1394918 Ontario Ltd. v. 1310210 Ontario Inc. et al.
57 O.R. (3d) 607
[2002] O.J. No. 18
Docket No. C35821
Court of Appeal for Ontario
Carthy, Moldaver and Cronk JJ.A.
January 10, 2002
Corporations -- Contracts -- Pre-incorporation contracts -- Person signing agreement to purchase lands on behalf of corporation to be incorporated -- Vendor repudiating contract before corporation incorporated -- Corporation being incorporated and adopting contract by commencing action to enforce contract -- Corporation having status to enforce contract -- After adopting contract, corporation entitled to benefits and subject to burdens of contract retroactively to date agreement was signed -- Business Corporations Act, R.S.O. 1990, c. B.16, s. 21.
In the fall of 1999, the defendant 1310210 Ontario Inc. entered into an agreement to sell land to "Raymond Stern in trust for a company to be incorporated and not in his personal capacity". After an amending agreement had been signed, in February 2000, the solicitor for the defendant asserted that the amendment was unauthorized and void and that the agreement had expired because its conditions had not been waived within the prescribed time. On March 1, 2000, the solicitor for "Raymond Stern in trust for a company to be incorporated and not in his personal capacity" wrote the defendant's solicitor and asserted that there had been a repudiation and that the purchaser intended to claim damages. On March 22, 2000, Raymond Stern purported to assign his rights under the contract to the plaintiff 1394918 Ontario Ltd., a company that had been incorporated the previous week. The plaintiff commenced proceedings, and the defendant moved pursuant to rule 21.01(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 o n the ground that the plaintiff did not have capacity to commence or continue the action. More particularly, the question was whether the plaintiff corporation had effectively adopted the contract under s. 21 of the Business Corporations Act. Power J. held that the plaintiff had status to pursue the action and dismissed the motion. The defendant appealed.
Held, the appeal should be dismissed with costs.
Section 21 replaced the common law regarding pre- incorporation contracts and should be read on its own terms and in an interpretative context of the purpose it was intended to fulfill. It was directed at meeting the needs of a promoter who negotiated for liability to be assumed by an as-yet- unincorporated corporation. Under s. 21(1), the promoter is entitled to the benefits and subject to the burdens of the contract. Under s. 21(4), if a promoter enters into a contract on behalf of a corporation to be incorporated and that contract expressly provides that the promoter is not bound by the contract, then the promoter is not entitled to the benefits or subject to the burdens of the contract. Section 21(2) applies to contracts under s. 21(1) or s. 21(4). After incorporation and notice of intention to adopt, s. 21(2) provides that the corporation is bound and entitled to the benefits retroactively to the date the agreement was signed. Thus, the corporation can be liable for any breach on the promoter's part and can sue on any breach regardless of when the breach occurred. Under s. 21(4), during the period before the corporation exists or adopts the contract, the contract is nascent, its enforceability being suspended and there being no one entitled to sue for its breach. After incorporation and an indication of intention to adopt, the corporation is entitled to the benefits and subject to the burdens of the contract.
In the immediate case, the agreement was within s. 21(4). Pending incorporation, Stern was performing as a functionary because s. 21(4) can only work if someone is responsible for carrying the contract forward pending incorporation of the corporate party. In the immediate case, Stern accepted the repudiation of the contract. While acceptance of the repudiation ends future obligations under the contract, accrued obligations under the contract continue to exist, at least in the form of an obligation on the guilty party to pay damages. To the extent that contractual obligations remain in existence, it cannot be said that the contract ceases to exist. In the immediate case, there was a contract that could be adopted by the plaintiff. The institution of the action was the indication of the intention to adopt the contract, and therefore the plaintiff had status to bring the action.
