OVERVIEW
A recent (and ongoing) case before the Ontario Superior Court of Justice and the Ontario Court of Appeal illustrates the hazards that can befall parties in the midst of commercial negotiations.
Binding and enforceable agreements can be formed in the absence of signatures on the execution version of a contract. Parties should be cautious about the language used in meetings and email exchanges during the course of negotiations.
In Lithium Royalty Corporation v. Orion Resource Partners,1 the Court found that the parties to a negotiation involving an overriding gross royalty interest in a Nevada lithium mine (Royalty) had agreed to the essential terms of the deal, and thus formed a binding contract, despite the lack of an executed term sheet. The Court also found that certain entities, over which it would not otherwise have any jurisdiction, had voluntarily attorned to its jurisdiction by making fulsome submissions without raising the issue of jurisdiction. The trial of this matter proceeded only on liability, with the remedy trial deferred to a later date.
The Orion defendants appealed that decision.
Around the same time, Lithium Royalty Corporation brought a motion against the Orion defendants to preserve the Royalty and other assets pending the remedy trial.
The Orion defendants sought to stay both the preservation motion and remedy trial pending its appeal on the liability decision. However, the Court of Appeal2 allowed only a partial stay of proceedings and enforcement as against two of the respondent entities, and it declined to stay the entire underlying action pending appeal. Instead, the appeal was stayed pending the completion of the underlying proceedings.
BACKGROUND FACTS
The Thacker Pass mine in Nevada is one of the world's largest lithium mining projects. Being an essential component in batteries, lithium is quickly becoming a key global resource commodity.
Orion Resource Partners and related entities (collectively, Orion) had previously launched two bidding processes to sell a royalty interest in Thacker Pass in 2019 and 2020. Both processes ultimately terminated with no successful bid, though Lithium Royalty Corporation (LRC) bid both times.
Orion and LRC again entered negotiations in January 2021, when LRC offered US$20 million for 100% of the Royalty. Negotiations culminated with a video conference on January 20, 2021. The contents of this discussion were disputed by LRC and Orion.
Following this video conference, LRC's president sent an email to Orion's representative, stating:
We accept your offer of USD$18.7m in cash for 85% of the Thacker Pass royalty held by Orion. On closing, the 85% and 15% portion of the royalties shall be divided into two separate royalties with any repayment split accordingly. Binding term sheet to follow.
Orion's representative replied via email, "OK, sounds good."
A term sheet was sent to Orion by LRC for comment, which was marked up and returned by Orion.
A few days later, a third-party company, Trident Royalties PLC (Trident), made an unsolicited offer for the Royalty. Orion informed LRC of this and the fact that it was considering the unsolicited proposal. LRC replied that it considered their agreement binding and enforceable.
Two days later, LRC returned the term sheet that Orion had revised, but Orion did not sign it. Instead, Orion entered a deal with Trident, selling a 60% interest in the Royalty.
PROCEDURAL HISTORY
LRC commenced an application in the Ontario Superior Court of Justice seeking a declaration that an enforceable contract existed between it and Orion Resource Partners and specific performance of the transfer of an 85% interest in the Royalty.
The Jurisdiction Motion
Before the matter proceeded to trial, LRC sought to add Trident as a respondent to the proceeding because Trident had acquired an interest in the Royalty that infringed upon the 85% interest that LRC claimed.3
Trident resisted being added, arguing that the Ontario Court had no jurisdiction over it or the contract between Orion and Trident for the sale of the 60% interest in the Royalty.
In order to find jurisdiction over Trident, LRC needed "to show that it has a good arguable case for the assumption of jurisdiction, or that its case has 'some chance of success.'"
The Court considered the four presumptive connecting factors for a claim in tort, as set out in Club Resorts Ltd. v. Van Breda,4 any of which create a (rebuttable) presumption of jurisdiction:
- the defendant is domiciled or resident in the province;
- the defendant carries on business in the province;
- the tort was committed in the province; or
- a contract connected with the dispute was made in the province.
Ultimately, the Court concluded that: (i) none of the four Van Breda factors applied; (ii) the factors that were argued did not meet the standards established in Van Breda; and (iii) no submissions were made on establishing a new presumptive connecting factor.
The Court considered, but rejected, an argument that the underlying contract was made in Ontario because the critical email correspondence was exchanged through a server in Toronto.
The Liability Trial
LRC's application was converted to an action and the parties agreed to bifurcate the issue of liability and remedies. The liability trial proceeded in December 2022.
A number of procedural and substantive issues were addressed at the trial:
LRC's Motion to add Other Orion Entities to Correct a Misnomer
At the outset of the trial, LRC applied for leave of the Court to add additional defendants within the Orion group, which were the actual holders of the Royalty and the entities that held the shares of those holding companies. This is because the initial defendant named by LRC in the proceeding was simply a business name and not a legal entity.
