This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The core purpose of a commercial contract is to document a deal so that each party has a clear understanding of its commitments. All too often, however, parties enter into negotiations and proceed into contract performance without precisely defining their deal. The following cases show how this kind of corner-cutting can undermine the certainty of terms and lead to contracting chaos.
Invisible Oil Sands Deal Sparks Multimillion-Dollar Dustup
As the March 2007 decision of the Alberta Court of Queen’s Bench in Klemke Mining Corp. v. Shell Canada Ltd. illustrates, an enforceable contract may be created even where there’s no formal written agreement. In this case, the Court awarded $26 million in damages for the breach of an oral contract. The plaintiff, Klemke Mining Corp., claimed it had negotiated an oral agreement for a mining project in the Athabasca oil sands with a group of oil companies operating as Albian Sands Energy Inc. Klemke claimed that Albian had breached the agreement by failing to proceed with the project.
In its defence, Albian claimed that it never entered into an agreement in the first place. The Court disagreed, finding that the parties had formed an enforceable contract, even if that contract was never reduced to a formal written agreement. The Court determined that the parties had engaged in a series of discussions (which were recorded through a document referred to as a “Memorialization”), and through those discussions had established all of the terms necessary to form a contract at law. The Court found Albian in breach of contract for failing to follow through with the oral agreement and awarded $26 million in damages.
Dalhousie Deal Hits Wall of Uncertainty on Pricing
As the January 2006 decision of the Nova Scotia Supreme Court in Alumitech Architectural Glass & Metal Ltd. v. J.W. Lindsay Enterprise Ltd. illustrates, failing to firm up your pricing structure can have costly downstream consequences. The case dealt with a dispute over a building project at Dalhousie University. Alumitech Architectural Glass & Metal Ltd. agreed to pay $240,000 for J.W. Lindsay Enterprise Ltd. to install approximately 39,000 square feet of wall. However, the project ultimately required only 31,000 square feet of wall. A dispute arose over payment.
Lindsay maintained that the parties had agreed to a lump sum contract and it claimed the full $240,000. Alumitech disagreed, arguing that the payment structure was based on a unit price of $6.1538 per square foot, which entitled Lindsay to a lesser, pro-rated amount of $191,000. The Court concluded that the pricing structure was vague and that there had been no meeting of the minds on whether the deal was a lump sum or unit price contract. Since Alumitech failed to provide any useful evidence to support its lower price calculations, the Court was left with little choice but to award Lindsay the full $240,000 even though it installed only 31,000 of the originally contemplated 39,000 square feet of wall.
No Clear-Cut Answer on Rate Review Clause
In its May 2005 decision in Stratus Contracting Ltd. v. Abitibi Consolidated Inc., the British Columbia Supreme Court dealt with a contract interpretation dispute. The case involved a contract for the transportation of logs. The plaintiff, Stratus Contracting Ltd., had entered into a contract with Abitibi Consolidated Inc. to transport logs to sawmill sites. The contract included an annual rate review clause, which guaranteed Stratus a minimum 12 percent net profit per annum.
A dispute arose over whether this clause was intended to apply from the second year onwards or whether it was intended to apply retroactively to adjust the first year of payments. Stratus argued that the clause should be applied retroactively to increase its first-year rates. Abitibi disagreed. It argued that there should be no rate adjustment for the first year, since the clause applied only to the second and subsequent years.
Since there was more than one reasonable interpretation available, the Court determined that it was free to consider additional evidence to determine the true intentions of the parties when the contract was created. The Court considered a lengthy series of discussions that had preceded the formation of the contract. While the Court ultimately sided with Abitibi and rejected the retroactive interpretation, this case demonstrates how vaguely drafted provisions can undermine the certainty of pricing under a contract and lead to interpretive disputes and litigation.
Due Diligence in Deal Design
As these cases illustrate, contracting parties should exercise a great degree of diligence when negotiating and drafting their contracts. While purchasing professionals will often face intense pressure to dispense with formalities and paper a deal quickly, they should never forget that the time saved in the initial rush to cut corners will be lost many times over when informal negotiation practices and imprecise deal-drafting causes downstream contract disputes.
