COURT FILE NO.: 324/03

DATE: 20030627

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

B E T W E E N:

ROYAL GROUP TECHNOLOGIES LIMITED and ROYAL PIPE SYSTEMS LIMITED

Plaintiffs

• and -

MICHAEL SAKNO, DAVID J. FRENCH PFC SURECHEM LTD., PERFORMED COMPONENTS

Defendants

DENNISON ASSOCIATES and SCOTT JOHNSON

Third Parties

Eric R. Hoaken, for the Plaintiffs

Bruce Stratton and Michael D. Crinson, for the defendants Michael Sakno and David French

HEARD: June 5, 2003

Pitt J.

REASONS FOR JUDGMENT

1The motion is for an order granting leave to appeal to the Divisional Court. It is an appeal from Swinton J.’s order dated May 12, 2003 dismissing the plaintiffs’ application for judgment in accordance with the minutes of settlement dated December 2, 2002. The defendants, Mr. Sakno and Mr. French, are requesting an order enforcing the terms of the minutes of settlement. The defendants claim that the motions judge erred in finding that there was no agreement on the terms of the licence agreement, that there was no agreement on the essential terms of the contract, and, therefore, that the minutes of settlement were not an enforceable agreement.

THE FACTS AND THE ISSUE

3The parties were involved in a mandatory mediation session conducted by the Honourable Mr. Saunders, Q.C. The mediation resulted in the execution of minutes of settlement. Mr. Sakno agreed to assign the ownership rights over two Canadian patent applications to the plaintiff. In return, he was to receive a licence to use the patents. The minutes of settlement contained the following clause 4 (a) and (b) which is at issue on this leave to appeal:

(a) Royal gives to Sakno or his assignee an irrevocable, royalty free, untrammeled, unfettered and worldwide license to practice and sub-licence (with notice to Royal) the inventions described or claimed in Canadian Patent Applications 2,319,876 and 2,331,099 and the inventions described or claimed in all patents corresponding to or claiming priority from such Canadian applications.

(b) A draft license agreement to implement the terms of his license will be prepared by Royal’s counsel and provided to counsel for Sakno within 7 days for review by the parties, and upon approval of this draft or amendments thereto the parties shall execute a final license agreement within a further 4 days and in any event no later than December 13, 2002.

4Extraordinarily the settlement floundered on the shoals of paragraph 4 because of the failure of the parties to agree on one term of the license agreement; namely, whether or not an indemnification provision should be included in it. The defendants resisted the inclusion of the indemnification provision while the plaintiffs insisted on it.

5On the defendants’ motion to enforce the settlement without an indemnification clause in the licence agreement, the motions judge found that there was no enforceable agreement.

6Paragraph 12 and 13 of the motions judge’s endorsement are as follows:

I am satisfied from the evidence of Mr. Hughes that the indemnification and insurance clause sought by the licensor is not an unreasonable nor unusual provision. Nor does it fetter or trammel the broadly worded license given in clause 1.01 of the draft agreement. It is a measure designed to protect the licensor from risk or loss arising from the licensee’s use of the license, should litigation ensue.

It is not my task to draft the agreement for the parties. It would not be appropriate for me either to find the indemnification provision should be implied, nor to exclude it. The parties contemplated the negotiation of a license agreement to govern their ongoing relationship. That license agreement was an essential term of the settlement, and absent agreement on the terms, there is no binding settlement agreement to enforce. This is a case analogous to Bawitko, supra or Canadian Tourism Human Resource Council v. Meadow Wood Communication Group Inc. (1998), 19 C.P.C. (4th) 124 (Ont. Ct. (Gen. Div.)), where there has been a failure to agree on essential terms of the agreement between the parties.” [My emphasis.]

DISCUSSION

7The language of paragraph 4(b) of the settlement may leave the impression with the reader that a consensus on the form and content of the license agreement was a prerequisite for a firm agreement. However, courts do go a long way towards holding parties’ feet to the fire when they make what appears to be settlements during litigation.

8Bogue v. Bogue (1999), 46 O.R. (3d) 1 (Ont. C.A.) was a case where the Court of Appeal dismissed an appeal in circumstances where a motions judge drafted the wording of the release clause himself in a settlement agreement when the parties could not agree.

9The motions judge referred to three cases, among others, on point: Cellular Rental Systems Inc. v. Bell Mobility Cellular Inc., [1995] O.J. No. 721 (Gen. Div.), aff’d [1995] O.J. No. 3773 (C.A.) (“Cellular”); Fieguth v. Acklands Ltd. (1989), 59 D.L.R. (4th) 114 (B.C.C.A.) which Farley J. adopted in Cohen v. Kechichian, [2002] O.J. No. 4635 (S.C.J.); and Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.) (“Bawitko”). A brief discussion of the pertinent points from the cases may be helpful in addressing whether or not the motions judge erred.

