Friedmann Equity Developments Inc. v. Final Note Ltd., [2000] 1 S.C.R. 842
Friedmann Equity Developments Inc. Appellant
v.
Dr. Almas Adatia, also known as Almas Adatia,
Mohamed Rajani, Shorim Investments, in Trust,
Shorim Investments Limited, in Trust, Peter Bortoluzzi,
Sultan Lalani, in Trust, 808413 Ontario Inc., and
Crown Freight Forwarders Ltd.,
previously known as 808548 Ontario Inc. Respondents
and
Lionel C. Larry and Robins, Appleby & Taub Respondents
Indexed as: Friedmann Equity Developments Inc. v. Final Note Ltd.
Neutral citation: 2000 SCC 34.
File No.: 26971.
2000: January 27; 2000: July 20.
Present: Gonthier, Major, Bastarache, Binnie and Arbour JJ.
on appeal from the court of appeal for ontario
Contracts -- Sealed contracts -- Mortgages -- Mortgage agreement entered into by corporation acting as agent of undisclosed prncipals ‑‑ Mortgage executed under seal of corporation ‑‑ Corporation defaulting on mortgage and mortgagee suing undisclosed principals ‑‑ Common law rule preventing undisclosed principals from being sued on contract executed by their agent when contract executed under seal ‑‑ Whether sealed contract rule applies to corporate agent -- Whether sealed contract rule should be abolished.
Contracts -- Sealed contracts -- Intent ‑‑ Evidence -- Creation of sealed contract requiring intent to create instrument under seal -- Whether attachment of corporate seal to agreement constitutes evidence of intent to create sealed instrument -- Statutory provisions may render intent irrelevant.
A corporation was created to hold legal title to municipal property as a trustee or agent for beneficial owners. A mortgage registered against the property was executed in the form required under the Ontario Land Registration Reform Act, 1984. The mortgage agreement was signed by the corporation’s duly authorized officer under its corporate seal. In 1994, the mortgagee commenced an action for a default on the mortgage against the beneficial owners, none of whom were parties to the mortgage. The beneficial owners commenced proceedings against the solicitors who had represented them in the transaction. The beneficial owners and the third party solicitors brought a motion to dismiss the action on the basis that the beneficial owners were undisclosed principals who could not be sued on an indenture executed by their agent under seal. The Ontario Court (General Division) dismissed the motion. On appeal, the Divisional Court granted the motion and dismissed the action. The Court of Appeal upheld the Divisional Court’s decision.
Held: The appeal should be dismissed.
As a general rule, an undisclosed principal may sue or be sued on a simple contract entered into on his or her behalf by an agent. The sealed contract rule is a well-established exception to that general rule: when a contract is executed under seal, an undisclosed principal can neither sue nor be sued upon the contract. The exception stems from the rule that only parties to a sealed instrument may have obligations and rights under it. The sealed contract rule operates within a system of rules relating to sealed instruments, all of which are derived from the fact that a sealed instrument is enforceable by virtue of the form of the instrument itself. The English Court of Appeal’s decision in Harmer did not create an exception to the sealed contract rule nor did it recognize any legal relationship upon which a third party can sue a beneficiary.
The sealed contract rule is part of the common law of Canada and applies equally to individual agents and corporate agents. Subject to exceptions set out by statute, a corporation has the same powers and capacities as a natural person and there is no principled basis upon which to treat corporations differently. While it is clear that the sealed contract rule applies to corporate agents, the attachment of a corporation’s seal to an agreement may not be sufficient in all circumstances to constitute a sealed contract within the meaning of the sealed contract rule. The creation of a sealed instrument requires formalities that must be observed. A sealed instrument must be signed, sealed and delivered and the application of the seal must be a conscious and deliberate act. The relevant question is whether the parties intended to create an instrument under seal. Corporate seals, in many circumstances, are equivalent to the signature of a natural person, and therefore, merely affixing a corporate seal may not be evidence of an intent to create a sealed instrument. Courts must examine the instrument and the circumstances surrounding its creation to determine intent. Statutory provisions, however, may render intent irrelevant. In this case, s. 13(1) of the Land Registration Reform Act, 1984 rendered intent irrelevant by making all documents transferring an interest in land, and charges or discharges, sealed instruments for all purposes including the application of the sealed contract rule.
A proposed change in the common law must be necessary to keep the common law in step with the evolution of society, to clarify a legal principle or to resolve inconsistency. A change should be incremental and its consequences should be capable of assessment. Courts should not intervene if a change will have complex, uncertain and far-reaching effects. Here, no compelling reasons exist for the abolition of the sealed contract rule. There is no conflicting appellate authority regarding whether the rule applies in Canada and its inclusion in Canadian common law is not out of step with other jurisdictions. The rule is consistent with commercial reality and with other rules that apply to sealed instruments, and continues to serve a useful purpose in our law. It has not caused inconvenience in commercial transactions nor great hardship. The sealed contract rule is part of a system of property and contract rules. To abolish it simply because the historical rationale for the rule is no longer important would necessarily call into question the validity of other rules that apply to sealed instruments and of other technical rules, both in the law of contract and in the law of property, which no longer appear to have any modern day rationale, thereby creating uncertainty both in commercial relations and in the law itself. The abolition of the sealed contract rule could also have far-reaching effects on existing contractual relationships. It would have the unfair result of creating uncertainty for those who had relied on the rule in executing their contracts. To avoid uncertainty and any unfairness to those parties who have structured their commercial relationships in accordance with the sealed contract rule, any change to the law should operate prospectively. Only a legislature has the power to create a prospective change in the law.
The corporation’s officer affixed the corporation’s seal to the mortgage agreement and the mortgage is in the form prescribed under the Land Registration Reform Act, 1984, which deems all instruments governed by its provisions to be documents under seal. The sealed contract rule applies and only the parties to the mortgage may be sued upon it. Therefore, the mortgagee cannot maintain its action on the covenant in the mortgage against the beneficial owners.