APPEAL from an order dismissing a motion under rule 21.01(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
Cases referred to Guarantee Co. of North America v. Gordon Capital Corp., 1999 664 (SCC), [1999] 3 S.C.R. 423, 178 D.L.R. (4th) 1, 247 N.R. 97, 49 B.L.R. (2d) 68, [2000] I.L.R. 1-3741, 39 C.P.C. (4th) 100; Heinhuis v. Blacksheep Charters Ltd. (1987), 1987 2491 (BC CA), 19 B.C.L.R. (2d) 239, 46 D.L.R. (4th) 67, [1988] 2 W.W.R. 444 (C.A.); Moschi v. Lepp Air Services Ltd., [1973] A.C. 331, [1972] 2 All E.R. 393, [1972] 2 W.L.R. 1175, 116 Sol. Jo. 372 (H.L.); Sherwood Design Services Inc. v. 872935 Ontario Ltd. (1998), 1998 3116 (ON CA), 39 O.R. (3d) 576, 158 D.L.R. (4th) 440, 38 B.L.R. (2d) 157 (C.A.); Szecket v. Huang (1998), 1998 4425 (ON CA), 42 O.R. (3d) 400, 168 D.L.R. (4th) 402, 42 B.L.R. (2d) 1 (C.A.); Westcom Radio Group Ltd. v. MacIsaac (1989), 1989 4073 (ON SC), 70 O.R. (2d) 591, 36 O.A.C. 288, 63 D.L.R. (4th) 433, 45 B.L.R. 273 (Div. Ct.) Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, s. 21 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 21.01(3) Authorities referred to Chitty, J., Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999) Fridman, G.H.L., The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) Waddams, S.M., The Law of Contracts, 4th ed. (Toronto: Canada Law Book, 1999)
Ronald S. Petersen, for appellants. Russell Kronick, Q.C., for respondent.
The judgment of the court was delivered by
[1] CARTHY J.A.: -- This appeal is from the dismissal of a motion brought pursuant to rule 21.01(3) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] to have an action dismissed on the ground that the plaintiff has no capacity to commence or continue the action. The legal issue concerns the application of s. 21 of the Business Corporations Act, R.S.O. 1990, c. B.16, to the facts of a real estate transaction. The appellants are the vendor company and individuals associated with it. The purchaser under the agreement of purchase and sale was "Raymond Stern in trust for a company to be incorporated and not in his personal capacity". When the vendor repudiated the contract, Stern accepted the repudiation and then incorporated the plaintiff to pursue damages. The motions judge, in reasons reported at [2001] O.J. No. 334, held that the plaintiff had status to pursue the action.
Chronology
[2] A brief chronology of the real estate transaction follows:
October 14, 1999 -- 1310210 Ontario Inc. entered into an agreement to sell land to "Raymond Stern in trust for a company to be incorporated and not in his personal capacity" for $4.7 million with a deposit of $3,000. Ninety days was given for the purchaser to waive certain itemized conditions whereupon a further deposit of $27,000 was to be paid. Failure to waive conditions within the prescribed time would render the agreement null and void. Closing was fixed for April 16, 2000.
December 27, 1999 -- "Raymond Stern in trust for a company to be incorporated and not in his personal capacity" signed an amending agreement extending the time for waiver of conditions and closing for one month.
December 31, 1999 -- The amending agreement was signed on behalf of the vendor by David Cohen, one of the two officers of the vendor who had signed the original agreement.
January 15, 2000 -- David Cohen passed away.
February 11, 2000 -- In a letter to the purchaser's solicitor, the vendor's solicitor asserted that the amending agreement was null and void because, as Stern knew, it was never signed by authorized officers. The letter also stated that since the original waiver period had expired, the agreement of purchase and sale was terminated.
March 1, 2000 -- Solicitor for "Raymond Stern in trust for a company to be incorporated and not in his personal capacity" wrote the vendor's solicitor asserting an unlawful repudiation, his client's acceptance of the repudiation, and his intent to pursue a claim for damages.
March 15, 2000 -- Plaintiff company was incorporated.
