Crystal Clear Contracting: The Supreme Court clarifies the law of pre and post-incorporation contracts
October 26th, 2020
This past Friday the Supreme Court of Canada released a rare decision touching upon a commercial contractual dispute. The decision, Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp. 2020 SCC 29, saw the court address whether a corporation is bound by a pre-incorporation contract and the analytical approach to determine if a company has entered into a post-incorporation contract on the same terms. Justice Côté’s wrote the majority’s decision, while Justice Rowe dissented on the disposition of the appeal, but not the law. Here a strata corporation (“Strata Co.”) within a multi-use development argued that it was not bound by a pre-incorporation contract to pay for parking rights to the operator of a parking facility (“CSPC”) in the same multi-use development. As Strata Co. had not yet been incorporated when the contract was originally created with CSPC, it argued that it was not bound by the agreement to pay for parking rights. Meanwhile CSPC argued that the company’s behaviour subsequent to incorporation manifested an assent to a new agreement on the same terms as the original agreement that this contract was equally binding.
Both Strata Co. and CSPC owned property situated within a multi-use development in Burnaby known as the “Crystal”. The Crystal was developed with multiple open air land parcels including an office tower and a parking facility. As part of the development of the Crystal, the developer and the City of Burnaby entered into an ASP Agreement and registered it on title to the various parcels. This agreement obliged the owner of the parking facility to provide the owner of the office tower parcel with parking rights in exchange for a monthly fee. However, at this point, neither CSPC nor Strata Co. had been incorporated.
In 1999 Strata Co. was incorporated and became the owner of a large number of units in the office tower, but was never assigned the ASP Agreement, though oddly enough, when CSPC was later incorporated in 2002, the parking company was assigned the pre-incorporation contract.
The SCC was asked to determine whether Strata Co., which had never become a party to the ASP Agreement, was nonetheless bound by it. The court began by re-stating the basic principles of pre-incorporation contracts: a corporation is not bound by a pre-incorporation contract, but may enter into a new contract on the same terms as the pre-incorporation contract once it has been incorporated. The true issue in dispute between the parties was what conduct was required for a corporation to enter into a post-incorporation contract.
The court held that the traditional approach to the formation of a contract applied equally to post-incorporation contracts as it did to any other, noting that the “applicable test for finding that a post-incorporation contract exists is the same as the one for finding that any other agreement exists at common law. The test is objective, and the offer, acceptance, consideration, and terms may be inferred from the parties’ conduct and from the surrounding circumstances.”
The court briefly addressed whether there were any legal barriers in the specific context of strata corporations to the adoption of post-incorporation contracts and found none. This complete, the court went on to address whether the post-incorporation conduct of Strata Co. was sufficient to enter into a post-incorporation contract. The court determined that Strata Co. manifested an intention to be bound by a post-incorporation contract after CSPC purchased the parking facility and made the parking spaces available to Strata Co.’s members. By paying the fees contemplated in the ASP agreement and using the parking spaces, Strata Co. accepted CSPC’s offer. In effect, the SCC determined that Strata Co. had entered into post-incorporation contract by acting as if bound by the contract; Strata Co. accepted the benefits and burdens of the contract and a reasonable person would have understood that they were acting in a manner that implied an offer and acceptance of the terms of the ASP Agreement.
With this decision, the majority took the opportunity to re-affirm the law of pre- and post-incorporation contracts. Justice Côté’s decision is a refreshingly clear statement of the law in a rarely touched upon area from the SCC. It will be interesting to see whether this sort of judicial clarity, particularly in regards to contractual or commercial case continues to become a trend for Chief Justice Wagner’s court. I have no doubt that anyone studying contract law will appreciate the change.
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