Cases Cited
Overturned: Kootenay Savings Credit Union v. Toudy (1987), 22 B.C.L.R. (2d) 201; distinguished: Harmer v. Armstrong, [1934] Ch. 65; discussed: Chesterfield and Midland Silkstone Colliery Co. v. Hawkins (1865), 3 H. & C. 677, 159 E.R. 698; MacAskill v. The King, [1931] S.C.R. 330; Crowley v. Lewis, 146 N.E. 374 (1925); referred to: Keighley Maxsted & Co. v. Durant, [1901] A.C. 240; Nalbandian v. Hanson Restaurant & Lounge, Inc., 338 N.E.2d 335 (1975); Porter v. Pelton (1903), 33 S.C.R. 449; Margolius v. Diesbourg, [1937] S.C.R. 183; Whisper Holdings Ltd. v. Zamikoff, [1971] S.C.R. 933; Re Zamikoff v. Lundy (1970), 9 D.L.R. (3d) 637; Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1987), 46 D.L.R. (4th) 37; Napev Construction Ltd. v. Lebedinsky (1984), 7 C.L.R. 57; Tri-S Investments Ltd. v. Vong, [1991] O.J. No. 2292 (QL); Edelstein Construction Ltd. v. Fire Pit Inc. (1996), 30 O.R. (3d) 383; Marbar Holdings Ltd. v. 221,401 B.C. Ltd. (1984), 54 B.C.L.R. 169; 872899 Ontario Inc. v. Iacovoni (1998), 163 D.L.R. (4th) 263; Re Lawton, [1944] 3 D.L.R. 51, aff’d [1945] 4 D.L.R. 8; Newfoundland & Labrador Housing Corp. v. Suburban Construction Ltd. (1987), 38 D.L.R. (4th) 150; Alton Renaissance I v. Talamanca Management Ltd. (1996), 27 B.L.R. (2d) 307; Vetrovec v. The Queen, [1982] 1 S.C.R. 811; Watkins v. Olafson, [1989] 2 S.C.R. 750; R. v. Jobidon, [1991] 2 S.C.R. 714; R. v. Salituro, [1991] 3 S.C.R. 654; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210; McMullen v. McMullen, 145 So.2d 568 (1962); Toll v. Pioneer Sample Book Co., 94 A.2d 764 (1953).
Statutes and Regulations Cited
Business Corporations Act, R.S.O. 1990, c. B.16, s. 15.
Canada Business Corporations Act, R.S.C., 1985, c. C-44, s. 15(1).
Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, ss. 2, 3, 9.
Land Registration Reform Act, 1984, S.O. 1984, c. 32, s. 13 [now Land Registration Reform Act, R.S.O. 1990, c. L.4, s. 13].
Land Titles Act, R.S.O. 1990, c. L.5, s. 79(1) [rep. 1998, c. 18, Sch. E, s. 132].
Limitation of Actions Act, R.S.N.B. 1973, c. L-8, s. 2.
Limitation of Actions Act, R.S.N.S. 1989, c. 258, s. 2(1)(c).
Limitations Act, R.S.O. 1990, c. L.15, s. 45(1)(b).
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, r. 21.01(1)(a).
Statute of Frauds, R.S.O. 1990, c. S.19, s. 2.
Statute of Limitations, R.S.P.E.I. 1988, c. S-7, s. 13.
Authors Cited
Ames, James Barr. “Undisclosed Principal – His Rights and Liabilities” (1909), 18 Yale L.J. 443.
Anger and Honsberger: Law of Real Property, vol. 2, 2nd ed. By A. H. Oosterhoff and W. B. Rayner. Aurora, Ont.: Canada Law Book, 1985.
Bowstead and Reynolds on Agency, 16th ed. By F. M. B. Reynolds. London: Sweet & Maxwell, 1996.
British Columbia. Law Reform Commission. Report on Deeds and Seals. Vancouver: The Commission, 1988.
Cardozo, Benjamin N. The Paradoxes of Legal Science. Westport, Conn.: Greenwood Press, 1928.
Cheshire, Fifoot and Furmston’s Law of Contract, 13th ed. By M. P. Furmston. London: Butterworths, 1996.
Fridman, G. H. L. The Law of Contract in Canada, 4th ed. Scarborough, Ont.: Carswell, 1999.
Fuller, Lon L. “Consideration and Form” (1941), 41 Colum. L. Rev. 799.
Halsbury’s Laws of England, vol. 9(1), 4th ed. (reissue). By Lord Mackay of Clashfern. London: Butterworths, 1998.
Herschorn, Arnie. “Documents Under Seal: Consequences and Complications” (1989), 10 Advocates’ Q. 129.
McGuinness, Kevin Patrick. The Law and Practice of Canadian Business Corporations. Toronto: Butterworths, 1999.
Ontario. Law Reform Commission. Report on Amendment of the Law of Contract. Toronto: Ministry of the Attorney General, 1987.
Schiff, Martin. “The Undisclosed Principal: An Anomaly in the Laws of Agency and Contract” (1983), 88 Com. L.J. 229.
Seavy, Warren A. “The Rationale of Agency” (1920), 29 Yale L.J. 859.
Waddams, S. M. The Law of Contracts, 4th ed. Toronto: Canada Law Book, 1999.
Weinrib, Ernest J. “The Undisclosed Principle of Undisclosed Principals” (1975), 21 McGill L.J. 298.
APPEAL from a judgment of the Ontario Court of Appeal (1998), 41 O.R. (3d) 712, 112 O.A.C. 253, 20 R.P.R. (3d) 257, [1998] O.J. No. 3520 (QL), dismissing the appellant’s appeal from a judgment of the Divisional Court, [1997] O.J. No. 642 (QL), allowing the respondents’ appeal from a decision of Borins J., dismissing the respondents’ motion to dismiss the appellant’s action for a default on a mortgage. Appeal dismissed.
Benjamin Zarnett, Carolyn Silver and Julie Rosenthal, for the appellant.
