Court of Appeal Decision of the Week

Contracts/Leases: Collateral Agreements

Case: Skylink Express Inc. v Innotech Aviation, 2018 NSCA 32 (CanLII)

Keywords: Hanger; lease extension; collateral agreement

Synopsis:

The Appellant, Skylink Express Inc., leases hangar space and office facilities from the Respondent, Innotech Aviation, pursuant to a lease agreement. Negotiations begin to extend the lease. Between 1999 and 2011, the lease is extended a number of times – each time for increased space in the Respondent’s facility. As part of these particular negotiations, the Respondent agrees to credit the Appellant $27,121.23 for unused hanger space and encourages the Appellant to enter into an extension.

Prior to the signing of the lease extension, Mr. Morgan (negotiating on behalf of the Appellant) emails the Respondent (represented by its Vice President and General Manager, Mr. Bédard) and advises he has “one question left”. The email exchange is as follows:

Mr. Morgan:

We only have one question left. If we were to change the type or number of aircraft we have or need more office space would we be able to do an Ad Hoc Addendum to the lease when that event happened?

Mr. Bédard:

Yes we would just do an addendum reflecting that change to ensure we don’t have the same problem. But it would be important to let us know ASAP so we can reflect the changes. If its only temporary I would rather leave everything as is and agree to a temporary rate via E-Mail when it comes to extra aircrafts we can just agree on a daily rate.

Subsequent to this exchange, the Appellant executes a final addendum to the lease with retroactive effect. Following a significant downturn in its business, the Appellant decides to remove the five aircraft it keeps at the Respondent’s facility and stops paying rent. The Appellant argues the email discussion between Mr. Morgan and Mr. Bedard constitutes a collateral contract allowing it to unilaterally reduce the number of planes stored in the Respondent’s hanger.

The Respondent seeks a declaration the Appellant is in breach of the lease agreement. The Application Judge finds no collateral contract; concludes the Appellant breached the lease agreement. The Court of Appeal agrees; finds the email exchange lacks certainty of terms and intention.

Importance:

With respect to standard of review, the Court of Appeal noted the question on appeal (which it framed as being whether the Application Judge erred in concluding no collateral contract was formed) was a question of mixed law and fact. (See paras. 24, 25).

Citing McPhee v. Gwynne-Timothy, 2005 NSCA 80 (CanLII), the Court determined this question should be reviewed on the palpable and overriding error standard, defined as follows: “An error is palpable where it is ‘clear or obvious’. 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’”. (See para. 25).

The decision is important, in part, because it affirms the basic requirements for creating a binding collateral agreement. Counsel for the Appellant and the Court of Appeal referred to G.H.L.Friedman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell 2011) at pp. 513-13 on the subject of collateral agreements. (See paras. 28, 43).

Broadly speaking, to establish a binding collateral agreement, one must show more than an understanding or expectation. Rather, evidence as to certainty of terms and an intention to enter a binding contractual agreement is required. According to G.H.L. Friedman, that means “the statement purporting to be the contractual promise in such a collateral contract must amount to more than a broad, general inducement to enter into the main contract”, it must “constitute a definite, contractual undertaking…meant to be taken seriously by the party to whom it is made”. (See para. 28).

In this case, the dispute was over the significance of the email exchange between Mr. Bédard and Mr. Morgan. The Court of Appeal found no reason to interfere with the Application Judge’s conclusion that a reduction in aircraft to zero was not contemplated by either party at the time of the email exchange and cited evidence the Appellant had, itself “not anticipated” the dramatic change in its business at the time of the email exchange or the signing of the lease addendum. (See para. 34).

Furthermore, the Court of Appeal determined that, even if the Application Judge was in error with respect to whether there had been reductions in space rented by the Appellant, such an error was “…not one which would have affected the result” since both the evidence and conduct of the parties suggested “…whenever a change to the Lease was sought the parties negotiated the terms and entered into a written agreement”. (See para. 42). As such, the Court of Appeal concluded

The April 27, 2015 email exchange was not and could not be a collateral contract.  There was no certainty of terms nor was there any intention to enter into such an agreement.  Referring back to the excerpt from Friedman, supra, Skylink has not produced the kind of evidence as to certainty of terms and intention to enter into a binding contract to establish the existence of a collateral contract. (See para. 43).

Counsel for the Appellant: Patrick O’Neil (Burchell MacDougall LLP, Elmsdale)

Counsel for the Respondent: John Shanks and Jeff Waugh (Stewart McKelvey, Halifax)

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Posted: Wednesday, April 18, 2018