I have previously written about the importance of documenting transactions between family members (for example, here and here). Often, transactions between family members (loans, gifts, property transfers, etc…) are not documented. This is a common occurrence in transactions between parents and children. There are numerous cases which illustrate the importance of reducing intentions to writing.
However, the parties must also take care to properly document the agreement, and to make sure the agreement as documented is valid and enforceable. There must be certainty of terms to create a binding agreement. The agreement must also not be invalid as a result of the circumstances surrounding its creation. For example, the agreement must not be unconscionable or procured by undue influence.
In the recent decision of Woods v. Woods 2022 BCSC 2269, the B.C. Supreme Court considered the enforceability of an alleged agreement whereby a son would receive his father’s property in return for the right to remain on the property, as well as a share of his son’s business. There were some attempts made to document the agreement, but the question was whether there was an enforceable agreement.
In Woods, the father owned a 20 acre property in Golden B.C. He lived a manufactured home on the property, and also used the property as a junk yard.
The son developed a plan to open a tourism business on the property using Volkswagen vehicles, called “Camping in the Woods.” He took steps to clean up the property, and made improvements to set it up for his business, in which visitors would be able to sleep in converted VW busses on the property.
The father fell behind on his mortgage payments, and the property was in danger of foreclosure.
The father and son began to discuss an arrangement whereby the son would buy the property (saving it from foreclosure) and further develop his business.
There was a meeting between the father, the son and a second son (not a party to the agreement) to formalize the plan. The son alleged that there was a cocktail napkin agreement, which was actually written on a cocktail napkin. The Court included a photo of the agreement in the reasons for judgment:
The father denied ever seeing a copy of the napkin agreement before the litigation, and also denied that certain writing was in his handwriting. He said that they discussed that he would receive a 40% interest in the property, not a 10% interest. He also said that the business was to be restricted to an acre or less of the property.
There was a subsequent draft agreement prepared for the transfer of the property. The agreement did not discuss the father getting a share in the business. The lawyer who prepared the agreement recommended that the father obtain independent legal advice.
The father and son both signed the agreement on a bench following the meeting with the lawyer. The father did not get independent legal advice. The son conceded that he “urged” his father to sign, but said this was because the property was going to be foreclosed upon the next day. In hindsight, the son said that he should have forced this father to get independent legal advice, but that his father said he didn’t have the money to pay a lawyer.
The lawyer subsequently wrote to raise concerns that the proposed transaction was unfair, or worse fraudulent, as it did not appear to address the equity in the property, for which the father ought to receive some compensation.
After signing the agreement, the father refused to transfer the property.
Relations between the father and son deteriorated. The son attended to remove his belongings from the property, the father called the police, the son was arrested for mischief, and a no-contact order was put in place.
The son concluded that there was no way the father was going to proceed with the transfer, and did not take any steps to close the deal.
The son rented an alternative location for his business (which he says was not as attractive a location), and incurred additional expenses. He also claimed that some of his items were still on the property, and that some of them were damaged.
The son commenced an action claiming specific performance, damages, malicious prosecution and conversion.
After the action was commenced, the father entered into an agreement to sell the property for $350,000 to another party, with the understanding that the father could continue to live in the home on the property for as long as he wishes.
There was no certainty of terms, and therefore no enforceable agreement
The first issue was whether there was certainty of terms sufficient to establish the existence of a contract.
The test that governs whether the parties have formed an enforceable contract involves answering two questions:
- whether the parties objectively intended to enter contractual relations; and
- whether they had reached agreement on essential terms that are sufficiently certain to enforce.
The court will look at whether a reasonably third-party observer would conclude from all the circumstances, including the document itself, the circumstances underlying execution, and the parties’ subsequent conduct, that the parties intended to enter into binding legal relations. This is a fact-specific inquiry.
The Court referred to the following recent summary of the law on certainty of terms:
When [parties] agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract.
Where there is an intention to contract, the court will make a significant effort to give meaning to that agreement. However, a court cannot create an agreement on essential terms where none exists. The fact that parties may wish to contract, or believe they have entered into a binding contract, does not make it so.
What constitutes an “essential” term will depend upon the nature of the agreement and the circumstances of the case. The key question is whether the parties have agreed on all matters that are “vital and fundamental” to the arrangement.