March 22, 2000 -- Raymond Stern purported to assign his rights under the contract to the plaintiff company.
[3] The question for the court is whether the respondent, 1394918 Ontario Ltd., has an assertable cause of action against 1310210 Ontario Inc. The answer depends on whether the respondent has effectively adopted the contract under s. 21 of the Business Corporations Act. The claims against the individual appellants for conspiracy would [fail] if the respondent lacked status to seek damages, but are not otherwise before this court for consideration.
[4] Section 21 reads:
21(1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof.
(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt an oral or written contract made before it came into existence in its name or on its behalf, and upon such adoption,
(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and
(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.
(3) Except as provided in subsection (4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit.
(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.
[5] This is the third occasion this court has had to deal with s. 21 of the Act. Sherwood Design Services Inc. v. 872935 Ontario Ltd. (1998), 1998 3116 (ON CA), 39 O.R. (3d) 576, 158 D.L.R. (4th) 440 (C.A.) and Szecket v. Huang (1998), 1998 4425 (ON CA), 42 O.R. (3d) 400, 168 D.L.R. (4th) 402 (C.A.) recite the history of difficulty the common law experienced in dealing with incorporated companies that were to be inserted into contracts and make it clear that s. 21 was intended to replace the common law. As such, that section should be read on its own terms and in an interpretative context of the purpose it was intended to fulfil. The statutory scheme for pre-incorporation contracts throws off the confusion of the common law and shouldn't be thwarted to that end by concern, for instance, that a common law contract requires two parties with co-existent liabilities. If s. 21 calls for liability absent those features, then those liabilities must flow and the "contract" referred to must be treated as a statutory creation.
[6] Commercial business concerns inform s. 21. The section is clearly directed at meeting the needs of a party who wishes, and has negotiated for, liability to be assumed by an as-yet- unincorporated corporation. In the circumstances described in s. 21(1), the promoter is personally bound by the contract and entitled to its benefits. Either party can sue on the other's breach. After incorporation and notice of intention to adopt, s. 21(2) provides that the corporation is bound and entitled to the benefits retroactively to the date the agreement was signed. Thus, the corporation can be liable for any breach on the promoter's part and can sue on any breach by the third party, regardless of when the breach occurred.
[7] Contracts under s. 21(4) differ from those under s. 21(1) in a few important ways. The wording of the subsection is awkward but its meaning can be restated as follows. If a promoter enters into an oral or written contract on behalf of a corporation to be incorporated and that oral or written contract expressly provides that the promoter is not bound by the contract or entitled to the benefits thereof, then the promoter is not in any event bound by or entitled to the benefits of the contract.
[8] Section 21(2) applies to a s. 21(4) contract and the position of the corporation after adoption is identical whether or not the promoter was personally bound before adoption.
[9] The timeline of obligations under a s. 21(4) contract is as follows:
Prior to incorporation and adoption, the promoter is not personally bound or entitled to benefits of the contract. He might be described as a functionary, performing such duties as assuring that any necessary inspections of property or title are pursued, that deadlines are met, and defaults avoided which might excuse the third party from the obligations. At the same time, the corporation does not exist or has not adopted the contract and thus is not bound by it or entitled to its benefits. There is an entity called a "contract" under the statute, but no one is entitled to sue for its breach. That is not to say that ongoing obligations can be ignored. I would term this a nascent contract, its enforceability being suspended.
After incorporation and indication of intention to adopt, the corporation is both bound by and entitled to the benefits of the contract. One feature of the statutory scheme that is unknown to the common law is that, after adoption, the corporation is entitled retroactively as if it had been in existence at the time the contract arose. Thus, the corporation can be liable for any breach on the promoter's part that occurred prior to adoption and can sue on any breach by the third party regardless of when it occurred.