Robert D. Malen, for the respondents Dr. Almas Adatia, also known as Almas Adatia, Peter Bortoluzzi, Sultan Lalani, in Trust, 808413 Ontario Inc. and Crown Freight Forwarders Ltd., previously known as 808548 Ontario Inc.
Carl Orbach, Q.C., for the respondents Mohamed Rajani, Shorim Investments, in Trust, and Shorim Investments Limited, in Trust.
Valerie A. Edwards, for the respondents Lionel C. Larry and Robins, Appleby & Taub.
The judgment of the Court was delivered by
Bastarache J. —
I. Introduction
1 There is an established rule in our common law that an undisclosed principal cannot be sued on a contract executed by his or her agent when that contract is executed under seal (the “sealed contract rule”). The appellant, Friedmann Equity Developments Inc. (“FED”), submits that this Court should abolish that rule. The appellant has not shown that the application of the rule in this case would cause any injustice, nor has it shown that the rule is no longer consistent with commercial reality. It relies instead on the contention that the rule is a technical one which does not appear to have any present underlying rationale. The issue in this appeal, therefore, is whether this Court should abolish one rule, existing within a system of rules governing both property and contract law, without any evidence that it creates injustice or any evidence of a change in commercial reality, simply because the historical rationale for the rule is no longer of importance.
II. Factual Background
2 By Statement of Claim issued October 14, 1994, the appellant sued the respondent group of beneficial owners for a default on a mortgage registered on February 6, 1989, against property to which Final Note Limited (“Final Note”) held title. The appellant alleged that Final Note executed the mortgage as the beneficial owners’ bare trustee and agent. The mortgage was signed by Final Note’s duly authorized officer under its corporate seal. None of the beneficial owners were parties to the mortgage. After the appellant brought the action on the covenant in the mortgage, the beneficial owners commenced proceedings against the solicitors (“third parties”) who represented them in the transaction.
3 The beneficial owners and the third parties brought a motion pursuant to rule 21.01(1)(a) of the Ontario Rules of Civil Procedure, R.R.O. 1990, Reg. 194, for a determination before trial of a question of law raised by the pleadings. They asked for an order dismissing the action against them on the following ground:
If Final Note did act as agent for the remaining defendants, they are entitled to a dismissal of this action on the basis of the rule that an undisclosed principal cannot be sued by a third party on an indenture executed by an agent under seal.
Borins J. of the Ontario Court (General Division) dismissed the motion. The Divisional Court granted an appeal and dismissed the appellant’s action on the basis of the sealed contract rule. Morden A.C.J.O., on behalf of the Court of Appeal, upheld the decision of the Divisional Court. That decision is the subject of the appeal before this Court.
4 When a motion is brought pursuant to rule 21.01(1)(a), the only factual materials that may be considered by the court are the pleadings and, in this case, the mortgage in question. For the purpose of addressing the question raised on this appeal, this Court is required to accept as true the allegations in the appellant’s statement of claim, the relevant portions of which are as follows:
2. The Defendant, Final Note Limited (the “Bare Trustee”) is a corporation under the laws of Ontario and is the legal title holder to property municipally known as 100 Tullamore Court, Brampton, Ontario (the “Property”).
3. The Bare Trustee holds title to the Property as trustee and/or agent for the remaining defendants which are the beneficial owners thereof (the remaining defendants will hereinafter be collectively referred to as the “Owners”).
. . .
7. The Plaintiff states that the Bare Trustee was created for the sole purpose of holding title to the Property as Bare Trustee on behalf of the Owners.
8. The Plaintiff states that at no material time did the Bare Trustee have any independent existence either in fact or in law and that at all material times all decisions regarding the Property and the Mortgage were made by the Owners.
. . .
10. Alternatively, the Plaintiff states that at all material times the Bare Trustee acted as agent for the Owners who are at law liable to the Plaintiff under the Mortgage.
The mortgage was executed in the form required under the Land Registration Reform Act, 1984, S.O. 1984, c. 32. The mortgage agreement was signed by Abdul Pirani, Vice President of Final Note. Final Note’s corporate seal appeared to the right of his signature and name.
III. Judicial History
5 Borins J. noted that there was no disagreement amongst the counsel that an undisclosed principal cannot be sued by a third party on a specialty contract, executed by a trustee or an agent, under seal. There was also no disagreement that in certain circumstances a mortgage, signed by the application of a corporate seal, could constitute a specialty contract under seal. Borins J. found, however, that whether what would ordinarily be a simple contract is transformed into a contract by specialty by its execution under seal could only be determined by examining the intentions of the parties. The parties’ intentions could only be determined by a trial judge, upon hearing the evidence surrounding the completion of the contract. Therefore, Borins J. found that it was not plain, obvious and beyond a doubt that FED could not succeed at trial. He dismissed the motion.
6 Steele J. granted leave to appeal to the Divisional Court from the decision of Borins J. He found that the mortgage was executed under a corporate seal and that the decision of Borins J. conflicted with the rule that an undisclosed principal cannot be sued by a third party on such a contract. Steele J. found that in some cases the intention of the parties might be relevant to determine whether a simple contract was turned into a specialty by execution under seal. However, in his view, a mortgage was a specialty in itself and the intent of the parties was irrelevant.
7 Saunders J., on behalf of Keenan and Sharpe JJ., for the Divisional Court, allowed the appeal by the beneficial owners and the third parties: [1997] O.J. No. 642 (QL). Since the indenture of mortgage was executed under seal, it could only have been a specialty debt. In such a situation, there was no room for ascertaining the intent of the parties. Since all the parties agreed that an undisclosed principal could not be sued on a contract executed by an agent or trustee under seal, it was plain and obvious that the action against Final Note should be dismissed.
8 Morden A.C.J.O., for a unanimous Court of Appeal, dismissed FED’s appeal: (1998), 41 O.R. (3d) 712. He maintained that, although the sealed contract rule had been criticized by reason of its technicality, there was no question that it continued to exist.
