Legal Blog

Seal of Approval

The seal keeps raising its ugly head. Without a doubt, all lawyers understand that the affixing of a seal renders a document enforceable without the necessity of showing consideration. Many would also know that a seal may convert a simple contract into a specialty, resulting in a longer limitation period. However, there are three other effects of a seal, one of which is very important. It was discussed in Friedmann Equity Developments Inc. v. Final Note, [2000] S.C.R. 842.

Other Uses

As part of our history lesson, here are the other effects:

1.   “Where a debtor covenants in a deed to pay a debt antecedently based in simple contract, the right to sue in debt merges in the right to sue on the covenant and is extinguished in law.”

2.   “In an action on a deed, a statement in the deed may operate by estoppel against the maker of the statement.”

Before we discuss the third effect, let’s stop here. Our reaction to the first two effects was simple: what are they and will we ever see them? Our equally simple answers are: We’re not sure and we doubt it. Therefore, for purposes of this exercise, we are ignoring them.

The third effect, although probably most lawyers never knew about it, reverses a rule of agency. Under agency law, an undisclosed principal can be sued by the person who enters into a contract with the agent, if the agent was acting within the scope of the agent’s actual authority. However, if the contract was under seal, the undisclosed principal is not liable for an alleged breach of that contract. This is known as the “sealed contract rule.”

Real Life

A corporation executes a mortgage under its corporate seal. There are no guarantees. The mortgage goes into default. The mortgagee then alleges that the corporation is holding the lands, and had executed the mortgage, as the bare trustee for a group of individuals and sues the individuals as undisclosed principals. The individuals then third party their lawyer. The individuals and the lawyer bring a motion for a determination of law. They argue that the mortgage was under seal and the sealed contract rule applies. The mortgagee argues, among other things, that the sealed contract rule is an historical anomaly and should be abolished.

The motion is dismissed by the motions judge; leave to appeal to the Divisional Court is granted; the Divisional Court reverses, allows the motion and dismisses the action; the Court of Appeal dismisses the mortgagee’s appeal; and the SCC grants leave to appeal. Big legal bucks.

Corporate Seal

The mortgage was executed under corporate seal; is this “under seal?” The courts all agree: the answer is maybe. Since a corporate seal is the equivalent of the signature of a natural person, affixing it is not necessarily the intention to create a sealed instrument. This can only be determined by the intention of the parties and “the true construction of the document in question.” Translation – uncertainty. It was for this reason that the motion was unsuccessful before the motions judge.

Land Registration Reform Act

Any mortgage registered in the form required under the above Act is, pursuant to section 13 of it, deemed to be a document executed under seal. To all of the appellate courts, including the SCC, this was a conclusive answer as to whether or not the mortgage in this case was a mortgage under seal.  It was a mortgage registered under the Act and it was therefore executed under seal. Accordingly, the sealed contract rule applied and unless the courts abolished that rule, the undisclosed principals could not be liable under the mortgage.

Abolition

The SCC first noted that the main agency rule, not just the exception to it, had been under attack. Some commentators liked it; others did not. However, the court also noted that the rule was firmly established. Undisclosed principals could avoid the application of the rule either by ensuring that an express term of the contract stipulated that only the parties to it could be liable or by executing the contract under seal.

The practice of sealing a contract is centuries old and was used as a means of authenticating a document when most individuals could not sign their own name. The mortgagee therefore argued that the sealed contract rule lacked a current principled justification. The SCC’s answer: so what.

The SCC stated that before there is a change in the common law, the change must be necessary to keep the common law in step with the evolution of society, the change must be incremental, and the change must be capable of assessment.

The SCC noted that a rule might be anachronistic while serving a useful commercial purpose. It felt that the seal continued to have a useful purpose in our law. Further, if the sealed contract rule were abolished, all of the other rules regarding seals would also have to be abolished. This would be a fundamental reform rather than an incremental change and would call into question all other technical common law rules that do not have a modern day rationale. Finally, abolition would affect an untold number of prior rights. What would happen to all prior contracts under seal? Would they all lose their intended effect?

The SCC refused to abolish the sealed contract rule. Accordingly, the mortgagee was unsuccessful.