Most people involved in buying or selling a business assume that they are not legally committed to anything until they sign the final purchase agreement. They exchange letters of intent, term sheets, and emails; they shake hands; they instruct lawyers to “paper the deal.” Throughout, they assume that the real commitment comes at the end, when the definitive share purchase agreement or asset purchase agreement is signed. Until then, they believe, either side can walk away.
This assumption is dangerous. Canadian law does not require a signed, formal contract for binding obligations to arise. A letter of intent can be enforceable. A term sheet can be enforceable. A handshake can be enforceable. A thread of emails worked out over a couple of days, without lawyers, can be enforceable. Whether binding obligations have been created depends not on what the parties privately believed, but on what a reasonable observer would conclude from their words and conduct. And the case law is full of business people who were astonished to learn that they had bound themselves to a multi-million dollar transaction, or conversely that the deal they thought was locked up was not a deal at all.
This article examines the law of pre-execution liability in mergers and acquisitions in Canada: the circumstances in which binding obligations can arise before the definitive agreement is signed, what terms a court considers essential to a binding deal, whether and when a duty to negotiate in good faith exists, and the specific traps (handshakes, emails, “subject to contract” language, and hybrid term sheets) that recur in the case law. It is written for business people negotiating the purchase or sale of a business, and for the advisors who guide them. Our breach of contract practice regularly handles disputes about whether and when a binding agreement was formed in Ontario.
Why Preliminary Deal Documents Are Dangerous
M&A transactions very often begin with a preliminary document: a letter of intent (LOI), a memorandum of understanding (MOU), or a term sheet. These documents serve real purposes. They set out the framework of the proposed transaction, give the lawyers, accountants, and financial advisors a reference point for what the deal is, help a buyer who needs financing show a lender that a transaction is real, and satisfy the very human need to write things down and record what has been discussed.
But preliminary documents are also, in the words of one leading text, among the most fertile grounds for disputes in all of contract law. The reason is that they occupy an uncomfortable middle ground. They are more than mere conversation but usually less than a definitive agreement, and the question of which side of the binding line they fall on is frequently unclear. Parties who intend a non-binding framework can find that they have created enforceable obligations. Parties who believe they have a deal can find that what they have is an unenforceable agreement to agree. The same words can be read different ways by different judges, and the law in this area has been described by courts and commentators alike as uncertain, mercurial, and difficult to predict.
The practical consequence is that anyone who negotiates an M&A transaction needs to understand how the binding line is drawn, and needs to manage their words and conduct accordingly from the very first communication.
Has a Binding Agreement Been Formed?
The central question in pre-execution disputes is whether the parties objectively intended to enter into a binding agreement, or merely a non-binding framework for further negotiation. The test is objective. It does not turn on what either party privately believed or intended, but on what a reasonable person would conclude from the parties’ words and conduct, viewed in their full context.
The Language of the Document
The starting point is the language the parties used. Words that signal commitment (“it is agreed,” “this agreement,” “upon acceptance”) point toward a binding obligation. Words that signal contingency (“subject to a definitive agreement satisfactory to the parties,” “the parties may agree to extend or terminate negotiations”) point away from one.
The contrast between two Ontario cases illustrates the point. In Cedar Group Inc. v. Stelco Inc., the court found that a letter of intent and subsequent letter agreements did not create a binding deal, emphasizing the LOI’s stipulation that the transaction would be set forth in a more definitive agreement and that, if such an agreement were not signed within 60 days, the parties could mutually agree to extend or terminate negotiations. The language made it obvious that a binding transaction was contingent on definitive agreements. By contrast, in Wallace v. Allen, the Ontario Court of Appeal held that a letter of intent for a share purchase was binding, focusing on its use of the phrases “it is agreed,” “upon acceptance,” and “this agreement.” In Wallace, the more detailed documentation that the LOI contemplated was an obligation flowing from the agreement already reached, not a condition that had to be satisfied before any agreement existed.
The Conduct of the Parties
Equally important, and often decisive, is how the parties behaved after the preliminary document was signed. Conduct consistent with a concluded deal is powerful evidence that a deal was concluded.