9 Having determined that the sealed contract rule continued to be binding, Morden A.C.J.O. proceeded to discuss its application. He rejected the appellant’s argument that the rule did not apply to corporate agents. He found that pursuant to the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 15, a corporation had the same capacity and powers of a natural person, and that this extended to the application of the sealed contract rule. In addition, he reviewed the cases where the rule had been applied to corporate agents and found that they could not be distinguished from the facts of the case at bar. The appellant had relied upon the decision of Bouck J. of the British Columbia Supreme Court in Kootenay Savings Credit Union v. Toudy (1987), 22 B.C.L.R. (2d) 201, as authority for the proposition that the sealed contract rule could not be applied to corporate agents. In that decision, Bouck J. had declined to apply the sealed contract rule to a corporation, citing the fact that the seal had been affixed to the contract pursuant to a statutory requirement. Morden A.C.J.O. distinguished the case on the ground that the seal affixed to the FED mortgage was not mandatory.
10 Morden A.C.J.O. proceeded to consider the appellant’s claim that there was an exception to the sealed contract rule that allowed an undisclosed principal to sue on a contract under seal despite the fact that such a principal could not be sued on the same contract. To support this claim, the appellant cited the decision of the English Court of Appeal in Harmer v. Armstrong, [1934] Ch. 65. The case involved a situation where the trustee had initially refused to enforce the contract under seal against the defendants. The plaintiff beneficiaries were allowed to bring an action against the agent and the third party defendants. Morden A.C.J.O., however, noted that it was an important part of the reasoning of at least two of the three members of the Court of Appeal in that case that the contract was being enforced in favour of the agent and not in favour of the plaintiff beneficiaries. The case was clearly distinguishable from the one at bar, wherein one of the contracting parties sought to enforce the contract directly against the beneficiary/principal without involving the trustee/agent.
11 Morden A.C.J.O. then turned to the issue of the intent of the parties in affixing Final Note’s corporate seal to the mortgage. Section 13(1) of the Land Registration Reform Act, 1984 states that any document which transfers an interest in land need not be executed under seal and that those documents which are not executed under seal have the same effect for all purposes as if executed under seal. In his view, the section had the effect of making the covenant to pay in the mortgage a covenant under seal for all purposes, including the application of the sealed contract rule. The provision, in his view, went beyond providing the requirements for the registration of documents under the Act and had a substantive effect. The underlying rationale of the provision was to preserve the common law substantive consequences associated with traditional forms of mortgages and conveyances. In light of this, he found that the intent with which the corporate seal was affixed was not relevant and that the provision had the effect of making the sealed contract rule applicable to the covenant to pay in the mortgage.
12 Morden A.C.J.O. rejected the appellant’s policy arguments for abolishing the sealed contract rule. In his opinion, while the rule had been criticized, it did form part of the law. Presumably, parties would take the rule into account in structuring their transactions and would know, by the very form of the document, who would have rights and obligations under it. To repeal the rule would have the effect of unfairly frustrating the intentions of the parties.
IV. Legislation
13 Land Registration Reform Act, 1984, S.O. 1984, c. 32 (now Land Registration Reform Act, R.S.O. 1990, c. L.4)
13. – (1) Despite any statute or rule of law, a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal.
(2) Subsection (1) applies to a guarantee in a charge.
V. Analysis
14 The appellant, FED, has asked this Court to abolish the sealed contract rule. It contends that the rule has no present principled justification and that it has been criticized by academics and some courts. In addition, the appellant submits that the rule is unjust and unfair. With respect, I disagree with the appellant’s submissions. In my view, there is no evidence that the sealed contract rule creates injustice or that it is inconsistent with commercial reality. The sealed contract rule is part of a system of property and contract rules which provide certainty in commercial relations. To change or abolish one rule within that system would inevitably create uncertainty with regard to the other rules. Courts should not interfere with such rules without clear evidence that it is necessary to change the law to be in step with commercial reality and clear evidence that a change in the rule will not have unwarranted far-reaching ramifications.
A. The Undisclosed Principal
15 When a third party contracts with an agent and the contract is not under seal, the principal has the same rights and liabilities under the contract whether he or she was disclosed to the third party and despite the fact that his or her name did not appear on the face of the contract. Therefore, undisclosed principals can sue and be sued in their own name on any simple contracts made on their behalf by their agents as long as those agents have acted within the scope of their delegated authority in so doing.
16 The rule which allows an undisclosed principal to sue or be sued on a simple contract has been criticized. Some argue that the doctrine is anomalous and that it violates some of the basic tenets of the laws of contract and of agency: see, e.g., J. B. Ames, “Undisclosed Principal – His Rights and Liabilities” (1909), 18 Yale L.J. 443; M. Schiff, “The Undisclosed Principal: An Anomaly in the Laws of Agency and Contract” (1983), 88 Com. L.J. 229. Critics of the rule argue that contracts are premised upon the agreement of two or more persons to be bound to each other and to the terms pursuant to which they will be so bound. It appears to be inconsistent with this fundamental principle to bind the third parties to principals with whom they did not contract.
17 While some commentators have criticized the rule relating to undisclosed principals, other commentators have argued that the rule is consistent with commercial reality. Although the undisclosed principal may not be named in the contract, he or she does exist in fact and directs the agent. The agent is simply the instrument through which the principal acts. Since the principal controls the agent and receives the benefit of the contract with the third party, there does not appear to be any injustice in making the principal directly answerable to the third party or in allowing the principal to enforce the contract against the third party. The rule simply gives effect to what exists in fact, even if that fact is not reflected in the contract: see Keighley Maxsted & Co. v. Durant, [1901] A.C. 240 (H.L.), at p. 261, per Lindley L.J.; E. J. Weinrib, “The Undisclosed Principle of Undisclosed Principals” (1975), 21 McGill L.J. 298.
18 Regardless of the criticism of the rule, it is firmly established that undisclosed principals may sue or be sued on simple contracts entered into by their agents. Parties are presumed to be aware of the possibility that those with whom they are bargaining are acting on behalf of an unnamed principal. The parties to a contract can avoid the application of the rule, either by including an express term in the contract which limits liability to the parties named in the contract itself, or by executing the contract under seal.
