A few essential criteria must be satisfied for a contract to be considered legitimately formed between two or more parties: there must be an offer, that offer must be accepted, and consideration (i.e., something of value) must be exchanged between the contracting parties. These criteria are deceptively simple, as many issues may arise concerning any of the delineated criteria. For example, while an offer may have been made, a court must ask itself whether all parties clearly understood the terms of the offer; after all, if the terms of the offer are unclear, then the parties may not have actually had a “meeting of the minds” concerning the terms of the contract.
Moreover, issues often arise in contract law when determining what constitutes part of the contract. It is not uncommon for parties to engage in significant negotiation before arriving at mutually acceptable contractual terms. If such negotiation takes place in writing, then one party may become confused about what information will form an addendum to the contract and what terms are considered excluded from the deal. The issue becomes even more thorny when discussions occur verbally, and only one party believes that verbal promises also form part of the final contract. After all, it is difficult to assess whether a contract has been breached when the terms of the contract itself are unclear.
In this blog, we discuss breaches of commercial contracts, including how a contract is formed, which promises (verbal or written) form part of a formal contract, and how to determine when the contract has been breached.
Immigration Rejection & Business Failure Ends South Africans’ Business Dealings in Canada
The case of Rosenbrock v. Van der Wath involves a complicated transnational franchise agreement whose terms were apparently unclear to all parties involved. The plaintiffs in the case are citizens and residents of South Africa who, at the time the contract was formed, were interested in immigrating to Canada. To that end, they entered into discussions with the defendants to purchase and operate one of their Monkeynastix (a children’s gymnastics program) franchises on Vancouver Island, British Columbia.
The parties structured their agreement to allow the plaintiffs to take advantage of the entrepreneurship immigration stream available through BC’s Provincial Nominee Program. Unfortunately, the province rejected the plaintiffs’ Provincial Nominee Program applications. At the same time, one of the plaintiffs decided he no longer wished to leave South Africa.
Despite these decisions, the plaintiffs continued to invest time and resources in the franchise, and one of them even relocated to BC on a temporary work permit for one year. However, it was ultimately determined that the franchise was not financially viable in Canada, and the plaintiffs completely ceased operation of their Monkeynastix franchise and returned to South Africa.
Plaintiffs Seek Return of All Investment Monies
Upon return to South Africa, the plaintiffs (the franchisees) argued they should be able to have the money they invested in the franchise returned, as they could not proceed or relocate to Canada. The plaintiffs claimed that the defendants (the franchisors) had verbally promised they would return the plaintiffs’ entire investment if, for any reason, the plaintiffs were unable to immigrate to Canada. They further asserted that the defendants had written them an email in which they said an addendum would be added to the original franchise agreement to dictate that all of the plaintiffs’ monies would be returned to them if the immigration process was unsuccessful.
For their part, the defendants claimed that any verbal assurances they may have provided regarding the return of investment monies did not form part of the franchise agreement, and therefore, they were not obligated to return any monies to the prospective franchisees.
How to Discern the Terms of a Contract
When a dispute arises over contractual terms, it is the party that seeks to enforce a term of the contract who bears the onus of proving, on a balance of probabilities, that the contractual terms exist as claimed. When considering whether a contract has even been formed between two or more parties, the court considers whether it would be clear, to an objective, unrelated, reasonable person who is informed of all relevant facts, that the parties to the dispute meant to enter into a contract (and on the terms as claimed).
In evaluating the existence of and terms contained in any contract, the court considers the following criteria:
- Is there evidence of the parties’ intention to enter into a contract?
- Have the parties agreed to the essential terms of the contract?
- Are the vital terms of the contract sufficiently certain?
- Have the requirements of a binding contract been satisfied (as considered from the perspective of a dispassionate, reasonable bystander rather than from the perspective of the parties involved in the disputed contract)?
- Whether a contract appears to have been formed in light of all surrounding circumstances, including discussions between the parties and their behaviour before and after the contract was purportedly formed.
The fifth question is of particular significance, as courts will consider not just a written contract but also the behaviour of the parties to it. In other words, did the contracting parties conduct themselves in a manner that would suggest, to a reasonable bystander, that they believed they were under contract?
Informal Discussion and Email Constitute Addendum to Contract
The court carefully reviewed the circumstances surrounding the formation of a contract in this case, including the multiple discussions between the parties regarding the plaintiffs’ immigration to Canada as a contingency of the contract. It noted the defendants had indicated, in an email to the plaintiffs, that they would include an addendum in the franchisee contract to assure that the plaintiffs’ monies would be returned to them if their attempts to immigrate were unsuccessful.
Although the addendum was never actually included in the written contract between the parties, the court acknowledged that written contracts do not always contain all of the terms applicable under a particular contract and concluded that “the parties’ outward manifestation of their intentions when they entered into the franchise agreement was that an addendum would be added to the contract providing the additional term offered by [the defendants] and accepted by” the plaintiffs.
Satisfied that the franchise contract included an addendum concerning immigration and the return of the monies if it was unsuccessful, the court next considered the proper interpretation of this additional term. Given the surrounding circumstances, the court accepted that the parties’ mutual intention had been to assure the plaintiffs that their monies would be returned if BC rejected their immigration applications. Notably, the court was careful to note that the addendum did not state that the plaintiffs’ monies would be returned if they failed to immigrate successfully to Canada for any reason; instead, the funds were to be returned in their entirety only if the province of BC rejected the plaintiffs’ Provincial Nominee Program applications.
Failure to Assert Contractual Rights Fatal to Claim of Contractual Breach
When BC rejected the plaintiffs’ Provincial Nominee Program applications, the plaintiffs decided to continue their pursuit of opening a Monkeynastix franchise in BC through alternative channels. One of the plaintiffs accepted a temporary immigration permit to come to Canada for one year, during which time he unsuccessfully attempted to get the franchise off the ground. It was only after having spent a year in Canada that the plaintiffs determined that the franchise was not viable in BC and, therefore, was unlikely to be successful under any conditions. The plaintiffs waited to claim the return of their investment funds after returning to South Africa (i.e. after the business already failed in BC), nearly two years after BC had rejected the plaintiffs’ Provincial Nominee Program applications.
Given the circumstances, the court was satisfied the defendants had not breached the contract when they failed to return the plaintiffs’ investment monies to them because the plaintiffs had never demanded the return of the funds in accordance with the agreement. The contractual addendum stated the plaintiffs were entitled to the return of their investment money if BC rejected their immigration applications. However, the plaintiffs did not seek to have their monies returned immediately after the rejection of their applications; instead, they had attempted other avenues of immigration and had commenced operations in BC for two years before ultimately returning to South Africa and deciding not to pursue the Monkeynastix business further. Because the plaintiffs had not sought the return of their investment monies commensurate with their discovery that their applications had been rejected, they were no longer contractually entitled to receive those funds back.
Contact CM Lawyers for Dependable Franchise Agreement Advice in Vernon & Salmon Arm
At CM Lawyers, our knowledgeable business lawyers are experienced in drafting, reviewing, and negotiating a wide range of business contracts, including franchise agreements. We understand the intricacies of these legal documents and work diligently to protect your interests. Whether you’re a franchisor seeking to expand your brand or a franchisee looking to secure a successful business venture, our skilled lawyers will guide you through the process, ensuring your rights are protected and your business goals are achieved.
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