Sometimes the Entire Agreement is not the Entire Agreement: Shelanu Inc. v. Print Three Franchising Corporation

Many commercial contracts (including agreements of purchase and sale and leases) will contain a provision stating that the written agreement constitutes the entire agreement between the parties and that any other agreements on the same subject matter (oral or otherwise) not contained in the agreement have no force or effect. These provisions are commonly known as entire-agreement or four-corners clauses. These provisions were developed in response to the common law generally recognizing oral amendments to written agreements.

The recent decision of the Ontario Court of Appeal in Shelanu Inc. v. Print Three Franchising Corporation (2003), 64 O.R. (3d) 533 (C.A.) (“Shelanu”) has limited the enforceability of entire-agreement provisions. The facts at issue were somewhat complicated. In 1987, Brian Deslauriers, through BCD Print Inc. (“BCD”), purchased a print store franchise from Print Three Franchising Corporation (“Print Three”). In 1989, Deslauriers and his wife purchased Shelanu Inc. (“Shelanu”), which at that time operated two Print Three stores. In 1991, Shelanu closed one of its stores. No documentation formalizing this arrangement was executed or requested by either of the parties.

In 1995, Print Three opened a business which competed with the remaining franchises. Print Three orally agreed that BCD could close its store and proposed that BCD combine its operation with the remaining Shelanu store. Although the Deslauirers initially were hesitant to enter into this arrangement, they eventually agreed and sent a letter to Shelanu’s solicitor confirming their agreement. Shortly thereafter, the relationship between Shelanu and Print Three began to deteriorate, and Print Three purported to deny the termination of the BCD store and continued to treat the operation as two stores for royalty rebate purposes. Shelanu sent a letter to Print Three stating that it considered the franchise agreement terminated, but continued to operate the remaining franchise and pay royalties until the franchise ended pursuant to the terms of the franchise agreement.

Shelanu brought an action for a declaration that the franchise agreement was terminated as of the date of the notice of termination, for repayment of royalties and payment of overdue royalty rebates. Print Three counterclaimed for damages for breach of contract and for an injunction requiring Shelanu to comply with the termination provisions of the franchise agreement. Print Three argued that the oral agreement was not enforceable because the franchise agreement contained exclusion clauses which had the effect of limiting the parties’ duties to each other to those set out in the agreement. One of the exclusion clauses was an entire-agreement provision which read as follows:

The trial judge found in favour of Shelanu holding, among other things, that the attempt by Print Three to resile from the oral agreement and the withholding of royalty rebates on that basis amounted to a breach of contract. Although the franchise agreement contained an entire-agreement provision, the oral agreement was enforceable because the parties had not been enforcing their legal rights throughout the course of their dealings with one another. It was therefore not open to Print Three to insist on compliance with those legal rights.

Print Three appealed, arguing that the trial judge had erred in law in holding that the oral agreement was enforceable. The Court of Appeal held that the oral agreement was enforceable and not precluded by the exclusion clauses in the franchise agreement. When interpreting an exclusion clause, a court must first consider whether the exclusion clause covers the present circumstances. In addition, exclusion clauses are interpreted contra proferentum, meaning that if there is any doubt as to the meaning of the clause, the benefit of the doubt goes to the party that is disadvantaged by it. If the clause does cover the present circumstances, it is enforceable unless it would be unconscionable or unless the clause is unfair, unreasonable or unconscionable.

Having established this framework of interpretation, the Court held that the terms of the oral agreement did not conflict with the franchise agreement. The entire-agreement clause did not apply because, the Court reasoned, the rights and obligations of the parties to the oral agreement were not “matters herein” and were not “created” by the franchise agreement between Shelanu and Print Three. Rather (and surprisingly), the Court saw it as a new agreement that was not subject to the terms of the franchise agreement (including the provision requiring all agreements to be in the franchise agreement). Further, the language used in the provision was limited to the agreement between the parties at the time the franchise agreement was signed. The Court held that the entire-agreement clause could not be read to unequivocally address any and all future contractual relations between the parties.

Although the exclusion clauses did not apply, the Court went on to consider whether it would have exercised its discretion not to enforce the exclusion clauses had they applied. The Court reasoned that, where the parties to an agreement have, by their conduct, amended the written agreement so that it no longer represents their intention, the court will refuse to enforce the written agreement because to do otherwise would not give effect to the intention of the parties. The intention of the parties is the governing factor in determining contractual rights and obligations, and consequently where there is a subsequent oral agreement amending a written agreement, not giving effect to the oral agreement would defeat the intentions of the parties. Enforcing an exclusion clause that is contrary to the reasonable expectations of the parties would be unreasonable. Accordingly, even if the exclusion clauses had applied, the trial judge was entitled to refuse to enforce them.

There may be a distinction available for certain agreements pertaining to real property. If the agreement at issue was intended to create an interest in land or is a lease or an agreement to lease, the Statute of Frauds may require that the terms be documented in writing. However, even then, no form of agreement is required (and correspondence has, for example, been held to be the required writing) and the courts have recognized acts of part performance by one party (relying on the existence of the oral agreement) as sufficient to enforce an oral agreement.

For parties seeking certainty, Shelanu represents a drafting challenge. A typical entire-agreement provision could state on even stronger terms that any future dealings by the parties on the subject matter or any related subject matter must be by written amendment to the agreement. However, even then the decision in Shelanu is a bold reminder that while we strive for certainty, values such as fairness, equity and justice underlie contractual interpretation and enforcement.

This article appeared in Real Estate Brief February 2004.  To subscribe to this publication, visit our Publications Request page.