B. The Sealed Contract Rule
19 The practice of sealing documents is one which is centuries old and which predates much of our modern legal history. Originally, it was used as a means of authenticating a document when most individuals were unable to sign their names. However, as time passed, the seal became a symbol of the solemnity of a promise and began to serve an evidentiary function. The seal rendered the terms of the underlying transaction indisputable, and thus rendered additional evidence unnecessary: see L. Fuller, “Consideration and Form” (1941), 41 Colum. L. Rev. 799, at p. 802. A contract under seal derived, and still derives, its validity from the form of the document itself: see, e.g., Nalbandian v. Hanson Restaurant & Lounge, Inc., 338 N.E.2d 335 (Mass. 1975), at p. 337; Ontario Law Reform Commission, Report on Amendment of the Law of Contract (1987), at p. 35; Law Reform Commission of British Columbia, Report on Deeds and Seals (1988), at p. 8.
20 Because a contract under seal derives its validity from its form alone, there are several incidents of such a contract which differ from those of a simple contract. The fundamental difference between contracts under seal and simple contracts is in relation to the doctrine of consideration. The law will enforce a contract under seal even without consideration. Therefore, a gratuitous promise which is expressed in an instrument under seal is enforceable. There are other incidents of a contract under seal, which may be summarized as follows:
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 way of estoppel against the maker of the statement.
3. At common law, only a person named in an instrument under seal as a party to it could sue on a covenant in the instrument expressed to be for his benefit.
4. The limitation period for an action for a breach of a contract under seal may be longer than for a simple contract in some provinces.
See A. Herschorn, “Documents Under Seal: Consequences and Complications” (1989), 10 Advocates’ Q. 129, at p. 130; Halsbury’s Laws of England (4th ed. 1998), vol. 9(1), at para. 617; Limitations Act, R.S.O. 1990, c. L.15, s. 45(1)(b); Limitation of Actions Act, R.S.N.B. 1973, c. L-8, s. 2; Limitation of Actions Act, R.S.N.S. 1989, c. 258, s. 2(1)(c); Statute of Limitations, R.S.P.E.I. 1988, c. S-7, s. 13. The sealed contract rule at issue in this case, namely that only the parties to a contract under seal may sue or be sued on it, thus exists within a system of rules which apply to sealed contracts.
21 I agree with Morden A.C.J.O. that the sealed contract rule is clearly a part of the common law of Canada. The rule was first described by this Court in Porter v. Pelton (1903), 33 S.C.R. 449. In that case, Porter had given an option to Pelton to purchase his gold mines and to develop them. Porter was unaware that Pelton was Holden’s partner and that the option was taken for the benefit of the partnership, by Holden’s directions. Pelton eventually decided to purchase the property. He paid part of the purchase price and signed an agreement under seal that he would organize a company to mine the area and give Porter stock in the company for the balance of the purchase price. The company did some work on the mine but ceased operations before paying the rest of the purchase money to Porter. Porter sued both Pelton and Holden. Nesbitt J. found as follows, at p. 455:
The cases for over a century establish the rule of law firmly that where partners contract under seal they are bound by the form of the instrument, and where parties so signing are merely acting as agents and are so described, only the parties signing can be bound. A principal or partner cannot be bound unless he has given authority for his signature under seal, and is designated as a party to the deed.
The Court thus denied recovery against Holden.
22 This Court next had the opportunity to consider the sealed contract rule in Margolius v. Diesbourg, [1937] S.C.R. 183. In this case, Kellner had contracted with Margolius to buy 200,000 gallons of whiskey. The contract between the two men was executed under seal. After agreeing to sell the whiskey to Kellner, Margolius learned that Kellner had been acting on behalf of his principal, Diesbourg. The contract was breached and Margolius attempted to sue both Kellner and Diesbourg. The Court found that the action was not maintainable against Diesbourg. At p. 189, Davis J. found as follows:
It has long been settled that no person can sue or be sued in an action at law upon a contract under seal, unless the person is a party to the contract.
He cited with approval the following statement from Pollock on Contracts (10th ed. 1936), at pp. 97-98:
When a deed is executed by an agent as such but purports to be the deed of the agent and not of the principal, then the principal cannot sue or be sued upon it at law, by reason of the technical rule that those persons only can sue or be sued upon an indenture who are named or described in it as parties.
23 The most recent decision of this Court to consider the sealed contract rule is Whisper Holdings Ltd. v. Zamikoff, [1971] S.C.R. 933. The case involved two contracts under seal governing the purchase of land in Toronto by four partners. One contract divided the land amongst the partners. The second contract detailed the consequences should a partner default on his or her obligations pursuant to the agreement. The second contract reflected the fact that, following the execution of the first contract four years earlier, one partner was replaced by his daughter and another partner was replaced by a holding company. The daughter and the holding company were included as parties in the final deed of transfer of the land and both of them executed a mortgage on the land. The holding company defaulted on its obligations under the agreement and the other partners asked the company to leave the partnership and forfeit all rights to the land. The land increased in value, and the holding company alleged that it continued to have an interest in it. Spence J. stated the sealed contract rule as follows, at pp. 941-42:
It is, of course, well established that when an instrument is executed under seal only those who are expressed in it to be parties thereto can sue or be sued on a covenant contained in the said instrument. No further authority is required than Porter v. Pelton & Holden . . . .
The Court, however, also found that the circumstances following the execution of the original agreements showed beyond any doubt that there was a novation of the contracts, where all partners old and new agreed to the replacement of two of the partners. The holding company, therefore, was bound by the provisions of the first two contracts despite the operation of the sealed contract rule.
