Supreme Court of Canada Clears Up the Law on Pre-Incorporation Contracts

The recent Supreme Court of Canada decision in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp 2020 SCC 29 is noteworthy for its clear analysis on whether a corporation can be bound by an obligation set out in an agreement reached before the company was legally formed.

Importantly, the Supreme Court sets out the test to be applied in determining whether a company has entered into a post-incorporation contract on the same terms as are found in a pre-incorporation agreement.

The Background Facts

The case was set in the City of Burnaby, British Columbia, and involved a large, newly-built multi-use commercial complex. Known as “The Crystal”, it included an office tower, residential and hotel towers, and a parking facility. A strata corporation (the “Corporation”) was set up for the owners of a particular strata property within The Crystal development.

In 1999, the Developer of The Crystal entered into an Air Space Parcel Agreement with the City (the “Agreement”). It covered various aspects needed for development, such as easements designed to support the air space parcels. The Developer signed and registered the Agreement on title at a time when the Corporation had not yet been incorporated. In other words, the Agreement with the City pre-dated the existence of the Corporation, which was duly established only a few months later.

In 2002, the Developer sold the land containing the parking facility, and assigned the corresponding Agreement, to a third-party parking company (“ParkCo”). The Corporation duly paid the annual fees to ParkCo on a monthly basis, at the rate designated in that Agreement, in exchange for ParkCo providing parking and vehicle access to the Corporation’s members. Those members proceeded to use the facility as expected.

This continued until 2012, when a dispute arose. The Corporation stopped paying the fees to ParkCo, The Corporation took the position that the original Agreement could not be binding on it, since it pre-dated its own date of incorporation. The Agreement’s payment obligations were also not enforceable against it, the Corporation claimed, since it had never formally taken them over from the Developer by way of an assumption agreement, even though the contract with the City called for it.

The legal issues for the Court, therefore, were: 1) whether the Corporation could be legally called upon for the payments related to parking rights, under a contract entered into before the Corporation came into existence; and 2) whether the Corporation was contractually bound after-the-fact, under a post-incorporation agreement.

At trial, the judge found the Corporation was not bound by the terms of the original Agreement, since its conduct did not manifest an intent to enter into a post-incorporation contract with ParkCo. The Court of Appeal reversed, concluding the Corporation had indeed entered into a post-incorporation contract of its own, on the same terms as stipulated in the original Agreement.

The Supreme Court of Canada Ruling

The Supreme Court of Canada dismissed the appeal; the Corporation was indeed legally bound by to The Court canvassed the governing basic principles. By law, a corporation is not bound by a contract made prior to its incorporation. However, after coming into existence, the corporation may choose to enter into a new contract, on the same terms as those found in the pre-incorporation contract.

To confirm whether such a post-incorporation contract exists, the law applies the same objective test as for any other agreement: There must be offer, acceptance, and consideration. The terms may be inferred from the surrounding circumstances, and by the parties’ conduct.

The assent of each party – sufficient to induce the other party into having reasonable expectations – is also needed. This may involve considering how each party’s conduct would appear to a reasonable person in the position of the other party.

In this case, and looking objectively at the post-incorporation conduct of the Corporation after the Developer’s sale to ParkCo, it manifested an outward intention to be bound by a post-incorporation contract with the latter. The Corporation paid the fees at the rate contemplated in the original Agreement, and its members agreed or acquiesced to suing ParkCo’s services, and took the benefit of them.

Likewise, after buying the parking facility ParkCo objectively manifested an intention to offer the Corporation a contract on the same terms as the original Agreement, by making valid parking passes available to the Corporation’s members, in the same quantity that the original Agreement would have dictated. ParkCo also spent money to maintain and operate the parking facility over the years.

When viewed objectively, these elements showed the needed offer-and-acceptance between the parties, and showed that both of them intended to be bound by the same parking-related terms as found in the original Agreement. For ParkCo in particular, these facts gave rise to a reasonable expectation that such a continuing and binding contract was in place, and that the Corporation had assented to the terms of the original Agreement. The Supreme Court of Canada ruled accordingly.

What’s the Take-Away?

The law is clear that pre-incorporation contracts are not binding on a yet-to-be-incorporated entity. However, the Supreme Court of Canada has confirmed that once incorporation has been completed – and in the right circumstances – it is possible to commit a corporation to contractual obligations by conduct alone, in situations where it gives rise to reasonable expectations by another party.

This is a significant legal principle that can give rise to unintended contractual consequences and obligations, and is one that officers and directors of newly-formed corporations must keep in mind.

Note 1: Under corporations legislation across Canada, including the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 21(2), a business corporation may adopt a pre-incorporation contract by any act or conduct signifying its intention to be bound by the contract. However, the equivalent British Columbia provision (namely the Business Corporations Act, S.B.C. 2002, c. 57, s. 20(3)) does not apply to strata corporations. As such, the corporation must be found to have entered into a post-incorporation contract on the same terms as the pre-incorporation contract, applying common-law principles.

Note 2: As noted by the Court, the common-law presumptions and tests for forming a valid contract are not ousted in B.C. by provincial legislation governing strata land and real property. The principles relating to legislative intent, plus the need for certainty in commercial affairs, dictate that a strata corporation in B.C. was subject to the same common-law principles and could enter into a post-incorporation contract by its conduct, as elsewhere in Canada.

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