Wallace v. Allen is again instructive. After the LOI was signed, the buyer began making daily visits to the business to learn its operations and get acquainted with customers and staff. The seller held a special employee meeting to announce his retirement and that he had “sold” the company, then introduced the buyer as the “new owner” at the company Christmas party. The seller’s wife even wrote in her Christmas cards that the family had “sold our business.” This conduct clearly demonstrated that the parties considered themselves bound, and it weighed heavily in the court’s conclusion that they were.
The same theme appears in other cases. In Hoban Construction Ltd. v. Alexander, the British Columbia Court of Appeal enforced a one-page, handwritten share purchase agreement “hastily drafted and signed in a gravel pit,” despite errors in the document and non-compliance with the governing shareholders’ agreement, in part because immediately afterward the buyer assumed direction of the company, banned the seller from the premises, removed the seller’s banking authority, and sought transfer of the business records. In Matic v. Waldner, the Manitoba Court of Appeal found a binding agreement to jointly purchase a company where one party attended the closing, signed a guarantee for thirty per cent of the financing, was appointed a director and officer, and saw the company renamed to an amalgam of the parties’ holding company names. Conduct consistent with a closed deal makes it very hard to argue later that no deal was reached.
The Significance of Signatures
Canadian courts treat the signature of a document as an important indication of an intention to be bound, though not an absolute requirement. A signed term sheet is strong evidence of commitment. But the absence of a signature is not necessarily fatal. Courts have held that where a term sheet leaves space for signatures, that space is evidence of what was agreed but is not necessarily a “prescription” that the document can only become binding once signed. In some cases, a party’s acceptance communicated by email, or demonstrated by conduct, has been enough even where the formal signature line was never completed.
What Terms Are “Essential” to a Binding M&A Deal?
Even where the parties intend to be bound, no binding agreement exists unless they have agreed on all the essential terms of the transaction. If an essential term is missing or left to future agreement, there may be no enforceable contract. The difficulty is that the case law is not entirely consistent about what counts as “essential,” and the answer varies with the nature of the transaction.
Price Is Almost Always Essential
The one term that is essential in virtually every transaction is price. In Rana v. Nagra, the British Columbia Court of Appeal held that there can be no doubt that in an agreement for the sale and purchase of an asset, the purchase price is an essential term. In that case, a share purchase agreement provided for a fixed price subject to adjustment following a review of the companies’ accounts, but the adjustment clause gave no formula, basis, or objective standard for calculating the adjustments. Because the price could not be determined with certainty, the court held there was no binding agreement. A price that cannot be ascertained, and that depends on future agreement without any objective yardstick, can be fatal to the contract.
Beyond Price, It Depends
Other than price, what counts as essential varies. In UBS Securities Canada Inc. v. Sands Brothers Canada, Ltd., the Ontario Court of Appeal found a binding agreement for the sale of shares where the parties had agreed on the number of shares, the price per share, and the closing date, and it specifically declined to treat representations and warranties, or a material adverse effect clause, as essential terms (the parties had discussed and deliberately excluded the MAE clause). In Ruparell v. J.H. Cochrane Investments Inc., by contrast, the court took a more expansive view tailored to the specific transaction, holding that the essential terms included price, the share sale structure, financing, security, timing of payment, asset valuation, post-closing adjustment, and retention of the general manager.
The closing date is a particularly good illustration of the inconsistency. Some courts have treated a fixed closing date as essential; others have not. In Hoban Construction, the British Columbia Court of Appeal rejected the notion that a fixed closing date is an essential element of every share purchase agreement, and was untroubled by a reference to unspecified “adjustments,” holding that adjustments are the kind of detail commonly sorted out after an agreement is reached. The Manitoba Court of Appeal in Matic v. Waldner summarized the state of the law candidly: while “parties, property and price” are frequently cited as essential to a share sale, the closing date has been considered essential by some courts but not others.
The lesson is that essential terms depend on the factual matrix, the nature of the transaction, the context, and the parties’ interests. The same gap that is fatal in one deal may be an inconsequential detail in another. This uncertainty is precisely why precision in preliminary documents matters so much.