24 While the statement by the Court of the sealed contract rule in Whisper Holdings, supra, is dictum because of the Court’s final determination that there was a novation of the contract, I agree with Morden A.C.J.O. that the statement is an authoritative statement of the law. Laskin J.A. (as he then was) had made the following statement with respect to the sealed contract rule in his separate concurring reasons in the same case at the Court of Appeal: see Re Zamikoff v. Lundy (1970), 9 D.L.R. (3d) 637, at p. 648:
Failing any principle that time and rethinking may result in the desuetude, or at least justify reconsideration of a proposition that the Supreme Court has not reassessed or reaffirmed for more than half a century, I must accept the rule in Porter v. Pelton. But at the same time, I must say that the quoted paragraph no longer represents the English law in so far as it refers to the position of a cestui que trust with respect to a covenant made on his behalf by a trustee: see Harmer v. Armstrong, [1934] Ch. 65. Again, it probably no longer represents the English Law even in the case of an undisclosed principal who purports to sue on a sealed contract, at least where an equitable remedy is being sought; there is some warrant for Snell on Equity, 26th ed., p. 643, to view Harmer v. Armstrong as a case of agency no less than one of trust.
What is left of the old common law rule in England is a shell at best; and since, admittedly, it was originally founded on a formalistic view of the contract under seal which has ceased to terrify, there is no reason of substance for prolonging its life. It has ceased to be operative in most of the States of the United States; see I. A. Corbin on Contracts, s. 255, p. 448.
Spence J. restated the sealed contract rule despite the invitation from Laskin J.A. to reconsider it. In this context, the statement of the rule, even in dictum, is strong authority for the proposition that the rule is still very much a part of the common law in Canada. The rule has been cited as part of the common law in several decisions since Whisper Holdings: see, e.g., Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1987), 46 D.L.R. (4th) 37 (Alta. Q.B.); Napev Construction Ltd. v. Lebedinsky (1984), 7 C.L.R. 57 (Ont. H.C.); Tri-S Investments Ltd. v. Vong, [1991] O.J. No. 2292 (QL) (Gen. Div.); Edelstein Construction Ltd. v. Fire Pit Inc. (1996), 30 O.R. (3d) 383 (C.A.). The sealed contract rule is clearly still a part of the common law in Canada.
C. The Harmer v. Armstrong Decision
25 Despite the recognition of the sealed contract rule by this Court and other courts across the country, the appellant has asked this Court to abolish it. The appellant contends, amongst other claims, that the rule is now internally inconsistent. Following the decision of Harmer v. Armstrong, supra, the appellant claims that the rule no longer bars a principal from suing a third party on a contract entered into under seal for his or her benefit. As a result, the appellant argues, it is unjust not to allow the third party to sue the principal. To support this claim, the appellant cites the following passage from Cheshire, Fifoot and Furmston’s Law of Contract (13th ed. 1996), at p. 495:
The technical [sealed contract] rule, however, is subject to this limitation, that if the agent enters into a sealed contract as trustee for the principal, whether the trust is disclosed on the face of the contract or not, and he refuses to enforce it against the other party, then the principal, qua beneficiary, may himself enforce any proprietary right to which he is entitled by bringing an action against the third party and the agent. It would seem to follow that in such a case the principal is equally liable to be sued by the third party. [Emphasis in original.]
If the final sentence of the passage is correct, the sealed contract rule would no longer exist.
26 With respect, the passage cited above interprets the decision in Harmer beyond its original scope. The case involved a breach of trust. Armstrong was interested in purchasing some publications and approached Harmer and another potential investor to contribute a large portion of the purchase price. The investors agreed to contribute four-fifths of the price and authorized Armstrong to make an offer to purchase the papers. An agreement under seal was reached between the vendor and Armstrong to purchase the periodicals. Armstrong, however, asserted that he was the sole purchaser and, shortly after, asked to be released from his agreement to purchase. The vendor subsequently sold the papers to another purchaser. Harmer sued both Armstrong and the vendor for specific performance of the agreement. At trial, Maugham J. found that Harmer was not entitled to a judgment for specific performance because the contract was under seal and he was not a party to it.
27 All three of the judges on appeal of the decision of Maugham J. agreed with his finding that Armstrong had entered into the agreement to purchase the periodicals as a trustee for Harmer and the other investor. They also agreed that Armstrong had breached that trust in seeking to be released from the agreement. Lord Hanworth M.R. found that when a trust relationship existed, the trustee could take steps on behalf of the beneficiary to enforce the performance of a contract by the other contracting party. If the trustee, however, refused to do so, the beneficiary could sue, but was required to join the trustee as a defendant. Lord Hanworth M.R. explained that the rule was designed to eliminate procedural difficulties and circuity of action. It would have been possible for Harmer to initiate a separate proceeding to have it declared that Armstrong was his trustee. Upon receiving this declaration, he could seek leave to sue in Armstrong’s name when Armstrong refused to enforce his rights. Harmer could then bring an action against the vendors for specific performance. By allowing Harmer to sue the trustee and the vendor, the court could prevent the multiple proceedings.
28 Lawrence L.J., in his reasons, emphasized that the rule which would allow Harmer to join Armstrong as a defendant was an equitable rule, distinct from the common law sealed contract rule. Both rules were equally established and authoritative in the law. He explained the equitable rule as follows, at p. 88:
Whenever a party under a contract, at the date when he enters into it is . . . a trustee for a third party that party has a right conferred upon him by way of property to sue on the contract whether the contract be under seal or not and can, according to well settled principles, enforce that right in equity, joining the trustee as a defendant to the action. The right of a beneficiary in such a case as the present, however, is to enforce the agreement according to its tenor, that is to say in favour of the defendant Armstrong, and not in favour of the plaintiff beneficiaries. [Emphasis added.]
Lawrence L.J. also recognized that a court could refuse to enforce a contract in this way if there was a debate as to whether a trust relationship actually existed between the party to the contract and the third party beneficiary.
29 In my view, the decision in Harmer does not, as the appellant contends, carve out an exception to the sealed contract rule. On the contrary, the decision specifically distinguished the equitable principle applied in the case from the sealed contract rule. The decision provides the means for beneficiaries to enforce those agreements entered into by their trustees when those trustees have refused to do so. As this Court recognized in Margolius, supra, the case was one of a cestui que trust seeking to enforce a contract when the trustee had committed a breach of trust in refusing to do so. The decision is based on the law of trusts and not on the law of contract.
