Courts are often unwilling to hold that an agreement is unenforceable for uncertainty when, by all appearances, the parties intended to make a contract. But in a very spirited and colourful judgment, the Court of Appeal for Alberta has recently weighed in very heavily on the need for certainty in any contract, and particularly a building contract. In Seong Yun Ko v. Hillview Homes Ltd., that court provided a virtual law library on the Anglo-Canadian law, plus a dictionary of aphorisms and Latin phrases, on the subject of certainty in contracts. Put this case in your hip pocket for the next time you need to address the issue because it will take you to all the important principles and cases.
The Alberta Court of Appeal also pointed out that the principles of contract law are a seamless web in which each principle is connected to another, while each principle remains an essential thread in a valid contract. Thus, the intention to make a contract is one thread, but does not replace the need for certainty, and the mere existence of an intention to make a contract does not create certainty. And certainty of contract is connected not just to the initial validity of the contract, but to the objective terms of the contract and to a mistake about the terms of the contract, all of which may render the contract non-existent from the beginning, influence the contents of the contract or render it terminable by rescission.
The plaintiff was a licensed realtor and the defendant was a home builder. The defendant sold the plaintiff a lot and agreed to build a home on the lot for the total price of about $1.2 million. The contract contained an Entire Agreements clause precluding any reference to representations, warranties and previous statements. The contract stated that a particular model of the house was to be built on the lot. It also contained short form language that the parties agreed meant that the house was to contain 1,666 more square feet, costed at $80 per square feet. Those 1,666 square feet were not a minor part of the proposed building, and amounted to about 60 per cent of the size of the building if the size of the model house referred to in the agreement was used as a reference. However, the parties did not agree on what those 1666 square feet were to be added on to (and thus, what the total square feet were to be), or where the 1666 square feet were to be located in the house, or what they would contain, or anything else about those square feet.
The trial judge held that there was a valid contract. The trial judgment granted specific performance for the lot itself, but not as to the house. The trial judge held that the plaintiff was entitled to damages for the increased cost of construction of the house.
The Court of Appeal for Alberta held that there was no contract because of the uncertainty as to what the defendant was to build. The fact that the parties may have thought that they made a contract, and had the requisite contractual intent, did not overcome the necessity that the terms of the contract be reasonably certain. And here, because the parties had not agreed upon what the 1,666 square feet were to contain or where they were to be located, the terms of the contract were uncertain and there was no contract.
The Reasons of the Alberta Court of Appeal
The reasons of the Court of Appeal canvas virtually the entire scope of the Anglo-Canadian law on the subject of certainty as an essential element of an enforceable contract. Since the issues that the court addressed are so numerous, it might be helpful to list them one after another.
Here are the Top 10 David Lederman-style lessons from Ko :
- A contract for the sale of land with a finished building for a specific price as adjusted by a square feet formula is not a design-build contract. So the uncertainty of the agreement could not be repaired or justified on the basis that it was a contract to provide professional or trade services at a reasonable rate. Moreover, even for a design-build contract to contain terms which meet the test of reasonable certainty, there must be a “warranty of suitability by the designer, restrictions on any variation by the owner and permission for variations by the builder” with the result that there is “control of the design by the designer, and a limitation on interference in it by the owner.” None of that was present in this case
- While “house-building companies commonly agree with a customer to modify one of their standing plans when building his or her specific house”, there must be “more care… and a moderate degree of detail” for the contract to be enforceable.
- The Entire Agreement clause precluded the parties from relying upon the negotiations and discussions to create certainty of terms. In any event, the plaintiff acknowledged that there was no agreement on where the 1,666 square feet would go, nor did the evidence disclose what the 1,666 square feet represented. Moreover, the parties’ subsequent conduct could not, and did not, clarify their prior agreement.