The Distinction Between Incompleteness and Uncertainty
There is a related but distinct problem: uncertainty. An agreement can fail not because a term is missing, but because a term that is present is too vague to enforce. A clause that commits the parties to an adjustment “to be agreed” with no formula, or to terms that cannot be objectively determined, may render the agreement void for uncertainty even if the parties believed they had covered the point. Courts try hard to give business agreements meaning and will not lightly strike them down, but there are limits. Where a court cannot determine what the parties actually committed to, it cannot enforce the commitment.
Is There a Duty to Negotiate in Good Faith?
A recurring question in failed M&A negotiations is whether, even if no binding transaction was concluded, one party can be held liable for failing to negotiate in good faith. A jilted buyer or seller who has spent months and significant money on a transaction that collapses often wants to argue that the other side was obligated to keep negotiating fairly. The Canadian answer is nuanced.
The General Rule: No Free-Standing Duty
The general rule is that arm’s-length parties negotiating a commercial agreement do not owe each other a duty to negotiate in good faith. Either side can walk away from negotiations, for any reason or no reason, until a binding agreement is formed. The Supreme Court of Canada’s decision in Bhasin v. Hrynew, which recognized a duty of honest performance, relates to the performance of existing contracts, not to the negotiation of new ones. It did not create a general duty to negotiate in good faith.
The Exceptions
The British Columbia Supreme Court in Concord Pacific Acquisitions Inc. v. Oei mapped the recognized exceptions to the general rule. A duty to make a reasonable and bona fide effort to agree can arise where the parties have already agreed on the essential terms of a contract but have not yet worked out the details, or where they have agreed on the essential terms but one party unreasonably or arbitrarily refuses to agree on a further term necessary to make the contract effective. A duty can also arise where an existing agreement contains an express or implied term to negotiate an outstanding issue in good faith, provided there is an objective standard against which to measure the obligation.
The importance of an objective standard is illustrated by two contrasting renewal cases. In Empress Towers Ltd. v. Bank of Nova Scotia, a lease renewal clause specified that the rent would be the “market rental prevailing at the commencement of the renewal term as mutually agreed.” Because “market rental” supplied an objective benchmark, the court implied a duty to negotiate the renewal in good faith. In Mannpar Enterprises Ltd. v. Canada, by contrast, a renewal clause for a gravel extraction licence referred only to “renegotiation of the royalty rate and annual surface rental,” with no objective benchmark such as fair value or market value. Without an objective standard against which to measure the parties’ conduct, the court found no enforceable duty to negotiate in good faith.
The Direction of Travel
The law in this area is unsettled and developing. Some judges and commentators have questioned whether the traditional rule, which excludes any enforceable duty to negotiate in good faith outside the recognized categories, reflects modern commercial reality. Some academic commentary argues that the reasoning in Bhasin v. Hrynew provides support for recognizing that an agreement to negotiate in good faith can be an enforceable contract, particularly where the parties have signed a non-binding letter of intent that records their material understandings and expresses a joint intention to negotiate a final agreement on that basis. This remains an area to watch. For now, the prudent assumption is that a bare agreement to negotiate, without agreed essential terms and without an objective standard, is unlikely to be enforced, but that the closer the parties come to a complete agreement, the more likely a court is to find an enforceable obligation to deal fairly with what remains.
The Specific Traps
Several specific situations recur in the pre-execution case law. Each is a trap for the unwary.
Handshakes
A handshake can conclude a binding deal. The most famous example is American: the “$10.53 billion handshake” in Texaco, Inc. v. Pennzoil Co., where a Texas court found a binding commitment to a multi-billion dollar share transfer supported by evidence that “there were handshakes all around,” social congratulations were exchanged, and champagne was broken out. Canadian courts have likewise given weight to handshakes in M&A disputes. In Gendis Inc. v. Richardson Oil & Gas Ltd., the Manitoba Court of Appeal upheld a finding that the parties had definitively agreed to a share sale where they shook hands after agreeing on price and incentive terms. In Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd., the Ontario Court of Appeal affirmed that an enforceable oral agreement for the purchase of land was concluded when the parties shook hands after agreeing on price per acre and closing date. And in Jeffrie v. Hendriksen, the Nova Scotia Court of Appeal found a binding share transfer where the parties were knowledgeable business people who had made deals on a handshake before. A handshake between sophisticated parties, following agreement on the essential terms, can be the moment a deal becomes binding, whatever the parties may have assumed about needing a formal contract.