10In Cellular, supra, the Court held that an agreement to settle a claim was enforceable. Chapnik J. held at paras. 17 and 23:

An agreement to settle a claim is a contract. To establish the existence of a contract, the parties’ expression of agreement must demonstrate a mutual intention to create a legally binding relationship and contain agreement on all of its essential terms: see Canada Square Corp. v. VS Services Ltd. (1981), 34 O.R. (2d) 250 (C.A.); and Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.).

… In my view, the reference to documentation represented a mere expression as to the manner in which the settlement, already agreed to, would be formalized.

11In Fieguth v. Acklands Ltd., supra, the Court held that settlement in a wrongful dismissal action was enforceable. After reaching an oral agreement, the defendant sent the settlement funds with income tax deducted and a release containing unusual covenants and indemnities. The plaintiff refused to sign the release and proceeded to trial. A dispute about what the settlement required to be done did not invalidate the agreement. The Court held at 121:

In these matters it is necessary to separate the question of formation of contract from its completion. The first question if whether the parties have reached an agreement on all essential terms. …

The next stage is the completion of the agreement. If there are no specific terms in this connection either party is entitled to submit whatever releases or other documentation he thinks appropriate. Ordinary business and professional practice cannot be equated to a game of checkers where a player is conclusively presumed to have made his move the moment he removes his hand from the piece. One can tender whatever documents he thinks appropriate without rescinding the settlement agreement. If such documents are accepted and executed and returned then the contract, which has been executory, become executed. If the documents are not accepted then there must be further discussion but neither party is released or discharged unless the other party has demonstrated an unwillingness to be bound by insisting upon terms or conditions which have not been agreed upon or are not reasonably implied in these circumstances. [My emphasis.]

The Court reasonably implied that the settlement agreement included the term that the plaintiff would execute a release. The Court went on to hold at 123:

Many such settlements are very complicated such as structured settlements, and the deal is usually struck before the documentation can be completed. In such cases, the settlement will be binding if there is agreement on the essential terms. When disputes arise in this connection, the question will seldom be one of repudiation as the test cited above is a strict one, but rather whether a final agreement has been reached which the parties intend to record in formal documentation, or whether the parties have only reached a tentative agreement which will not be binding upon them until the documentation is complete. Generally speaking, litigation is settled on the former rather than on the latter basis and, parties who reach a settlement should usually be held to their bargains. Subsequent disputes should be resolved by application to the court or by common sense within the framework of the settlement to which the parties have agreed and in accordance with the common practices which prevail amongst members of the Bar. It will be rare for conduct subsequent to a settlement agreement to amount to repudiation. [My emphasis.]

12The reasoning expressed at 123 in Fieguth v. Acklands Ltd. is echoed in Bawitko, supra but with the opposite result. The Court of Appeal in Bawitko held that an initial oral agreement between the parties to four points of variation from the standard form of franchise agreement was not enforceable. The parties subsequently failed to agree on the formal written franchise agreement whose complex terms were essential to the agreement and were not mere formalities. The Court held at 104-5:

As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into int. 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 of 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 an 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[.] [italics added]

13The provision that the defendant refused to include in the licence agreement was very likely a standard provision or, at least, a provision customarily included in licensing agreements.

14To grant judgment would most likely have resulted in a disposition not desired by the party seeking judgment. In other words, if the motions judge decided to do as the court did in Bogue, supra, she would most likely have required the defendant moving party to sign the license agreement with the indemnity provision. However, it cannot be overlooked that the court in Fieguth v. Acklands Ltd., supra refused to permit the inclusion of an indemnity clause in a release in the settlement of a wrongful dismissal action. Admittedly, there was no suggestion that such a clause was customarily included in such agreements. In fact, it was quite the opposite; the indemnities requested were described as “excessive and unnecessary:” Fieguth v. Acklands, supra at 116.

15I am inclined to the view that the motions judge may have been in error in not requiring the parties to execute the license agreement with or without the indemnification clause by making a decision, even if additional evidence were required, as to whether or not indemnification ought to have been implied. There is therefore good reason to doubt the correctness of the order.

DISPOSITION

16Clearly, the appeal involves matters of such importance that leave should be granted. A decision of the Divisional Court will be of significant benefit to the profession. Leave is therefore granted pursuant to Rule 62.02 (4)(b).

COSTS

17Brief written submissions on costs are to be made within 20 days of the release of these reasons.

Pitt J.