- Certainty is an essential element of the validity of a contract, and that element is tied into all the other elements of contractual validity. The court said that “certainty of terms is not a separate self-contained defence….Quite to the contrary, certainty is an integral part of the very heart of the contract… The rule is far from a technicality.” Thus, it is part of the law of offer and acceptance. It is part of the reasonable bystander test as to whether there is an enforceable contract: “if the bystander could not make any sense of it, or finds it contradictory, there is no contract. It is void ab initio for mistake.” It is part of the law of contractual mistake. It is part of the law of contractual remedies: the court will not grant a remedy for an uncertain agreement because in awarding damages or granting specific performance, the court “compares what the vendor contracted to provide with what it did provide. So one must know what it contracted to give.”
- Whether an alleged agreement is sufficiently certain to be a contract cannot be determined in the abstract. It depends on the subject matter of the contract. Thus, “what is enough specificity to make a valid contract to buy an existing power mower may not be enough for a contract to build a new house.”
- Uncertainty as to any essential term of the alleged contract renders that contract void from the beginning. Uncertainty is not just limited to parties, price and terms: “any term which the parties thought they needed and included in the agreement, but which is too vague, renders the contract void.” The court said that: “Disagreement on even a small term bars a contract”, usually on the basis that the offer and acceptance did not match to create a contract.
- Complete silence on price may enable the court to set a reasonable price. But the court cannot do that for the subject matter and the parties: the court cannot “set the parties or the property”. And so far as the price, if the parties specify a price formula which is uncertain, the court cannot supply the price for them.
- There is a substantive difference between an agreement in which the parties agreed that the terms were to be “fixed by their later agreement” and an agreement in which “the parties called for a future formal contract, but all its terms were fixed at once.” The former is not a contract but the latter is.
There are solutions available to parties who wish uncertainty in their agreement but want to have an enforceable contract. The court listed four solutions:
- A specific means to decide the matter, such as a published standard, price list or other reference;
- An arbitrator, valuator or referee to fix the matter;
- A custom of the trade;
- An implied term if the term or matter is obvious.
None of those solutions applied in the present case.
- The alleged duty to negotiate could not overcome the absence of certainty, for two reasons.
First, “designing and negotiating are not the same thing” and the court could not impose a duty to design the house which was enforceable on the parties.
Second, “a mass of binding and persuasive authority” made it impossible to overcome the absence of certainty with an obligation to negotiate.
The Aphorisms and Latin phrases of the Court of Appeal
The Court of Appeal was obviously steamed up about the state of contract law in Canada if the trial judgment was correct. In addressing this state of affairs, the court employed colourful language, aphorisms and Latin phrases which certainly keep the reader interested.
Here are just a few which you can put in your kit bag for further use:
“Commerce needs predictability. So do ordinary Canadians about to commit their future earnings and life savings, especially to acquire a house.”
“If that truly is Canadian contracts law, it needs fixing. It is another reason why litigation today is often priced out of reach. If it is not correct law, the present judgment should be changed and the correct law affirmed and clarified.”
“’De gustibus non est disputandum’, says a Latin proverb millennia old. One cannot debate tastes.”
“Ex nihilo nihil fit is a maxim meaning ‘From nothing, comes nothing.’
In its reasons, the Court of Appeal cites over 45 Canadian cases, and also several of the leading English cases, tracing the law relating to contractual certainty back to the 1800s. So it is a virtual treasure trove of case law on the subject.
Some might argue with the strictness of the court’s approach to the subject matter. Case law could be cited that is more generous to the use of conduct after the alleged contract to shed light on its meaning and certainty. The suggestion that lack of agreement on non-essential terms dooms the alleged contract also seems harsh. But the facts of the case did not render those points essential: here, the conduct of the parties after the contract did not clarify the terms of the alleged contract, and the 1,666 square feet of undefined and undefinable square footage was an important part of the building. So the comments of the Court of Appeal on these points may not be binding in future cases.
What is important about the decision is the re-affirmation of the need for contracts, and particularly building contracts, to be reasonably certain. And helpfully, the court stated many reasons that support that principle and identified several techniques to deal with uncertainty if the parties cannot agree on the specifics. The bottom line message is: when negotiating a contract, don’t throw the ball up in the air and expect the courts to catch it.