The proposed Orion defendants resisted the motion on the basis that LRC knew, or ought to have reasonably known, which entities held and controlled the Royalty.
The Court nevertheless granted LRC leave to correct the misnomer, finding that it was reasonable for LRC to have named Orion as the respondent and not have discovered that the Royalty was held by companies under Orion until after commencing litigation. The Court was satisfied that LRC had satisfied the so-called "finger litigating" test — it intended to name the companies, and the companies knew they were the intended defendants.
Whether the Court had Jurisdiction Over the Orion Defendants
Orion also argued that the Ontario Court lacked jurisdiction over it, and that the only entity that had attorned to the Court's jurisdiction was Orion Resource Partners (the nonlegal entity) and not the newly named defendants.
The Court rejected this argument, finding that although it lacked jurisdiction simpliciter over the Orion entities (for similar reasons as it lacked jurisdiction over Trident), the relevant Orion entities had voluntarily attorned to the jurisdiction of the Court:
The affidavit evidence submitted by [Orion Resource Partners] entirely applied to the position of the proposed Orion respondents. It is obvious that despite being a non-suable entity, instructions were being provided by a competent entity to fully defend this matter on the merits of whether or not a contract was validly formed and is enforceable. There is no suggestion that the proposed Orion respondents would have defended differently or provided different evidence than what was before this court. It appears that the proposed Orion respondents, as the holders of the Royalty at the time of this impugned transaction, made a tactical decision to see whether they could have this matter disposed of, in their favour, by this court.
Was There a Valid and Enforceable Contract?
The main factual disagreement as to whether an enforceable contract was formed between Orion and LRC related to:
- whether Orion made a counter-offer to LRC during the January 20, 2021 video conference;
- whether Orion's portfolio manager stated that he had the authority to make this binding counter-offer to LRC; and
- what the essential terms of the alleged contract were.
LRC claimed that following the January 20, 2021 video conference, there was a mutual intention between the parties to enter a binding agreement, and the essential terms were agreed upon.
Orion took the position that: (i) LRC misconstrued Orion's intentions amid ongoing discussions; (ii) the parties never agreed on the essential terms; and (iii) in any event, a comprehensive signed contract is an essential term of any royalty agreement, as per customary industry practice.
Considering the surrounding circumstances and the testimony of individual witnesses, the Court found that a binding and enforceable contract was formed. LRC's email sent after the January 20, 2021 video conference contained the essential terms of the deal, which were settled on that call, namely, price, the asset being traded (the Royalty), the percentage of the Royalty being acquired, the form of consideration, the lack of requirement for due diligence and LRC's waiver of conditions.
The fact the initial term sheet that was circulated contained conditions and other clauses counter to the deal the Court found was reached was not prohibitive because the essential terms were correctly stated, and "the balance of the terms were essentially boilerplate terms."5 Likewise, a clause in the term sheet stipulating that the underlying agreement would become effective upon delivery of Orion's signed copy was given little weight as it was a standard contractual term inserted by counsel and not reviewed by LRC's representative in the haste of completing the deal. The time-sensitive nature of the deal was a significant factor. Notably, Orion's fund holding the Royalty was nearing maturity, and there were two prior failed bids that predated the 2021 negotiations. These were external motivating factors for Orion to sell the Royalty interest in a timely manner. The speed of the transaction and resulting lack of formalized terms were found to be understandable from a commercial efficacy perspective given the circumstances. The Court reviewed conflicting expert evidence on customary practices in the sale of royalty interests but found that evidence to be of little assistance in resolving the issue.
The fact that Orion ultimately did not sign the term sheet was inconsequential because the essential terms were concluded in the prior email from LRC accepting Orion's offer and evidenced by Orion's response confirming LRC's acceptance. The binding term sheet was revised by Orion and accepted by LRC, without change or conditions, demonstrating a meeting of the minds not only on the essential terms but the standard non-essential terms as well. The comprehensive written agreement and related transactional documents were to follow, but their execution was not itself part of the essential terms of the contract.
Finally, the Court considered whether the contract was actually enforceable under Nevada's Statute of Frauds, given the signature requirements raised by that law. This was complicated by the fact that it is an open question as to whether mineral royalties are real property interests under Nevada law (and thus whether the Statute of Frauds applies at all). The Court considered expert opinions tendered by each party, but it concluded that mineral royalties would probably be considered personal property interests, or alternatively, if they are real property interests, that the electronic signatures found in the emails exchanged between the parties were adequate to confirm the contract.
