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Articles and Publications

February 2018

Fifty Shades of Grey: Contractual Interpretation in the World of Email Negotiation and Sex Toys

David Elmaleh
David Elmaleh
Partner

Alexander Steffen
Alexander Steffen,
Law Student


By David Elmaleh and Alexander Steffen

Even amongst sophisticated companies (or consenting adults for that matter), it is sometimes difficult to determine when a contract is entered into. On February 14, 2018, the Ontario Court of Appeal allowed an appeal in Cana International Distributing Inc. v. Standard Innovation Corporation, 2018 ONCA 145, which involved an alleged breach of a contract for, among other things, the exclusive distribution rights in retail shops, drug stores and sex toy retail outlet stores regarding a sex toy called “We-Vibe”.

This case is a cautionary tale that counterfactual negotiations – even if they are not signed at the same time – can nevertheless be considered binding.

Facts

Cana International Distributing Inc. (“Cana”) is a distributor of adult sexual health and wellness products. Prior to the exclusive distribution agreement, Cana had extensive discussions with Standard Innovation Corporation (“SIC”) with respect to the “We-Vibe” adult sex toy. Within this negotiation, two separate sub-agreements were made with respect to distribution. The first stream (“mainstream”) included the distribution rights in retail outlets and drug stores and the second stream (“sex toy industry”) included distribution at sex toy retail outlets and its environs.

The relationship between Cana and SIC did not vibe (pun intended), and litigation ensued. Cana asserted that separate agreements were reached, giving them exclusive distribution rights for both streams. The trial judge rejected both contractual claims, finding that no agreement was reached between the parties. Cana also brought claims for quantum meriut and filed a defence against a counterclaim for defamation.

The crux of the issue before the trial judge was whether emails exchanged between the parties formed a contract signed in “counterpart” with respect to the agreement. The trial judge found there was no agreement and dismissed the claim.

Outcome
The Court of Appeal disagreed, finding that an agreement existed. The Court of Appeal found that trial judge made palpable and overriding errors of fact and an extricable error in law that justified intervention vis-a-vis the above-noted agreement.

Of note, the terms of the agreement were negotiated by the presidents and/or owners of the parties. The key fact was that in August 2009, both parties exchanged emails requesting signatures on a written “term sheet”. SIC asked Cana to sign the signature page and fax it back stating that they look forward to the agreement. SIC then, later, signed the agreement and sent it back to Cana.

... both parties exchanged emails requesting signatures on a written “term sheet”.

The court concluded, in contrast to the trial judge, that the exchange of emails between August and September 2009 were two copies of the same contract that were signed in “counterpart” with the two parties, rather than two separate offers or contracts.

Consequently, the court found that the trial judges characterization of the exchange of emails as “two separate offers” as incorrect as they should have been considered one contract signed in counterpart. The court discussed the subsequent emails and SICs internal emails concluding that an agreement had been reached. This is notwithstanding minor discussions regarding potential changes to the agreement. The Court of Appeal found that the trial judge made an error of law by ignoring the legal doctrine that an agreement that is signed in counterparts forms a binding agreement as demonstrated in Foley v R., [2000] 4 CTC 2016 (TCC).1

The Court of Appeal also held that the “Term/Cancellation” term in the contract between the two parties was not fatal to the claim. This was because there was no evidence of the right of first refusal made by the parties and that there was no dispute that SIC terminated the distribution of the “We-Vibe” in March 2012. Therefore, they suffered damages for a breach of the exclusive distributorship rights between March 2012 and 2013.

With respect to the “adult industry” secondary agreement, the Court of Appeal agreed with the trial judge that there was no contract that was formed, since there was no signed-and-scanned agreement. The claim for quantum meriut was dismissed as well, as the legal test was not met in the circumstances.

Conclusion

While the origins of contract law are ancient, its principles have stood the test of time. The Court of Appeal, correctly, recognized in this case the realities of commercial life in the digital age. Counterpart agreements in Canadian law are considered binding (even if not expressly stated in the contract), and commercial entities should be acutely aware of any contracts that they may be party to.

With the increasing proliferation of new technology-based products hitting the Canadian market and considerable negotiation taking place via email, the risk of future misunderstandings as to whether a binding contract was entered into will likely continue to arise. As seen with this case, commercial entities cannot toy with any potential agreements and should be aware of any potential agreements that be made in counterpart.

Read the full review of the decision.:


1 Foley v R., [2000] 4 CTC 2016 (TCC)


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