Intention in Contract

Hoban Construction Ltd. v. Alexander, 2012 BCCA 75 has a useful discussion of when an informal contract is binding and the nature of intent to form contractual relations:

Did the parties enter into binding legal relations?

The law

[34] In Smith v. Hughes (1871), L.R. 6 Q.B. 597, in a widely-cited passage at 607, Blackburn J. formulated the test applicable to the question of whether parties have effectively agreed to enter into binding legal relations:

If whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.

[35] In G.H.L. Fridman, The Law of Contract in Canada, 5th ed (Toronto: Thomson Canada Limited, 2006), the learned author notes at 15:

Constantly reiterated in the judgments is the idea that the test of agreement for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract. The law is concerned not with the parties' intentions but with their manifested intentions. It is not what an individual party believed or understood was the meaning of what the other party said or did ...; it is whether a reasonable [person] in the situation of that party would have believed and understood that the other party was consenting to the identical terms. [Footnotes omitted.]

[36] See also Kernwood Ltd. v. Renegade Capital Corp., 97 O.A.C. 3, [1997] O.J. No. 179 (C.A.) at para. 17; Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd., 2000 BCCA 365 (CanLII) <http://www.canlii.org/en/bc/bcca/doc/2000/2000bcca365/2000bcca365.html> , 2000 BCCA 365 at paras. 18-21; Diegel v. Diegel, 2008 ABCA 389 (CanLII) <http://www.canlii.org/en/ab/abca/doc/2008/2008abca389/2008abca389.html> , 2008 ABCA 389 at para. 23.

[37] In Langley at paras. 20-21, McEachern C.J.B.C. stated for the Court:

[20] There is very little authority about the basis upon which intention to contract should be found. In Tilden Rent-A-Car Co. v. Clendenning (1978), 83 D.L.R. (3d) 400 (Ont. C.A.), it was suggested at 405, that a person "who attaches his signature to the contract intends by doing so to acknowledge his acquiescence to its terms, and that the other party entered into the contract upon that belief." In A.G. Guest, ed., Chitty on Contracts, 27th ed. (London: Sweet and Maxwell, 1994), it is noted at 152 that in normal commercial transactions, where the intention to be contractually bound is at issue, the onus of proving that such an intention did not exist "is on the party who asserts that no legal effect is intended, and the onus is a heavy one": Edwards v. Skyways Ltd., [1964] 1 W.L.R. 349. Those, however, were cases where the form of the documentation was clearly contractual. The circumstances in the instant case were far more informal.

[21] Most authorities suggest that the Court is not confined to the four corners of the alleged agreement, but may look at all the circumstances. In Osorio v. Cardona [1984 CanLII 364 (BC SC) <http://www.canlii.org/en/bc/bcsc/doc/1984/1984canlii364/1984canlii364.html> , (1984), 15 D.L.R. (4th) 619], McLachlin J. considered evidence of past agreements involving other parties, the circumstances in which the alleged agreement was made, and future actions and representations by both parties. The investigation is to determine whether a reasonable observer would think that Terry Johnson on behalf of Langley, in signing the faxed document in these circumstances, intended to be contractually bound when he signed and delivered the faxed documents.

[Emphasis added.]

[38] In Langley at para. 76, this Court referred to Bawitko Investments Ltd. v. Kernels Popcorn Ltd. 1991 CanLII 2734 (ON CA) <http://www.canlii.org/en/on/onca/doc/1991/1991canlii2734/1991canlii2734.html> , (1991), 79 D.L.R. (4th) 97 (Ont. C.A.), setting out the following excerpt from 103-104:

As a matter of normal business practice, parties planning to make a formal written document [of] the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange or correspondence, or other informal writings. The parties may "contract to make a contract", that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.

However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself...