The Nova Scotia Court of Appeal recently addressed a collateral agreement and whether that agreement enabled one party to withdraw from a transaction.

What Happened?

Innotech Aviation (“Innotech”) is in the business of leasing hangar space and office facilities. Skylink Express Inc. (“Skylink”) leased hangar space and office facilities from Innotech, in accordance with a lease agreement. From 1999 to 2011, the Lease was extended several times – each time increasing the amount of leased space within the Innotech’s facility. During one particular negotiation, the Innotech agreed to credit Skylink $27,121.23 for unused hangar space and encouraged Skylink to enter into another Lease extension.

On April 27, 2015, prior to signing the Lease extension, Graham Morgan, the Director of Maintenance at Skylink, e-mailed Joel Bédard, Vice-President and General Manager at Innotech, explaining that he had only “one question left”: Whether Skylink would be able to change the type and/or number of aircrafts Skylink had, or amount of space Skylink would need with an “Ad Hoc Addendum” to the Lease, should the circumstance arise.

Mr. Bédard agreed that they could, but it would have to be done as soon as possible when those changes occurred. However, Mr. Bédard stated, if the changes were only temporary then it was his preference to leave the Lease “as is” and agree to a negotiated temporary daily rate via e-mail correspondence. On April 27, 2015, Skylink executed the final addendum to the Lease, which was retroactive to July 15, 2014.

As a result of a downturn in Skylink’s business, Skylink removed five aircraft from Innotech’s facility and stopped paying rent.

Innotech’s position was that there was no clause in the Lease that would allow Skylink to stop payment of rent.

In an e-mail from Mr. Morgan to Mr. Bédard dated November 12, 2015, Mr. Morgan advised that Skylink was not seeking to terminate the Lease, but rather sought an Addendum to the Lease to reflect the situation and change in circumstances.

On August 19, 2016, Innotech made an application in court for a declaration that Skylink was in breach of the Lease. It was Skylink’s position that an exchange of e-mails between Mr. Morgan to Mr. Bédard constituted a collateral contract, which allowed Skylink to unilaterally reduce the number of planes stored in Innotech’s hanger.

The Original Trial Decision

The Supreme Court of Nova Scotia concluded that there was no enforceable collateral contract between Skylink and Innotech based on the e-mail exchange on April 27, 2015. The court stated:

The e-mail exchange on April 27, 2015, in response to Mr. Morgan’s “one last question” amounts to nothing more, in my view, than a commitment to discuss, as the parties had done in the past, any future changes to the 2014 addendum that might be required by the Respondent’s operational needs in the future, and to reduce writing anything to which they could agree at that time. It is, therefore, the proverbial “agreement to agree.” It is of no force and effect whatsoever.

As a result, the trial judge found that Skylink had breached its contractual obligations to Innotech when it stopped paying the full rental amount in November 2015.

The Court of Appeal Decision

The Court of Appeal focused on one issue: Whether the trial judge erred in concluding that no collateral contract was formed on the basis of the April 27, 2015 e-mail exchange between Mr. Bédard and Mr. Morgan.

The Court of Appeal also noted that this was a question of mixed law and fact and referred to McPhee v. Gwynne-Timothy, which indicated a “palpable and overriding error standard.” The Court of Appeal clarified that an error is palpable when it is “clear or obvious” and an error is overriding if it is “so serious as to be determinative when assessing the balance of probabilities with respect to that particular factual issue.”

It was also determined that the trial judge went to great lengths to explain why he did not find a collateral contract, and that the findings of the trial judge were supported by evidence. Even if the trial judge was in error, the Court of Appeal held, the error was not one that could have affected the final results.

The Court of Appeal also highlighted that the parties did not expect the number of aircrafts Skylink stored in Innotech’s hangers would reduce to zero. This is evidenced within the e-mail from Mr. Morgan to Mr. Bédard dated November 12, 2015, in which Mr. Morgan spoke of the unforeseen downturn in business.

Ultimately, the Court of Appeal concluded that the April 27, 2015 e-mail exchange was not a collateral contract, given that there was no certainty of terms nor was there an intention to enter into such an agreement. The appeal was dismissed.

This case highlights that establishing a collateral contract involves more than a demonstration of expectation. A party must present evidence of intention to enter into a binding contractual agreement.

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