Merger of Executory Contracts

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Doctrine of Merger

Let’s say you are about to buy a farm! It doesn’t all happen at once.

First, you submit an Offer; that results in an Agreement.

Second, the agreement contains a closing date.

Third, the contract is “executory”, meaning that it runs until the closing date.

Fourth, until the closing date, you have “time” to check things out and get ready for closing.

Let’s go back 500 years in the common law system. You submit your Offer in June 1680. Your Agreement doesn’t arrive until September of 1680. The title conveyancer is about seventy miles away. You have to pack up two lifetimes’ worth of title deeds to take them with you (that was 60 years at that time).

You meet with the title conveyancer and provide them with instructions. There could be all kinds of stipulations and conditions contained in the Deed. The farmer might say that you have to provide food to himself and his wife for the rest of their lifetimes. That’s something like a vendor take back mortgage.

You might also want to include some conditions yourself, like who gets the farm if you die. This is something like a Will.

These Deeds were complicated and often ran 50 to 60 pages in length. Conveyancers were paid by the word, so why say “give” when you can say “I give, devise and bequeath”. Many of these Deeds are currently on display at the Tower of London and other English museums.

So, what happens on the Closing Date?

The deal is over, the contract is finished. The contract now gets thrown into the garbage can.

The reason is “the doctrine of merger”. We are all done with that document. For the sake of simplicity “nothing about that contract matters anymore”.

That was helpful when it came to business affairs. We have a new starting point, namely, you are the new owner of the farm, not the old farmer anymore.

The Deed is the NEW Starting Point

So, everything contained in the contract “merges” with the Deed. We don’t want to be looking at two lengthy documents just one.

Closing Date

The actual closing probably took place a year later, that is, the late summer of 1681. The farmer gets the profits from the land for 1680 and 1681, and you get to take over in September, protect the property for the Winter and get ready for the Spring. The first profits for you will be in the Summer of 1682.

Remember, this contract for the purchase ran 15 to 18 months to allow you to do your due diligence.

Food for the Farmer for Life

This arrangement was set out in the Agreement. Courts decided that under the “doctrine of merger”, they are only going to look at one document, not two. So, the new document is the Deed. It replaces the Agreement.

If the “food for life” provision was in the Deed, then, it was enforceable. If it was not, then, it was no longer of any effect. The deal, merged in the Deed. And, if that provision wasn’t in there!

Intention in the Contract

So, let’s move forward 500 years. The doctrine of merger still applies but Courts can look at the documents (namely, the Agreement of Purchase and Sale) and make a determination as to whether BOTH parties really intended it to apply afterwards. If the answer was “yes”, then, Courts would apply the provision. If the answer was “no”, then, Courts would say that the provision “merged”.

Fraser-Reid vs. Droumsekas (1980 Supreme Court of Canada

Fraser-Reid purchased a brand new home from Ken Droumsekas, a builder. The Agreement contained the following statement:

“Providing that the Vendor has disclosed to the Purchaser all outstanding infractions and orders requiring work to be done….”

As you can imagine, the deal was closed, there was improper drainage and Ken Droumsekas had not in fact disclosed the municipal work orders.

So, the outstanding question was whether or not this provision “merged” with the Deed!

The Court concluded that this statement was an independent, collateral obligation and did not merge on closing. They concluded that both parties “intended” for this particular provision to “survive the closing”.

The Magic Words

Just to make sure that you don’t have to go to the Supreme Court of Canada to figure out your intention, it became common practice to include the following:

“This statement shall not merge, but shall survive the closing of this transaction” (or certainly words to that effect).

COMMENT

Remember that these magic words do not need to be used, but they are certainly “best practice”.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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