In Woods, the son argued that the cocktail napkin agreement and the subsequent document prepared by the lawyer formed the contract.
However, the Court observed that there were uncertainties in the agreement, including but not limited to:
- If the father was entitled to a 10% stake in the son’s business, what did this mean? i.e. ownership, gross rental income, profits net of expenses, etc…
- Was the father actually only entitled to 10%, or was it 40% as asserted by the father?
- Was the son entitled to pay himself a salary before calculating the 10% (or 40%)?
- What remedy would the father have if the son simply abandoned his business after getting the property?
- What were the implications of the father not remaining sober, and what was the test for sobriety?
The Court also observed that there were contradictions between the two documents, making it impossible to read the two documents together as a single contract. For example, the signed agreement requires that the father give up vacant possession, but he was supposed to be allowed to remain in the home on the property.
The Court concluded that that the uncertainties and the inconsistencies related to terms that were consequential, vital and fundamental. No enforceable contract was created, and the claim in contract must be dismissed on this basis alone.
The father argued that he did not sign the cocktail napkin agreement, and that he was never given the entire other agreement before signing it. The Court held that the father signed both documents (relying upon the evidence of his other son, a disinterested party). However, the fact that he signed the documents did not address the issue that there was no certainty of terms and therefore no enforcable agreement.
In the alternative, the agreement was invalid due to undue influence and was unconscionable
The father also argued that any agreement was invalid due to undue influence or unconscionability.
With respect to undue influence, there is a presumption of undue influence where there is the potential for domination inherent in the relationship itself. Equity recognizes certain relationships that may give rise to the presumption, including parent and child. Where the presumption applies, the party must be shown to have entered into the transaction as a result of his own “full, free and informed thought.” This may entail showing that no actual influence was exercised in the particular transaction, that the plaintiff had independent advice, etc…
The test for unconscionability is as follows:
- there must be an inequality of bargaining power between the parties; and
- there must be an improvident bargain.
With respect to the first element, an inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process. With respect to the second element, a bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable party.
In Woods, the Court noted:
- The contracts that the son was pressuring his father to sign involved the father’s only major asset;
- This was a parent-child relationship, and the father was heavily reliant on his son’s advice;
- The father was placed under “substantial pressure and influence” from the son to sell the property to him;
- There was a material inequality in bargaining power. The father was not in good health and was in a very tenuous financial position. He was vulnerable and this created a dependency;
- The proposed transaction was unfair. There was no financial analysis offered to show that the proposed terms were fair and reasonable. There was no effort to obtain an appraisal, even though this was recommended by the lawyer;
- The Court did not accept that the agreement was explained to the father by the lawyer, or that it was read aloud to the father three times; and
- The father did not obtain independent legal advice, despite being advised to do so by the lawyer. This was identified as a “key issue”. The Court was confident that any independent legal advice would have resulted in a modification or clarification of the terms.
The Court concluded that there was a presumption of undue influence, that undue influence was exercised by the son over his father, and that the transaction was unconscionable.
The Court also held that if it were necessary, the son failed to satisfy or waive the condition to obtain financing, which was a fundamental term, and constituted a repudiation of the agreement.
The Court also considered claims in malicious prosecution and conversion
There were two further separate claims considered by the Court.
First, the son alleged that the father’s report of him to the RCMP when he attended at the property to pick up his items qualified as malicious prosecution. To succeed on this claim, the son was required to prove that the prosecution was:
- initiated by the defendant;
- terminated in favour of the plaintiff;
- undertaken without reasonable and probable cause; and
- motivated by malice or a primary purpose other than that of carrying the law into effect.
The Court held that the son failed to establish #3 and #4. The father held title to the property and had the right to insist that the son leave the property, and the son failed to do so.
Second, the son sued for conversion of certain of his items that remained on the property. The father did not contest that his son was entitled to attend at the property to collect certain items. The Court did not award damages to reflect any degradation of items while they were on the property, as there was no agreement that the father would maintain or secure the son’s property.
Conclusion – the importance of properly entering into and documenting agreements between family members
This case serves as yet another example of the importance of properly documenting agreements between family members, and the importance of taking appropriate steps, including obtaining independent legal advice, to create binding and enforceable contracts. This case would have been further complicated had the father died and then the son brought proceedings, which is often what happens in estate litigation.