Legal Blog

Left Hand – Right Hand

The case of Sherwood Design Services Inc. v. 872935 Ontario Limited (1998), 39 O.R. (3d) 675 (C.A.) is fascinating, not for the law on which it expounds but as an illustration of what solicitors ought not to do.

Facts

Individuals executed an agreement of purchase and sale in trust for a corporation to be incorporated. The solicitor handling the purchase (the “Associate”) notified the corporate department of his law firm that he needed a numbered company for the transaction. A corporate law clerk assigned to the transaction a shelf corporation, which had been incorporated after the date of the execution of the agreement. That corporation, a numbered company, had been incorporated using the name of a partner of the law firm as the sole director and officer. The Associate then wrote to the solicitor of the vendor and notified him that a specified numbered company “has been assigned by (his law firm) as the corporation that will complete the asset purchase”. The corporate clerk later prepared appropriate minutes to organise the corporation and to adopt the agreement. The minutes were sent to the individuals for execution but were never executed. 

     The transaction did not close. The vendor re-sold the assets at a loss. In the meantime, the Associate then wrote a memo to the corporate department advising them that the minutes whereby the corporation was to be transferred to the individuals were never executed and the transaction did not close. He advised that the numbered company could therefore be put back on the shelf for re-use. The law firm subsequently transferred the same numbered company to another client of the firm.

Of course, the vendor not only sued the individuals for its loss, it sued the numbered company. The clients who were given the numbered company by the law firm found that their company, which was by then an ongoing corporation with assets, was involved in a law suit. This is the fascinating aspect of the case. How could the law firm have done what it did? A corporation, in this situation, is an insurance policy. You do not assign the insurance policy to another client. The lawyers were not third partied in this action but you can bet that LPIC was representing the numbered company and will foot the bill if there is a loss.

Issue

The actual issue is almost anti-climactic. It is a simple one. Section 21 of the Business Corporations Act provides that a corporation will be deemed to be a party to a pre-incorporation contract if, within a reasonable time after incorporation, it adopts the contract as its own. In such a case, the individual ceases to be bound by the contract.

The question was whether the letter by the associate was an adoption of the contract, even though none of the corporate resolutions were executed and the partner, who was actual director and officer of the corporation, knew nothing about the letter.

Split Decision

The trial judge decided that that the letter was not sufficient evidence of adoption of the contract and dismissed the action. The court of appeal in a 2-1 split reversed. The minority decided that a letter written by someone who had never obtained instructions from the sole officer and director of the corporation was not an adoption by the corporation. The majority noted that section 21 does not specify that there is only one mode of adoption. It noted that section 21 does not call for adoption, it calls for an intention to adopt and held that the letter was sufficient evidence of that intention.

As a result of this decision, a client who pays a law firm to supply it with a clean corporation is saddled with a judgment for $219,000, interest and costs. Guess who will pay it?