[10] The appellants argue that prior to adoption the s. 21(4) contract is a revocable offer, citing the British Columbia Court of Appeal holding in Heinhuis v. Blacksheep Charters Ltd. (1987), 1987 2491 (BC CA), 46 D.L.R. (4th) 67 at p. 72, 19 B.C.L.R. (2d) 239 (C.A.). That is a common law decision and, as indicated above, should, in my view, be resisted in giving meaning to this self-contained legislation, which seeks to move beyond the common law. Revocable offers are well known to the common law and any analogy to them would not explain the retroactive enforceability of this statutory "contract". Szecket, supra, established that common law contract principles should not be reintroduced into the analysis of s. 21 and rejected the two- stage approach in Westcom Radio Group Ltd. v. MacIsaac (1989), 1989 4073 (ON SC), 70 O.R. (2d) 591, 63 D.L.R. (4th) 433 (Div. Ct.), whereby the court first established that there was a valid contract at common law and only then applied the statutory rules.
[11] The next step is to take this understanding of s. 21(4) and apply it to the facts of this case.
[12] The recital of the name of the purchaser as "Raymond Stern in trust for a company to be incorporated and not in his personal capacity" is unaffected by the reference to a trust. There is nothing to be held in trust because Stern cannot benefit from the agreement and there is no beneficiary. It is no different in effect than if it read "on behalf of" rather than "in trust for". It is an agreement that fits squarely into s. 21(4).
[13] The agreement is for a sale at a price of $4.7 million with a deposit of $3,000 and a further deposit of $27,000 upon waiver of conditions. The major condition was inspection of the property by the purchaser and was to be waived within 90 days or the agreement became null and void. This was effectively an option for 90 days because the vendor had no security except the small initial deposit and no agreement that could be enforced.
[14] The agreement either was or was not extended for one month by the amending agreement of December 31, 1999. I must assume that the amending agreement was valid and that the vendor's letter of February 11, 2000 was a wrongful repudiation coming one day before the expiry of the extended waiver period. It is alleged that Stern intended to waive the conditions. On March 1, 2000, the solicitor for the purchaser wrote the vendor's solicitor, informing him of his client's acceptance of the repudiation and intention to commence an action for damages. Two weeks later, the respondent company was incorporated and on March 22 Raymond Stern in trust, etc., purported to assign the agreement to the numbered company. This action was commenced the following day in the name of the numbered company.
[15] In electing to accept the repudiation, Stern was performing as what I have termed a functionary, just as he was when he sought out an extension agreement. Section 21(4) of the Act can only work if someone is responsible for carrying the contract forward pending incorporation of the corporate party. However, I disagree with the motions judge's finding that the assignment was effective. By the very terms of s. 21(4), Stern had no entitlement to the benefits of the contract and thus had nothing to assign.
[16] The entitlement of the corporation must depend upon its adoption of the contract, if there was anything left to adopt. I am satisfied that the institution of the action was an indication of intention to adopt the contract and it remains to determine if the agreement had life at the time the action was commenced.
[17] The appellants take the position that there can be no adoption under s. 21(2) following the letter of March 1, 2000 accepting the repudiation and thus terminating the contract. Because s. 21 gives little guidance on the question of whether accepted repudiation terminates the contract, I think it useful to look to the common law on this point.
[18] Some support for the appellants' view would appear to come out of Moschi v. Lep Air Services Ltd., [1973] A.C. 331 at p. 345, [1972] 2 All E.R. 393 (H.L.), where Lord Reid stated:
. . . I cannot agree that after accepted repudiation the contractual obligations still exist as obligations. For the breach of any contract the normal remedy is damages in money. . . . So it appears to me that when a contract is brought to an end by repudiation accepted by the other party all the obligations in the contract come to an end and they are replaced by operation of law by an obligation to pay money damages.
(Emphasis added)
[19] According to Lord Reid, then, an accepted repudiation has the effect of ending the contract and ending all obligations under the contract. This description of the effect of an accepted repudiation seems inconsistent with the continued existence of the contract. And if the contract ceases to exist upon the acceptance of repudiation, then how could the newly incorporated company adopt the contract after that point in time?
