3 people having dispute over verbal agreement or contract

Free Enterprise Bus Lines v Winnipeg Exclusive Bus Tours, 2018 MBQB 64

In 2013, the plaintiffs H. Silva and V. Comeau – a married couple who owned and operated Free Enterprise Bus Lines (“Free Enterprise”), a charter bus business – decided to either sell or close that business. In October of that year the couple was introduced to the defendant W. Morris, the owner of Winnipeg Exclusive Bus Tours (“Winnipeg Exclusive”). The plaintiffs understood that Mr. Morris was interested in purchasing a busing business, and the parties held relevant discussions and exchanged information.

At that time, Winnipeg Exclusive did not own any buses nor did it have a licence to operate a bus company. Rather, the company operated by renting buses from licenced companies. Mr. Morris was interested in obtaining a licence, which could only happen if Winnipeg Exclusive purchased a company with a licence. Free Enterprise had such a licence, and that company also owned three motor coaches.

The negotiations between the parties were primarily conducted by plaintiff Ms. Comeau and defendant Ms. Hicks, an employee of Winnipeg Exclusive, although Mr. Morris retained final decision-making power. Any discussions between M. Comeau and Ms. Hicks had to be “run past” Mr. Morris, and at one point Ms. Hicks told the plaintiff that Mr. Morris would not accept their asking price of $400,000.

In early 2014, Free Enterprise received an email from Canadian National Railway (“CNR”) with a Request for Proposals (“RFP”). Free Enterprise had never worked with CNR and forwarded the RFP to Ms. Hicks at Winnipeg Exclusive. The following week, at the request of Ms. Hicks, Ms. Comeau on behalf of Free Enterprise signed a contract stating that Free Enterprise released all interest in bidding on the CNR project and all interest in any potential contract between Winnipeg Exclusive and CNR.

In February 2014, the parties met and Ms. Comeau and Mr. Silva of Free Enterprise signed a “term sheet” prepared by legal counsel for Winnipeg Exclusive. This form stated that Winnipeg Exclusive would, upon financing secured and due diligence completed, purchase Free Enterprise for $150,000 plus 5% commission on the CNR six-year project; should Winnipeg Exclusive not be awarded the contract, the purchase price would be $180,000. Significantly, the term sheet stipulated that no legal rights or obligations between the parties would come into existence until the final purchase agreement was executed except that Free Enterprise could not enter into any significant contracts without the consent of Winnipeg Exclusive and that Ms. Comeau and Mr. Silva could not discuss the sale with outside parties.

While Free Enterprise did not have legal representation when they signed this form, they later retained counsel. Winnipeg Exclusive’s counsel sent that lawyer a number of drafts of an asset purchase agreement, a management agreement, a non-competition agreement, and a commission agreement. No draft was ever signed, and Ms. Comeau testified that on her lawyer’s advice she refused to sign until the paperwork was acceptable. However, the plaintiffs did not provide evidence about which parts of the drafts were unacceptable and whether any objectionable terms were essential or non-essential. A consent to due diligence was sent to her counsel on March 31, 2014.

The draft management agreement provided by Winnipeg Exclusive’s lawyers provided that Winnipeg Exclusive would manage all aspects of Free Enterprise’s business beginning April 1, 2014 until the earlier of September 30, 2014 or the date Free Enterprise’s licence was transferred to Winnipeg Exclusive. Although this draft was never signed, Winnipeg Exclusive began managing Free Enterprise’s business beginning April 1. When Winnipeg Exclusive began to fulfill its contract with CNR, they used Free Enterprise’s buses.

However, in late April and early May a series of text messages between Ms. Comeau of Free Enterprise and Ms. Hicks of Winnipeg Exclusive ended the arrangement between the parties; in particular, the purchase price had still not be decided. By that point Winnipeg Excusive had not yet finished their inspection of the buses as part of the due diligence required to complete the agreement. Winnipeg Exclusive paid Free Enterprise for the month’s use of buses.

The plaintiffs, Free Enterprise, alleged that Winnipeg Exclusive had contracted with them to purchase the business and that they had breached that contract by failing to follow through on the agreement. Free Enterprise eventually sold its assets to a third party and claimed for the difference as damages.

When the matter proceeded to trial, the judge had to decide whether the parties had entered an oral agreement – and thus an enforceable contract – or whether they had merely ‘contracted to contract,’ which is not a valid contract according to contract law principles.

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In this case, the judge determined that the parties had only agreed to agree, and that the defendants, Winnipeg Exclusive, had not breached a contract with Free Enterprise. In order to find the existence of a valid contract, the essential terms of that contract must be ‘reasonably certain.’ The judge held that the text message exchange from late April and early May 2014 indicated that the parties still had not agreed on a purchase price, generally considered to be an essential aspect of a contract. Agreements are not final or binding until there is agreement, or ‘meeting of the minds,’ on the essential provisions, as stated in Ward v Ward, 2011 ONCA 178 and cited in Matic et al v Waldner et al, 2016 MBCA 60 at para 61.

In conclusion, the judge stated that the plaintiff’s true complaint was that the defendants had not negotiated with them in good faith. While there is a duty of good faith in the performance of a contract (Bhasin v Hrynew, 2014 SCC 71), there is no such duty in the negotiation of a contract (Martel Building Ltd v Canada, 2000 SCC 60), which was the extent of the parties’ involvement.

The plaintiffs had also alleged that the defendants had committed the torts of negligent misrepresentation and conspiracy. There are five elements to the tort of negligent misrepresentation: a duty of care based on a special relationship between the parties; the representation must be untrue, inaccurate, or misleading; the representor must have acted negligently in making said misrepresentation; the representee must have reasonably relied on that representation; and that reliance must have been detrimental in that there were damages (Queen v Cognos Inc, 1993 CanLII 146 (SCC)).

The plaintiffs needed to establish the first element: that the parties were in a special relationship such that Winnipeg Exclusive owed Free Enterprise a duty of care. The test for establishing this duty is quite complex (Deloitte & Touche v Livent Inc (Receiver of), 2017 SCC 63), but in previous cases where this relationship has been found there has been a contract between the parties. The judge here found that even if the relationship existed, there was no tort, as there was no evidence that the representations were untrue or misleading. Draft agreements were sent to the plaintiffs and it was the plaintiffs who chose not to sign them.

Finally, the plaintiffs also claimed conspiracy. In Canadian tort law, there are two recognized forms of conspiracy: predominant purpose conspiracy and unlawful means conspiracy (Pro-Sys Consultants Ltd v Microsoft Corporation, 2013 SCC 57). The first is where the defendant’s primary purpose is to cause injury to the plaintiff, and the second form occurs when there is unlawful conduct directed to the plaintiff, the defendant knew or should have known that injury to the plaintiff was likely to result, and injury does in fact occur. The judge held that in this case neither form of conspiracy was established, and the case was dismissed with costs payable to Winnipeg Exclusive.

Editor’s Note:

Procurement professionals need to be mindful that a ‘contract to contract’ is not a binding agreement. This issue often comes up when organizations issue a Letter of Intent to the successful proponent before the formal contract is signed. While there may be practical reasons for doing so, be aware that most Letters of Intent do not constitute a contract, but rather an agreement to enter into a contract. Allowing a proponent to begin work before the contract is executed carries significant risk. In the above case, the fact that Winnipeg Exclusive began managing Free Enterprise’s business without a contract in place was likely a catalyst for this litigation.

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Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.