30 The appellant has argued that the decision in Harmer must, on a principled basis, lead to the corollary that beneficiaries or principals should be able to be sued in their own name. With respect, I disagree with this submission. I agree with Morden A.C.J.O. that it was essential to the reasoning in the Harmer decision that the contract was being enforced by the beneficiary in the name of the agent. The beneficiaries could not assert any rights that they had against the third parties to the contract directly. The equitable rule did not create any legal relationship between the beneficiary and the third party. Without such a legal relationship, the third party certainly cannot sue the beneficiary.
D. Does the Sealed Contract Rule Apply Where the Agent Is a Corporation?
31 The appellant submits that there is inconsistency amongst the provinces as to when the sealed contract rule applies. Some courts, it contends, have declined to apply the rule to agreements under seal which are entered into by corporations, while other courts have found that there is no distinction, as to the application of the rule, between agents that are corporations and agents who are individuals. The appellant cites the decision of Bouck J. of the British Columbia Supreme Court in Kootenay Savings Credit Union v. Toudy, supra, as an example of a court’s refusal to apply the rule to an agent that is a corporation and asks this Court to follow that decision.
32 The case involved a mortgage which had been granted by Kootenay Savings Credit Union to a holding company established by a group of individuals. The mortgage was executed under the seal of the holding company. The credit union had sought personal guarantees from each of the individuals, but because of the terms of the guarantees, it was only able to recover the amount of the principal of the loan from them as guarantors. When the holding company defaulted on the mortgage, therefore, the credit union sued the individuals as the undisclosed principals of the holding company.
33 Bouck J. reviewed the authorities which had applied the sealed contract rule and found that, despite the fact that the rule appeared to be part of the law, it did not appear to be grounded in any good reason. He noted that none of the cases he had reviewed had applied the rule when a corporation had executed a document under seal on behalf of its undisclosed principals. Bouck J. noted that, at common law, a corporation could only be bound when it affixed its seal to an agreement, but that this rule had been modified by statute. Although the holding company was not required by the common law to affix its seal to the mortgage to enter into a valid contract, Bouck J. found that to register the mortgage as security for the loan in the land titles office, it had to be executed under seal pursuant to the Property Law Act, R.S.B.C. 1979, c. 340, s. 16(2). The seal was thus mandated by statute. After reviewing the law and finding that the seal affixed to the mortgage was required by statute, Bouck J. made the following statement, at p. 207:
It is clear the personal defendants would be liable as undisclosed principals of LeRoi if the mortgage were simply executed by an authorized officer of LeRoi without affixing its seal. However, it is now said that because the seal of LeRoi was in fact stamped on the mortgage, that act relieved the personal defendants from liability. With respect, such a conclusion makes little sense. While this technical rule, which is peculiar to England, may also be part of Canadian law as it applies to individuals, I can see no good reason for extending its application to corporations, particularly since no higher authority compels that result.
Accordingly, I hold that where a corporation enters into a mortgage under seal on behalf of undisclosed principals, those undisclosed principals can sue and be sued by the other party to the mortgage.
Bouck J. thus allowed the credit union to recover from the undisclosed principals of the holding company.
34 With respect, to the extent that the decision of Bouck J. in Kootenay can be read as creating the principle that the sealed contract rule does not apply to agents that are corporations, I do not agree with it. To craft an exception to the sealed contract rule for corporations that act as agents for undisclosed principals would be contrary both to the decisions of other courts in Canada and to the law of business corporations in general. Subject to those exceptions set out by statute, a corporation has the same powers and capacities as a natural person: see, e.g., Canada Business Corporations Act, R.S.C., 1985, c. C-44, s. 15(1); Ontario Business Corporations Act, s. 15. The powers and capacities include the power to sue and be sued, and the power to contract: see, e.g., K. P. McGuinness, The Law and Practice of Canadian Business Corporations (1999), at p. 204. I agree with Morden A.C.J.O. that since a corporation has all of the capacities and powers of a natural person, especially in relation to the law of contract, there is no principled basis upon which to treat corporations acting as agents for undisclosed principals differently than agents who are individuals.
35 Other courts across Canada have recognized the application of the sealed contract rule to corporations that act on behalf of undisclosed principals. In Marbar Holdings Ltd. v. 221,401 B.C. Ltd. (1984), 54 B.C.L.R. 169 (S.C.), Macdonell J. applied the sealed contract rule to bar an action against the undisclosed principals of a corporation on a document executed under the company’s seal. In Edelstein Construction, supra, Morden A.C.J.O. recognized the authority of the sealed contract rule in the context of an agreement executed under seal by a corporate agent, although the case was decided on different grounds. Also, in Tri-S Investments, supra, Feldman J. applied the sealed contract rule in a case of a corporate agent as one ground of her decision. In light of these authorities, the decision in Kootenay, in so far as it stands for the proposition that a corporate agent may be sued or sue on a contract executed under seal, appears to be anomalous. In my view, the sealed contract rule applies equally to individual agents and corporate agents. To the extent that the Kootenay decision can be read to find otherwise, it should not be followed.
36 While it is clear that the sealed contract rule applies to corporate agents, the attachment of a corporation’s seal to an agreement may not be sufficient in all circumstances to constitute a sealed contract within the meaning of the sealed contract rule. As I stated above, historically, the act of sealing was a solemn act designed to impress upon the parties to the contract the significance of their obligations. As a result, different legal obligations flowed from sealed instruments than from simple contracts. Today, while the creation of a sealed instrument no longer requires a waxed impression, there are still formalities which must be observed. At common law, a sealed instrument, such as a deed or a specialty, must be signed, sealed and delivered. The mere inclusion of these three words is not sufficient, and some indication of a seal is required: see, e.g., 872899 Ontario Inc. v. Iacovoni (1998), 163 D.L.R. (4th) 263 (Ont. C.A.). To create a sealed instrument, the application of the seal must be a conscious and deliberate act. At common law, then, the relevant question is whether the party intended to create an instrument under seal.
