The Court of Appeal wrongly upends a routine practice

“The Ontario Court of Appeal continues to do surprising and alarming things with pre-incorporation contracts… Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149 … is wrong on two grounds. The first ground is based on the expectations the parties will have had in the circumstances of the case. The second ground is based on a contractual or restitutionary analysis. […]

All standard disclaimers under subsection 21(4), or subsection 14(4) of the Canada Business Corporations Act, must now be re-drafted to protect the promoter to the extent that, before this case, it was entirely reasonable for such a person to expect.”

Angela Swan of Aird Berlis disassembles (no, wrecks) the Court of Appeal’s flawed reasoning in this very odd case. It is normal for individuals, knowing that they are going to incorporate, to contract with other parties on behalf of the soon-to-be-born corporation. The parties with whom they contract know that they are, in essence, making a contract with an entity which does not, as yet, exist, but will exist and so they agree to contract with it rather than with the individual incorporator. In Benedetto the ONCA upended those expectations. It is a decision which – in addition to the two key points noted by Angela Swan – also seems to swim against the grains of normal commercial practice, commercial reasonability, and the parties’ expectations.

Benedetto also raises a rather meta issue which Ms. Swan doesn’t address in her pithy article: yet another “square circle” mandate from the Courts. The Bar is under constant pressure to make legal documents shorter, more precise, less wordy, more comprehensible… in sum, to do its best to end the days of massive documents detailing every possible contingency. At the same time courts frequently issue decisions like Benedetto where lawyers are forced, both for clarity and to protect their clients’ interests to add further and further clauses to address some new specificity demanded by the courts, and to contract for things that are already governed by statute (here, as accurately noted by Ms. Swan, s.24 of the OBCA, which already addresses this issue).

Side Note: Ms. Swan also remarks upon (in her Footnote 1) something I have noted in the Court of Appeal on summary judgment cases: the adoption of old, superseded/rejected precedent and the ignoring of more recent and/or more binding authority. See for example my 2016 blog post “A worrying case regarding summary judgment“, which examines a case where the ONCA specifically adopted its own, overturned precedent (called “Combined Air”) and pretended that the Supreme Court of Canada case (called Hryniak) overturning both that case and its fundamental reasoning didn’t even exist.

All we can hope is that the losing party before ONCA is able to obtain leave to appeal so that the Supreme Court of Canada can clarify matters.

NOTE: In October of 2020 the Supreme Court of Canada laid down clarification on the issue of pre-incorporation contracts in a different case, Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp. 2020 SCC 29. Our blog post on that can be found at this link.

This post is done by Camberwell House for informational, discussion and educational purposes only. It is NOT to provide specific legal advice and does not do so. There is no lawyer-client relationship between you and Camberwell House and you should seek your own lawyer and obtain legal advice tailored to your circumstances.

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