Emails
A thread of emails can form a binding contract, and an email can satisfy the writing requirement of the Statute of Frauds. Courts recognize that much sophisticated dealmaking now happens by email, and that separate emails can combine, through the principle of “joinder,” to form a single agreement containing all the essential terms. At the same time, courts have repeatedly cautioned that email is a conversational, informal medium in which hitting “send” may be hasty rather than considered. In Girouard v. Druet, the New Brunswick Court of Appeal described the dispute as a cautionary tale for those “addicted to modern modes of instantaneous communication, but whose responses are not always informed by slowness of thought.” In that case, a thread of seven emails contained all the essential terms of a condominium sale and qualified as a sufficient writing, yet the court ultimately found no binding contract because the buyer had not yet even viewed the property and was still arranging to do so, which a reasonable observer would not square with a concluded purchase. The point cuts both ways: emails can bind you when you do not expect them to, and may fail to bind your counterparty when you are relying on them. Either way, casual email exchanges in the middle of a negotiation carry real legal risk.
“Subject to Contract” Qualifiers
Parties frequently mark preliminary documents “subject to contract” or “subject to definitive agreements,” intending to signal that nothing is binding until the formal agreement is signed. Under Canadian law, such qualifiers are strongly suggestive of an intention not to be bound, but they are not decisive. Canadian courts have repeatedly held that there are no “magic words.” Whether a “subject to contract” qualifier prevents a binding agreement is a question of construction that depends on the genesis and aims of the transaction, not on the talismanic use of a particular phrase. A qualifier can be undermined by language elsewhere in the document, or by the parties’ conduct, that shows they intended to be bound immediately. Conversely, where a qualifier genuinely reflects the parties’ intention, it will be given effect. American courts have taken a comparable approach: in Empro Manufacturing Co. v. Ball-Co Manufacturing, Inc., the court enforced “subject to contract” language but cautioned that such phrases are not “magic words” and that the text and structure of a letter of intent might still show the parties intended to bind themselves to some extent immediately. The key point for Canadian dealmakers is that writing “subject to contract” on a document is helpful but not bulletproof; the rest of the document and the parties’ conduct still matter.
This is an area where Canadian law differs sharply from English law. In England, “subject to contract” has a settled and powerful meaning: the initial agreement has no contractual effect until formal contracts are exchanged, and a court will not lightly find that the qualifier was waived. The United Kingdom Supreme Court confirmed in RTS Flexible Systems Ltd. v. Molkerei Alois Müller GmbH & Co. that while a “subject to contract” qualifier can be waived by words or conduct, a court will not lightly so hold and will require an unequivocal agreement that the qualifier no longer applies. Canadian law gives the phrase weight but treats it as one factor among many rather than as a near-conclusive rule. Parties doing cross-border deals should not assume that the phrase carries the same force on both sides of the Atlantic.
Hybrid Term Sheets
Many term sheets are deliberately hybrid: some provisions are intended to be immediately binding (confidentiality, exclusivity, expense allocation, governing law), while the commercial heart of the deal is not. Hybrid term sheets are useful but require careful drafting. The document should state clearly which provisions are binding and which are not, and the parties’ conduct should be consistent with that allocation. A poorly drafted hybrid term sheet invites the argument that, because some provisions were binding, the whole document was, or that the conduct of the parties under the binding provisions shows an intention to be bound by the rest.
Other Pre-Execution Liabilities
Beyond the question of whether a binding acquisition agreement was formed, M&A negotiations can give rise to other forms of liability that do not depend on a completed deal.
