Legal Commentary

Ignored contract is still in force, top court says

By David Canton

For the London Free Press - March 16, 2009

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The Supreme Court of Canada recently rejected a lower court’s decision that you can’t enforce a contract that you’ve demonstrated no intention to comply with.

In Jedfro Investments (U.S.A.) Ltd. vs. Jacyk Estate, the top court actually upheld the outcome of the Ontario Court of Appeal’s decision, but on very different grounds. The Court of Appeal decision was the subject of a column published Nov. 3, 2006 (see canton.elegal.ca/2006/ 11/06/ignoring-written-deals-risky).

In the Jedfro case, three investors entered into a joint-venture agreement to purchase, develop and sell property in the United States.

The investors bought the property using cash and a promissory note. They intended to make payments on the promissory note by selling lots. But when the real estate market plummeted, the investors couldn’t meet their payment obligations, and the noteholder threatened to foreclose.

The joint-venture agreement contained provisions to deal with such a situation by providing a method for one party to buy any of the other parties out.

But instead of this occurring, one of the investors paid off the note on behalf of the other two, with no new agreement as to how he’d be compensated.

One of the other investors agreed to a profit-sharing deal to compensate the investor for paying off the promissory note.

The third investor, however, couldn’t come to terms about what he’d give the payer, so the plaintiff sued the payer of the note, arguing he had breached the original joint-venture agreement under which all were to share proportionally any profits of the joint venture.

The trial judge dismissed the action, holding that none of the parties had relied on the joint- venture agreement and it was therefore inappropriate for the court to force the parties to abide by its terms.

The Court of Appeal upheld the trial judge’s decision, saying that if parties ignore the terms of a deal, they can’t later enforce the ignored terms against the others.

Essentially, the appeal court held that contracting parties can’t ignore an agreement when it doesn’t benefit them, then ask the court to enforce the same agreement when it does benefit them.

The matter was further appealed to the Supreme Court, which upheld the previous decisions but disagreed with the lower courts’ reasoning.

The top court held that there are many ways to discharge a contract, including by performance, agreement, frustration, or by repudiatory or fundamental breach. But unless a contract is discharged by one of these methods, it remains in force and the parties remain bound by it.

Specifically, the Supreme Court held that, “while the parties may have ignored the joint-venture agreement, the obligations under it remained in effect.”

This decision represents a significant effort by the Supreme Court to reel in previous case law and send a clear message that contracts will remain in force and binding on the parties until discharged.

In other words, simply ignoring a written contract will not make the agreement go away.

Full post as published by eLegal Canton on March 16, 2009 (boomark / email).