Does a Verbal Contract Exist Before the Written Contract Is Even Finalized?

Generally, An Agreement to Agree Is Unenforceable Whereas a Person Is Unable to Accept Contract Terms Before the Contract Terms Are Adequately Known. However, Where the Essential Terms Are Adequately Discussed and Agreed to With a Formal Contract to Follow, Such May Be Legally Binding.

A Helpful Guide For How to Determine When An Agreement Is Just An Agreement to Agree Rather Than a Legally Binding Contract

Forthcoming Contract Document Following Agreement to Agree It may arise in the course of certain dealings that the parties to a negotiation commit to the making of a deal despite that various terms of what will become a part of the deal are still unknown and are requiring further discussions. Without enough of the details required to fulfill the essential terms of a legally binding agreement, even when the parties are intending to agree and are willing to agree, if the essential details are lacking, any agreement at this stage is premature and failing to constitute as an enforceable contract.

The Law

For the creation of a legally binding contract, the terms must be certain and complete at the time of agreement.  If the essential terms undetermined, even if the parties agree that the terms will be determined and accepted at a later date, such is insufficient whereas it was said by the Supreme Court in the case of Murphy v. McSorley, et al, 1929 CanLII 29 (SCC), [1929] SCR 542 that an agreement containing the term, "balance to be arranged" was insufficient to establish the necessary completeness and clarity for the meeting of the minds required within the formation of a contractual relationship.

In the Court of Appeal case of Brown's Cleaners and Tailors Limited v. OMERS Realty Corporation2010 ONCA 599, involving commercial lease renewal discussions, it was also said that where essential terms of the lease were without finalization, the terms in this case being the terms of rental payment as well as the term of the lease, such was insufficient to establish a binding contract and was at most an 'agreement to agree'.  Specifically, it was stated:

[1]  In our view, this appeal cannot succeed.  The motion judge found that there was no genuine issue for trial and we agree with that finding.  It is clear on the appellant’s own evidence that at its very highest, there was an agreement to agree.  None of the terms of the lease had been agreed to during the August 25, 2005, meeting.

[2]  Mr. Victor argues they agreed to renew the very lease that was in force at the time subject to an agreement on only the rental payment and the term of the lease.  We do not accept that submission. As this court held, in Canada Square Corp. v. Versafood Services Ltd., 1981 CanLII 1893 (ON CA), 1981 Carswell Ont. 124 (C.A.), at para. 21:

There is no disagreement between the parties to this appeal on the requisite terms of a valid agreement for lease. Both rely on the following passage in Williams’ The Canadian Law of Landlord and Tenant (4th ed., 1973), at p. 75 as follows:

To be valid, an agreement for a lease must show (1) the parties, (2) a description of the premises to be demised, (3) the commencement and (4) duration of the term, (5) the rent, if any, and (6) all the material terms of the contract not being matters incident to the relation of landlord and tenant, including any covenants or conditions, exceptions or reservations.

[3]  Even accepting what the appellant alleges, it is common ground that two essential terms remained outstanding.

[4]  In our view, this could be nothing more than an agreement to agree which is unenforceable and we agree with the trial judge’s finding in this regard.  In addition, the appellant faces the hurdle of compliance with the in-writing requirements of s. 4 of the Statute of Frauds, R.S.O., c. S.19.  Having found there was no agreement, the argument relating to anticipatory breach naturally fails and accordingly it is unnecessary for us to deal with the limitation issue.

With the above said, and whereas both the Supreme Court and the Court of Appeal have said that where an agreement is incomplete without certainty or clarity of the essential terms, the agreement is merely an agreement to agree rather than a binding contract; however, where the essential terms can be ascertained, a binding and enforceable contract may be found.  Such was stated by the Court of Appeal in the case of Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. (Mr. Sub), 2016 ONCA 93, also a leasing concern, wherein it was said:

[27]  It is trite law that the courts will not enforce “an agreement to agree” and that there must be reasonable certainty as to the length of the term of a lease or of a renewal option, as well as to the amount of rent to be paid. See e.g. Re Fice and Department of Public Works of Ontario (1922), 1921 CanLII 529 (ON CA), 64 D.L.R. 535 (Ont. S.C. (A.D.)), at p. 539; Gourlay v. Canadian Department Stores Ltd., 1933 CanLII 9 (SCC), [1933] S.C.R. 329, at p. 331; and Re Calford Properties Ltd. and Kelly’s Billiards Ltd. (1973), 1973 CanLII 215 (AB QB), 37 D.L.R. (3d) 300 (Alta. S.C. (T.D.)), at pp. 303-5.

