ESTOPPEL BY CONVENTION:  Recent Updates from the Ontario Court of Appeal

A recent decision by the Ontario Court of Appeal in Fram Elgin Mills 90 Inc. v Romandale Farms Limited, 2021 ONCA 201 (“Fram v. Romandale”), sheds light on the power and scope of an equitable remedy known as estoppel by convention.

Estoppel by convention may arise where parties have agreed that certain facts are deemed to be true and which form the basis of the transaction they are about to enter. Estoppel by convention prevents a party from denying or resiling from the parties’ shared assumptions if it would be unjust and there is evidence of detrimental reliance by one or more of the parties. 

Background

The facts in Fram v. Romandale are complex and involve four actions with competing claims to undeveloped lands. The respondent, Romandale Farms Limited (“Romandale”), was the sole owner of two neighbouring farms in Markham, Ontario (“Land”). In 2003, Romandale sold five per cent of its interest in the Land to Fram Elgin Mills 90 Inc. (“Fram”). Romandale and Fram entered into a number of agreements relating to the Land, including co-ownership agreements ("COAs").

In 2005, Romandale entered into an agreement with Jeffery Kerbel (“Kerbel”), consisting of several transactions respecting properties in Markham ("2005 Agreement"). One of the transactions was the sale of Romandale's 95% interest in the Land to Kerbel which was conditional on either Fram's consent to the sale or Romandale's exercise of the buy-sell provisions under the COAs.

In 2007, Fram sued Romandale and Kerbel, claiming that the 2005 Agreement breached the COAs concerning Romandale’s interest in the Land. Fram commenced another lawsuit in 2008 against Romandale and Kerbel, alleging that the 2005 Agreement violated a separate contract between Fram and Romandale.

In 2010, the three parties reached an agreement in principle to settle the 2007 and 2008 actions, however Romandale later withdrew from the parties’ settlement. Despite this, Fram and Kerbel settled the matters between themselves and entered into a settlement agreement (“Settlement Agreement”).

In 2014, Romandale sued Kerbel claiming Kerbel breached the 2005 Agreement by taking steps to reduce the amount of developable acreage on the Land.

In 2015, Romandale took the position that, as a result of the Settlement Agreement, Kerbel had repudiated the 2005 Agreement and Romandale was therefore no longer bound by the terms of the 2005 Agreement. Kerbel subsequently sued Romandale for breach of contract.

The Trial Judge ruled that Kerbel had repudiated the 2005 Agreement through the Settlement Agreement, that Romandale had accepted the repudiation, and that Romandale was excused from performing its remaining obligations under the 2005 Agreement.

The issue on appeal was whether the Trial Judge had erred in concluding that Romandale was not bound by the 2005 Agreement. The Court of Appeal reversed the Trial Judge’s decision and allowed the appeal, finding that inter alia the doctrine of estoppel by convention prevented Romandale from changing its position pursuant to the 2005 Agreement.

Estoppel by Convention

Estoppel by convention is an equitable remedy that operates where parties share certain assumptions that each party deems to be true and which form the basis of the parties entering into an agreement. The remedy allows the Court to “estop” a party from acting against the parties’ shared assumptions where there is evidence of reliance and where detriment will result. 

The following criteria form the basis of the doctrine of estoppel by convention, which were set out by the Supreme Court of Canada in Ryan v. Moore, 2005 SCC 38:

  • The parties’ dealings must have been based on a shared assumption of fact or law: estoppel requires manifest representation by statement or conduct creating a mutual assumption. Nevertheless, estoppel can arise out of silence (impliedly);
  • A party must have acted in reliance on such shared assumption, its actions resulting in a change of its legal position; and,
  • It must also be unjust or unfair to allow one of the parties to resile or depart from the common assumption. The party seeking to establish estoppel therefore has to prove that detriment will be suffered if the other party is allowed to resile from the assumption since there has been a change from the presumed position.

A. Shared Assumption of Fact or Law

In Fram v. Romandale, the Court of Appeal clarified that a Court must decide “whether there was sufficient certainty and clarity in the shared assumptions to give rise ‘to an enforceable equity.’” The crucial requirement for estoppel by convention is that at the material time all of the parties must be of "a like mind". In this case, the Court found that the parties shared the assumption that Romandale would continue to comply with its obligations under the 2005 Agreement after Fram and Kerbel entered into the Settlement Agreement.

B. Reliance on the Shared Assumptions

In this part of the analysis, the Court found that “[f]or the purpose of estoppel by convention, reliance requires a finding that the party seeking to establish estoppel changed its course of conduct by acting (or abstaining from acting) in reliance on the shared assumption.” Fram and Kerbel satisfied the reliance criterion because they entered into the Settlement Agreement in reliance on the parties’ shared assumptions.

C. Evidence of Detriment

At this stage of the test, the Court determines whether it would be unjust or unfair to allow a party to resile from the assumptions shared between the parties prior to them entering into an agreement. The Court of Appeal concluded that Fram and Kerbel would suffer a detriment if Romandale withdrew from its obligations under the 2005 Agreement because both Fram and Kerbel gave up significant claims against Romandale as a result of entering into the Settlement Agreement. 

Key Takeaways

Estoppel by convention is a relatively rare form of estoppel and it will be interesting to see if the decision in Fram v. Romandale is appealed to the Supreme Court of Canada.

For now, this case provides further clarity on the appropriate circumstances where the Court will apply this equitable remedy. Specifically, estoppel by convention does not depend on all the parties having entered into a contract with one another. Rather, the question is whether the parties’ dealings, prior to entering into a contract, were based on certain shared assumptions of fact or law and whether there is evidence of detrimental reliance by one or more of the parties.

Although the Court of Appeal found that Romandale was not a party to the Settlement Agreement, it was actively involved in the negotiations leading up to the Settlement Agreement and exchanged correspondence with Fram and Kerbel which demonstrated the parties’ shared assumptions.

Lawyers and parties to a contract should therefore be particularly aware of the shared assumptions that take place prior to entering into an agreement as they could ultimately affect the parties’ contractual rights and obligations.

For more information about the article, please contact LN associate Dawit Debssou.