issue me is whether there was an enforceable agreement between the parties. The test for determining whether a contract has been formed is objective. I must consider how the Defendants’ conduct would strike a reasonable person in the same position of the Plaintiffs. The question is whether the Defendants’ course of conduct or acquiescence gave rise to a binding conduct.
[49] To be enforceable, the parties must have reached an agreement on all the essential terms. The parties “must so express themselves that their meaning can be determined with a reasonable degree of certainty.” Where the parties fail to agree on the essential terms or where their intentions cannot be determined by the court, the agreement must fail. In short, a judge cannot be tasked with making a contract for the parties after the fact. [citations omitted]
Applying these principles, the trial judge found that the parties failed to reach a consensus on the Venture’s key terms. JH had failed to obtain the consent of the Lentini when appointing one of its principals as a director and limited partner in the Venture. It was found that the parties never reached a mutual understanding of the Venture’s entitlement to the accounts receivable of Lentini’s business in the MOU. Given the respondents’ simplicity, the trial judge “would have expected [the Other Shareholder] to have insisted on independent legal advice and a signed agreement” confirming these terms. The Ontario Court of Appeal found the trial judge’s decision that there was no agreement on the MOU’s essential terms “…reasoned and well grounded in the evidence she heard over the 9-day trial.” They dismissed the appeal in favor of Lentini.
When drafting agreements, parties should identify the terms that are essential to confirming their mutual intentions, and assess whether their meaning can be objectively determined with a reasonable degree of certainty. Corridor confirms that sophisticated parties should be even more mindful of this when contracting with relatively unsophisticated counterparties.
The lawyers at Gilbertson Davis LLP have experience with business litigation, contract disputes and joint venture disputes. Please contact us for an initial consultation.
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