This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its March 2007 decision in Klemke Mining Corp. v. Shell Canada Ltd., the Alberta Court of Queen’s Bench awarded $26 million in damages for the breach of a verbal agreement. The case involved a proposed mining project in the Athabasca oil sands in Alberta, Canada. The plaintiff, Klemke Mining Corporation, was a mining company that claimed to have entered into an oral agreement with a group of oil companies operating as a joint venture under the name Albian Sands Energy Inc. It claimed that Albian had breached the agreement when it failed to proceed with the mining project. In its defence, Albian claimed that it never entered into an agreement with Klemke. The Court rejected this defence, finding that the parties had formed an enforceable contract, even if that contract was never formalized through a written agreement. The Court summarized its conclusions as follows:
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Summary
The plaintiff Klemke Mining Corporation (KMC) is an Alberta corporation with oil sands experience. The defendants Shell Canada Limited (Shell), Chevron Resources Limited (Chevron), and Western Oil Sands Inc. (Western) are participants in a joint venture that created the defendant Albian Sands Energy Inc. (Albian) to be their legal representative and operator of a mining project in the Athabasca oil sands.
KMC alleges the defendants orally agreed to grant to KMC certain mining and consulting work in connection with a mine to be built and operated in the oil sands. The defendants deny an agreement was made with KMC. Alternatively, if an agreement was made, the defendants assert it was a condition precedent to the agreement that KMC be competent to perform the work, and that KMC was not competent.
I find the parties entered into an oral Agreement followed by a Memorialization of that Agreement. Alternatively, I find they entered into a Written Agreement. Competence was not a condition precedent. Nevertheless, KMC was both able and willing to perform the Agreement.
By refusing to honor the Agreement, the defendants have caused a loss to KMC of $21,805,122 for mining work plus $200,000 for consulting work. Prejudgment interest and costs follow.
The Court determined that the parties, through a series of discussions, had established all of the terms necessary to form a contract at law. In fact, at a certain point, the parties had reduced their discussions into writing in the form of a document they referred to as a “Memorialization.” That document, the Court found, was sufficient evidence to support the plaintiff’s claim that a contract had been created between the parties:
(b) Informal Contracts v. Formal Contracts
The December 10 Memorialization is not a formal contract but is rather a collection of documents that reflects the essential terms of a contract that the parties negotiated. Its purpose was to record the oral Agreement and to serve as a map for the formal contract that would follow.
The Memorialization is silent on any conditions left to be fulfilled. Mr. Barber testified that legal counsel was involved in drafting the December 10 package. Legal counsel preparing these documents did not include standard language that the documents were subject to a formal contract or not intended to form a binding contract. Rather the Albian letter says “A formal agreement reflecting the Term Sheet will be signed by Albian and KMC.” The reference to arbitration immediately following, which was never discussed previously and which was later removed, does not alter the meaning or effect of the quoted sentence.
[T]he events on both dates captured the essential terms agreed to, although I concede the Memorialization provides stronger evidence for this finding. This is in part because the parties were as at December 10 on firmer footing, having satisfied the two conditions precedent of skin in the game and the existence of a project.
While Albian and KMC would have entered into a formal contract based upon the Memorialization, once the mine plan was more concrete, the absence of a formal contract does not preclude there being a binding contract: Langley; Kernwood Ltd. v. Renegade Capital Corp. (1997), 97 O.A.C. 3 (Ont. C.A.).
The Court was careful to distinguish situations that create an enforceable contract from situations that result in an unenforceable pre-contract “agreement to agree.” However, as the Court noted, the failure to formalize an agreement in writing does not necessarily mean that an agreement doesn’t exist, and the discussions resulted in an unenforceable “agreement to agree” only:
An agreement is not incomplete simply because it calls for some further agreement between the parties or because it provides for the execution of a further formal document. The question is whether the further agreement or documentation is a condition of the bargain or whether it is simply an indication or expression of desire as to the manner in which the contract already made will be implemented.
The case of Calvan Consolidated Oil & Gas Co. is very similar to the facts of this case. In Calvan Consolidated Oil & Gas the defendant offered to exchange interests in oil and gas development permits. The plaintiff accepted the offer unconditionally. The contents of the offer letter were to be reduced to a formal agreement and the terms of the formal agreement were to be settled by arbitration if the parties failed to agree on them. The defendant subsequently refused to sign a formal agreement. The Supreme Court of Canada held that the parties were bound by the informal agreement:
My opinion is that the parties were bound immediately on the execution of the informal agreement, that the acceptance was unconditional and that all that was necessary to be done by the parties or possibly by the arbitrator was to embody the precise terms, and no more, of the informal agreement in a formal agreement. This is not a case of acceptance qualified by such expressed conditions as “subject to the preparation and approval of a formal contract”, “subject to contract” or “subject to the preparation of a formal contract, its execution by the parties and approval by their solicitors”. Here we have an unqualified acceptance with a formal contract to follow. Whether the parties intend to hold themselves bound until the execution of a formal agreement is a question of construction and I have no doubt in this case.
After determining that the parties had entered into an enforceable agreement, the Court determined that Albian had breached that agreement by not going through with the proposed project. The Court’s ultimate award, when including prejudgment interest, exceeded $26 million. This case serves as a useful reminder to purchasing institutions to properly formalize their contracts in writing.