[28]  However, contrary to Mapleview’s submission, this case does not involve “an agreement to agree” on the renewal rate. In the cases relied upon by Mapleview, there was neither a formula or other objective standard for establishing the rate, nor any mechanism for its determination in the event of a failure to agree: see Sheppard v. Czechoslovak (Toronto) Credit Union Ltd. (1989), 1 R.P.R. (2d) 290 (Ont. D.C.), at p. 293; Young v. Van Beneen, 1953 CanLII 275 (BC CA), [1953] 3 D.L.R. 702 (B.C.C.A.), at pp. 704-5; Great Atlantic & Pacific Co. of Canada v. Topostar (Aurora) Inc., 2006 CanLII 7279 (Ont. S.C.), at paras. 51-52; and Delphi Management Corp. v. Dawson Properties, 2014 ONSC 354, at paras. 10-11.

[29]  Here, however, there is a formula or other objective standard for establishing the rate – namely, what is the “then current rate” at the time of renewal. Courts should not strive to set aside a commercial bargain that was intended to have legal effect where a clause in an agreement – even if not precisely expressed – has an ascertainable meaning: Hillas & Co. Ltd. v. Arcos Ltd. (1932), 147 L.T. 503 (Eng. H.L.), at p. 514; and Griffin v. Martens (1988), 1988 CanLII 2852 (BC CA), 27 B.C.L.R. (2d) 152 (C.A.), at p. 153. Adopting this approach in Empress Towers Ltd. v. Bank of Nova Scotia (1991), 1990 CanLII 2207 (BC CA), 73 D.L.R. (4th) 400, at p. 403, leave to appeal refused, [1990] S.C.C.A. No. 472, the British Columbia Court of Appeal concluded that “the courts will try, wherever possible, to give the proper legal effect to any clause that the parties understood and intended was to have legal effect.”  I agree.

[30]  Here, I am satisfied that the parties intended to make a binding agreement as to the renewal rate; they simply declined to specify that rate in a dollar amount because neither wished to assume the risk of error (too high or too low, depending on their interest) 15 years later. This makes commercial sense.  Expressing the renewal rate as the “then current rate” is the functional equivalent of saying the “then market value” or the “then prevailing market rate” – expressions that have been found to be sufficient to overcome a void-for-uncertainty argument. See e.g. Mustard Seed (Calgary) Street Ministry Society v. Century Services Inc., 2009 ABQB 171, 79 R.P.R. (4th) 252, at paras. 31-39, 46 (the “then prevailing market rate”); Brown v. Gould, [1972] 1 Ch. 53, at pp. 60-62 (the “market value of the premises at the time”); Great Atlantic & Pacific Co., at para. 51 (an “objective standard such as ‘market’ rent”); and Empress Towers, at p. 404 (the expression “market rent prevailing at the commencement of [the] renewal term” would itself have sufficed, but the addition of the words “as mutually agreed between the Landlord and the Tenant” rendered the clause void for uncertainty in the circumstances).

As it was shown above in Brown's, where essential terms, such as payment arrangement or the period of an agreement was left undetermined, within a lease where such terms would objectively be deemed 'essential', the agreement established during meeting discussions was deemed by the court as merely an agreement to agree.  However, in Mapleview-Veterans, where an ascertainable formula or method for calculating payment was included, the agreement was deemed legally binding.

Summary Comment

When parties come to what may appear as a contractual agreement; however, various terms were left for discussion on another day, and such terms are objectively essential terms to the agreement, such is deemed unenforceable without establishing of a binding contract and merely an 'agreement to agree'.  However, where the essential terms are established, and perhaps only minor terms require clarification or confirmation a binding contract likely exists.  Furthermore, even where essential terms are without specific detail, where the essential terms may be ascertained, a binding contract also likely exists.


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