[20] The respondent takes the position that a "contract" can be adopted under s. 21(2) after accepted repudiation. Although Lord Reid's speech in LEP Air Services appears to support the appellants' position that the contract does not exist to be adopted after accepted repudiation, Lord Diplock's speech in that case appears to support the respondent's view. About the defaulting party's obligations upon acceptance of repudiation, Lord Diplock had this to say at p. 350:
But for his primary obligations there is substituted by operation of law a secondary obligation to pay to the other party a sum of money to compensate him for the loss he has sustained as a result of the failure to perform the primary obligations. This secondary obligation is just as much an obligation arising from the contract as are the primary obligations that it replaces.
[21] Similarly, the position in Canada is that contractual obligations continue to exist after accepted repudiation. In Guarantee Co. of North America v. Gordon Capital Corp., 1999 664 (SCC), [1999] 3 S.C.R. 423 at p. 440, 39 C.P.C. (4th) 100 at p. 115, the Supreme Court of Canada found as follows:
Contrary to rescission, which allows the rescinding party to treat the contract as if it were void ab initio, the effect of a repudiation depends on the election made by the non- repudiating party. If that party treats the contract as still being in full force and effect, the contract "'remains in being for the future on both sides. Each [party] has a right to sue for damages for past or future breaches'" (emphasis in original): Cheshire, Fifoot & Furmston's Law of Contract (12th ed. 1991), by M.P. Furmston at p. 541. If, however, the non-repudiating party accepts the repudiation, the contract is terminated, and the parties are discharged from future obligations. Rights and obligations that have already matured are not extinguished. Furmston, supra, at pp. 543-44.
[22] Although the court does say that accepted repudiation "terminates" the contract, the context reveals that only future obligations under the contract are extinguished. Accrued obligations under the contract continue to exist, at least in the form of a secondary obligation to pay damages. To the extent that there remain in existence contractual obligations, it cannot be said that the contract ceases to exist.
[23] Further support for this view is found in Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999) at pp. 1219-20:
. . . although sometimes the innocent party is referred to as "rescinding" the contract and the contract as being "terminated" by the breach, it is clear that the contract is not rescinded ab initio nor is it extinguished by the breach. The innocent party, or, in some cases, both parties, are excused from further performance of their primary obligations under the contract; but there is then substituted for the primary obligations of the party in default a secondary obligation to pay monetary compensation for his non-performance.
[24] According to S.M. Waddams, The Law of Contracts, 4th ed. (Toronto: Canada Law Book, 1999) at p. 460"repudiation puts an end to the contract in the sense that it releases the innocent party from the duty of further performance, but it does not abrogate the whole contract -- the innocent party can sue for damages." Similarly, G.H.L. Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at p. 654, has written that "Repudiation does not 'end' a contract: it terminates future further performance by either side . . ." [emphasis in original].
[25] Further, and returning from the common law to this statutory "contract", s. 21(2)(a) provides that the corporation is entitled to all the benefits as if it had been in existence at the date of the contract. The common law authorities cited above did not have before them this new breed of legislated "contract". There were two parties to those contracts and the aggrieved party could always sue for damages, whatever the significance of termination might be. In the instant case, if the purchaser had been in existence at the outset, or at any time before March 1, 2000, it could have sued for damages. The company would be denied "all the benefits of the contract" if disentitled to sue in these circumstances.
[26] One curious feature of s. 21 deserves mention. The issues in this case arose because of the long time span between execution of the agreement and adoption by the corporation by the institution of this action. The legislation requires adoption by the company "within a reasonable time after it comes into existence" rather than a reasonable time after execution of the agreement. It is difficult to see a rationale for this provision but protection can presumably be provided by a suitably worded condition in the agreement.
[27] For all these reasons, I would dismiss the appeal with costs.
Appeal dismissed with costs.