A collateral contract can arise where one party makes a promise, distinct from the main transaction, that the other relies on. A claim in quantum meruit (payment for the value of services rendered) can arise where one party performs work in the expectation of a contract that never materializes, and it would be unjust for the other to retain the benefit without paying. A finder who introduces the parties may claim a fee on this basis. A breach of confidence claim can arise where confidential information disclosed during due diligence is misused, whether or not the deal closes; the recipient of confidential information in a data room is subject to obligations of confidence independent of any signed agreement. And the tort of inducing breach of contract can expose a third party who interferes with an existing agreement, such as a competing bidder who induces a seller to break an exclusivity commitment given to another buyer. Each of these is a reminder that the failure of a transaction to close does not necessarily mean that the negotiation generated no legal consequences.
Practical Guidance for M&A Negotiations
The uncertainty in this area of law is itself the reason for disciplined practice. Several measures substantially reduce the risk of unintended pre-execution liability, and of the opposite problem of believing a deal is binding when it is not.
First, be deliberate about binding intention from the first communication. Decide, before sending any letter of intent, term sheet, or significant email, whether you intend to be bound, and make that intention explicit in the document. If you do not intend to be bound until a definitive agreement is signed, say so clearly and consistently, and ensure that the binding and non-binding provisions are separately and unambiguously identified.
Second, watch your conduct, not just your words. The case law shows that conduct consistent with a closed deal (taking over the business, announcing the sale, assuming management) can establish a binding agreement even where the documents are equivocal. If you do not intend to be bound yet, do not behave as though you are.
Third, be careful with “subject to contract” language. Use it where appropriate, but understand that in Canada it is persuasive rather than conclusive. Reinforce it with consistent drafting and consistent conduct.
Fourth, treat emails and handshakes as potentially binding. The informality of the medium does not reduce the legal risk. A casual email confirming key terms, or a handshake after agreement on price, can be the moment a deal becomes enforceable. Negotiators should communicate with the same care they would bring to a formal document.
Fifth, address essential terms with precision or expressly defer them. If price or another essential term is genuinely open, say so, and either provide an objective formula for determining it or make clear that no binding agreement exists until it is agreed. A vague adjustment clause with no objective standard is an invitation to litigation.
Sixth, use confidentiality and exclusivity agreements deliberately. A well-drafted confidentiality agreement protects information disclosed in due diligence regardless of whether the deal closes. A “no binding agreement until definitive documentation” clause in the confidentiality agreement, of the kind that succeeded in the American Chalker Energy case, can be a powerful tool to preserve each side’s freedom to walk away.
Seventh, get advice early. The most expensive pre-execution disputes are usually the product of communications sent before anyone thought to involve a lawyer. Because binding obligations can arise from the earliest documents and communications, legal advice at the outset of a transaction, not just at the definitive-agreement stage, is the best protection.
The question of whether a binding agreement was formed before the definitive documents were signed is one of the most consequential, and most litigated, issues in M&A. The stakes are high: a party may be bound to a transaction it thought was still open, or may lose a deal it thought was closed. Whether you are negotiating the purchase or sale of a business, drafting a letter of intent or term sheet, facing a claim that you bound yourself before you intended to, or seeking to enforce a deal the other side is trying to walk away from, careful legal advice from the outset is essential. Our breach of contract practice regularly handles disputes about contract formation and pre-execution liability in Ontario. Contact Grigoras Law to discuss your situation.
Conclusion
The comfortable assumption that nothing is binding until the final agreement is signed is wrong, and acting on it can be expensive. Canadian law determines whether a binding M&A agreement exists by asking what a reasonable observer would conclude from the parties’ words and conduct, not from what the parties privately intended. A letter of intent, a term sheet, a handshake, or a thread of emails can all create binding obligations where the language and conduct point that way and the essential terms have been agreed. At the same time, a party that believes it has a locked-up deal can discover that what it has is an unenforceable agreement to agree, or an arrangement that failed for uncertainty or for the absence of an essential term.
The unifying lesson is that pre-execution liability is governed by objective appearances, and those appearances are within the parties’ control. Business people who are deliberate about their binding intention, careful with their words and conduct, precise about essential terms, and well advised from the outset can use preliminary documents to their advantage while avoiding the traps. Those who treat the early stages of a transaction casually, on the assumption that nothing counts until the formal signing, are the ones who end up litigating what they thought they had agreed.
