Can a Letter of Intent Seal the Deal in Saskatchewan?

Picture this: two farmers sketch out plans to sell several sections of land over a cup of coffee. On a spare piece of loose-leaf paper, they jot down their intentions, shake hands, and head back to the fields.

But as the dust settles and the coffee wears off, one party starts having second thoughts. Perhaps the seller decides they want to keep the land in the family, or the buyer realizes they would rather use the money for next season’s inputs. But the other party still wants to enforce the deal they thought they had reached. Was their handwritten note a legally binding contract to sell the land?

Can an informal document—whether we call it a “Letter of Intent” (LOI) or a Memorandum of Understanding (MOU) or something else—constitute a binding contract? Like most legal questions, the answer is: “It depends.” Let’s dive in.

Agreement to Agree or Binding Contract?

At its core, a contract is any agreement that creates legally enforceable obligations between parties. While contracts are often formal and written, a handshake deal, a scribbled note, or even an oral promise can suffice—so long as there is mutual agreement and an exchange of value.

However, an important caveat exists: an agreement to make an agreement in the future is not enforceable. Courts simply do not enforce promises to negotiate or contracts to make a contract.

Whether a Letter of Intent is binding or merely a preliminary step depends on its content and the circumstances surrounding its creation. The key question is whether the parties intended to be bound or were simply negotiating, testing out options, and working toward an eventual agreement. Courts assess this by looking at the document and the parties’ conduct objectively: would an outside observer, reading the document and seeing the parties’ actions, believe they had entered a binding contract with one another?

The Framework: Calvan Consolidated Oil & Gas Co v Manning, [1959] SCR 253

Seventy years ago, the Supreme Court of Canada set out a framework for analyzing this question which courts still find persuasive today, in Calvan Consolidated Oil & Gas Co v Manning, [1959] SCR 253. In that case, two parties drafted an LOI outlining the key terms of a prospective partnership in oil and gas development. Although it was comprehensive, the LOI anticipated that the parties would eventually enter into a future, more formal agreement.

When the deal fell apart, one party argued the LOI was just an outline of a preliminary understanding, not a binding contract. The Supreme Court disagreed. Justice Judson, writing for the Court, explained that an informal document like an LOI can constitute an enforceable contract, based on several factors:

1. It contains all the necessary terms for the agreement to work.
2. Those terms are sufficiently clear and certain.
3. The parties acted as though they intended to be bound.
4. A formal contract was seen as a mere formality—not a prerequisite to enforceability.

Let’s break each of these factors down.

1. Essential Terms

For an LOI to be binding, it must include all the critical terms for the type of transaction at hand. For a land sale, for example, the document only needs to specify the property, the parties, and the price.

For example, in Darnley v Tennant, 2006 ABQB 575, an Alberta court found that an LOI for the sale of land was capable of being a binding contract because it included these essential terms, even though certain details like the subdivision of the land were still unresolved.

On the other hand, if an LOI lacks the kinds of provisions that would be necessary for the type of agreement the parties were proposing to enter into, it cannot constitute a binding agreement. In an Ontario case called Bawtiko Investments Ltd. v Kernals Popcorn Ltd., (1991), 79 DLR (4th) 97 (Ont CA), the parties made an oral agreement to open a popcorn franchise. When the deal failed, the court found that an oral agreement could not possibly have contained all of the important details that a franchise agreement would require. So in that case, no binding contract existed.

2. Sufficient Certainty

The terms in an LOI must also be clear and precise. Courts will not enforce agreements with vague or ambiguous terms, as these signal that the parties have not actually finalized their deal.

In the Saskatchewan case of Lethal Energy v Kingsland Energy Corp., 2014 SKQB 10, an MOU that purported to be binding was vague regarding an aspect of the agreement dealing with the purchase by one company of the other’s shares. The court ruled the document was unenforceable because this vagueness showed there was no final agreement—despite the document’s claims of its binding effect on the parties.

3. Intent to Be Bound

The parties’ actions matter as much as their words. Courts analyze intent objectively, looking at the entire context rather than simply what the parties say they intended.

For instance, in Wallace v Allen, 2009 ONCA 36, the parties signed an LOI for the sale of a business. They held meetings, exchanged documents, and even introduced the prospective buyer to the employees to discuss how the business would operate under new management. But when the deal fell apart before a final contract was signed, the seller claimed the LOI was just a non-binding agreement to agree. The court disagreed, finding that the parties’ conduct demonstrated they believed they had already entered a binding contract.

4. The Role of a Formal Contract

If an LOI refers to a future formal agreement the parties plan to write, courts examine whether that document is a condition for enforceability or just a formality. In other words, the court will ask if the parties thought a future contract was a requirement before a deal would exist, or if they thought that was just the process through which their already-existing deal would proceed.

In Calvan Consolidated Oil & Gas Co v Manning, the LOI stated the parties would later sign a formal contract “subject to our mutual agreement.” The Supreme Court found this language described the manner of formalizing an already binding agreement, not a condition precedent to enforceability.

Similarly, in 1998726 Alberta Ltd. v KIPS Land Development Ltd, 2018 ABQB 117, the court found that references to future agreements did not undermine the binding nature of an LOI dealing with real estate development. As a result, one party was entitled to sue the other for failing to perform its side of the bargain, and to obtain full ownership of the property.

Lessons for Aspiring Dealmakers

In Saskatchewan and across Canada, Letters of Intent live in a legal grey zone. Like any relationship, the parties should be clear about the level of commitment they are comfortable with before they enter into them. And, again like any relationship, clarity in both communication and action is vital. To avoid disputes, parties should explicitly state what they intend and then act in a manner consistent with that statement, while being clear about what is essential to the relationship—and whether a binding relationship even exists.

When drafting a Letter of Intent, the devil is in the details—and those details might just bind you. At McDougall Gauley, our commercial team has extensive experience preparing and advising on them, and our litigation team has extensive experience navigating disputes involving LOIs and similar agreements. If you have questions or need assistance, contact a member of our team today.