The Stay of Appeal Motion
Following the liability decision (but prior to the commencement of the remedies hearing), Orion brought a motion for a stay of the proceedings pending its appeal of the liability decision (specifically on: (i) the finding that certain Orion entities attorned to the jurisdiction of the Court; (ii) the trial court permitting LRC's amendment motion to amend the defendant parties; (iii) the granting of a judgment in vague terms; and (iv) the finding that there was a contract without clarifying essential terms or which entities comprised the Orion group). The Court of Appeal granted a partial stay of proceedings, which permitted the action to continue but prevented enforcement of the action against two of the Orion entities.6
The determination to grant a stay was informed by the consideration of three non-exhaustive factors adapted from RJR-MacDonald:7 (i) whether there was a serious question to be tried; (ii) whether the moving party would suffer non-compensable harm if the stay was not granted; and (iii) the balance of convenience. The Court of Appeal was satisfied that some of the grounds of appeal were not frivolous or vexatious, and, therefore, there was a serious question to be tried. The Court placed significant weight on this factor with respect to the attornment of two of the Orion entities, given that the trial decision did not address issues of corporate separateness or lifting the corporate veil. It was this consideration that outweighed the other factors with respect to these two entities and persuaded the Court that a partial stay should be awarded but only for these two entities.
The Court did not accept that Orion would suffer irreparable harm without the stay. Orion argued that if the proceedings were not stayed, then any step it or its related entities take in these proceedings beyond challenging jurisdiction could constitute attornment, thereby rendering its attornment ground of appeal moot. However, that risk was diminished by LRC's undertaking not to rely on participation in the remedies phase as a further act of attornment, the trial judge having already determined that the Orion respondents had attorned in the trial decision, and the grounds of appeal for that finding not being especially strong.
The Court also found that the balance of convenience strongly favoured rejecting the motion for a stay of proceedings because there was evidence that Orion was dissipating the Royalty interests related to the contract in the proceedings.
The Preservation Motion
After the release of the decision in the liability trial, LRC sought an injunction to prevent Orion from dissipating the Royalty to ensure that it was available for judgment (unpublished decision of Justice Chalmers, dated January 3, 2024). The Court applied the same three-part RJR-Macdonald test for an interlocutory injunction and was satisfied that the three factors were met. In light of the previous findings that there was a binding contract between LRC and Orion, and that Orion had attempted to sell the Royalty while the litigation was ongoing, the Court found that there was a serious issue. The court also found that LRC would be irreparably harmed if the Royalty were sold or otherwise put out of reach pending the resolution of the proceeding. Finally, the balance of convenience favoured LRC, as there would be little harm to Orion if the injunction were granted.
Ultimately, the injunction was granted against Orion, with the exception of the two corporate entities under the Orion umbrella for which proceedings were stayed by the Court of Appeal.
WHY THIS CASE MATTERS
The decisions that have come out of this ongoing proceeding have addressed numerous issues that arise in contractual disputes between international parties: namely jurisdiction disputes and corporate identities.
The trial decision reinforces the principles of contract formation as they are applied to the increasingly digitized business world. Companies negotiating such contracts should be mindful of statements made in such negotiations (and in follow up email correspondence). This is especially true when transactions are being negotiated under tight time constraints (as they often are). Perhaps akin to a "thumbs-up emoji,"8 the Court was prepared to accept an email of "OK, sounds good" as binding acceptance of material terms.
This case also serves as an important reminder that a final signed set of contractual documents may not be necessary for an enforceable contract, and that seemingly inconsistent terms arising within a negotiation may be given little weight if they are found to be mere boilerplate or otherwise non-essential. It will be a highly fact-specific analysis in each case, and parties are wise to have their legal counsel involved in such negotiations.
Parties should also seek legal advice on attornment when litigation (or the prospect of litigation) is on the horizon among parties in different jurisdictions, as this is an area where it is easy to make a misstep that can be difficult to correct.
Still to come is the determination of remedies, which will raise interesting questions over the appropriate remedy where specific performance of a royalty was sought, but where that interest has, at least in part, been sold to a third party that the Court has no jurisdiction over.
Footnotes
1. 2023 ONSC 4664 (Lithium Trial).
2. Lithium Royalty Corporation v. Orion Resource Partners, 2023 ONCA 697.
3. Lithium Royalty Corp. v. Orion Resource Partners et al., 2021 ONSC 7686.
4. 2012 SCC 17.
5. Lithium Trial at para. 216.
6. Lithium Royalty Corporation v. Orion Resource Partners, 2023 ONCA 697.
7. RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC)
8. South West Terminal Ltd. v. Achter Land, 2023 SKKB 116.
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