37 Corporate seals have a different legal effect than the seal of an individual. The seal of a corporation, in many circumstances, is equivalent to the signature of a natural person: see, e.g., Re Lawton, [1944] 3 D.L.R. 51 (Man. K.B.), at p. 56, aff’d [1945] 4 D.L.R. 8 (Man. C.A.); Newfoundland & Labrador Housing Corp. v. Suburban Construction Ltd. (1987), 38 D.L.R. (4th) 150 (Nfld. C.A.), at p. 152; Alton Renaissance I v. Talamanca Management Ltd. (1996), 27 B.L.R. (2d) 307 (Ont. Ct. (Gen. Div.)), at p. 312. Therefore, the affixing of a corporate seal may not in all cases be evidence of an intention to create a sealed instrument, within the meaning of the sealed contract rule. I agree with the reasoning of Morgan J.A. in Newfoundland & Labrador Housing Corp., supra, who described the effect of a corporate seal as follows, at p. 152:
. . . not every document signed by a corporation by the affixing its corporate seal would become a specialty. When the seal of a corporation is affixed to a contract made by the corporation it has the same effect as the signature of an individual. However, any contract which, if made between private persons would by law be required to be under seal, may be made on behalf of a company in writing under its common seal. Whether what would ordinarily be a simple contract is transformed into a contract by specialty by execution under seal can only be determined having regard to the intention of the parties as evidenced and the true construction of the document in question.
In my view, a corporation is certainly capable of creating a sealed instrument and availing itself of the different incidents which flow from such an agreement. However, the attachment of its corporate seal, on its own, may not be sufficient to do so. Courts must examine the instrument itself and the circumstances surrounding its creation to determine whether the corporation intended to create a sealed instrument by affixing its corporate seal.
38 While I have stated above that evidence of an intention to create a sealed instrument is necessary when a corporate seal is affixed to a contract, I emphasize that this is a principle which operates at common law. Statutory provisions may have the effect of rendering a corporation’s intention to create a sealed contract irrelevant. I agree with Morden A.C.J.O. that s. 13(1) of the Land Registration Reform Act (“LRRA”) renders the intention to create a sealed instrument irrelevant. The subsection reads:
13. -- (1) Despite any statute or rule of law, a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal.
The intention of this provision goes beyond setting the procedural requirements for the registration of conveyances and mortgages. The words “for all purposes” have the effect of making all documents transferring an interest in land, and charges or discharges, sealed instruments for all purposes, including the application of the sealed contract rule. I agree with Morden A.C.J.O. that the purpose of the subsection is to preserve the common law substantive consequences associated with traditional forms of conveyancing and mortgages. As a result, the provision has the effect of deeming all of the interests within its scope to have the same legal effects as if they were executed under seal. In circumstances where s. 13(1) of the LRRA governs, the intention to create a sealed instrument is thus irrelevant.
39 To summarize, as a general rule, an undisclosed principal may sue or be sued on a simple contract entered into on his or her behalf by an agent. There is a well-established exception to this rule that when such a contract is executed under seal, the undisclosed principal can neither sue nor be sued upon it. The exception stems from the rule that only parties to a sealed instrument may have obligations and rights under it. That rule operates within a system of rules relating to sealed instruments, all of which are derived from the fact that a sealed instrument is enforceable by virtue of the form of the instrument itself. The equitable principle described in Harmer v. Armstrong, supra, may enable an undisclosed principal to recover on a contract made for his or her benefit when the agent refuses to do so. The rights enforced in such a situation are the rights of the agent; there is no direct legal relationship created between the third party and the undisclosed principal. As a result, there is no corresponding right for a third party to sue a beneficiary on a contract under seal. The sealed contract rule clearly applies to corporate agents, although the intention of the corporation to create a sealed instrument must be evident from the construction of the instrument itself and the circumstances surrounding its creation before the rule will be applied. The intention to create or not to create a sealed instrument will not be relevant if a statutory provision has the effect of deeming the instrument to have all of the effects of an instrument under seal.
VI. Should the Sealed Contract Rule Be Abolished?
40 As is evident from the foregoing analysis, the internal inconsistencies of the sealed contract rule and the inconsistencies in its application are not as glaring as the appellant has argued. However, these inconsistencies are not the only grounds upon which it has based its claim that the sealed contract rule should be abolished. The appellant also asks that this Court abolish the rule because it lacks a present principled justification because the rule is no longer applicable in some other jurisdictions, and because of the force of criticism by academics and some courts.
41 To support its claim that the rule has no present principled justification, the appellant cites the following statement of Baron Martin in Chesterfield and Midland Silkstone Colliery Co. v. Hawkins (1865), 3 H. & C. 677, 159 E.R. 698, at p. 703 E.R.:
[The sealed contract] rule is one which is established by authority and precedent, which does not depend upon reasoning or argument, but is a fixed established rule to be acted upon and only discussed as regards its application. . . .
The appellant also refers to Laskin J.A.’s invitation to this Court to abolish the rule in Re Zamikoff v. Lundy, supra. The appellant submits that some academics have criticized the rule as “anomalous” and as taking the doctrine of privity to “extreme lengths”, while others see no particular reason why the rule should continue to exist: see, e.g., S. M. Waddams, The Law of Contracts (4th ed. 1999), at para. 268 (n. 40); G. H. L. Fridman, The Law of Contract in Canada (4th ed. 1999), at p. 197; W. A. Seavy, “The Rationale of Agency” (1920), 29 Yale L.J. 859, at p. 880. The appellant submits that, in response to these criticisms, the abolition of the sealed contract rule is appropriate.
42 Before examining whether the criticisms raised above merit the abolition of the sealed contract rule, it is necessary to understand the principles which govern judicial reform of the common law. In the past, this Court has considered the conditions which must be present to effect a change in the common law in several cases: see, e.g., Vetrovec v. The Queen, [1982] 1 S.C.R. 811; Watkins v. Olafson, [1989] 2 S.C.R. 750; R. v. Jobidon, [1991] 2 S.C.R. 714; R. v. Salituro, [1991] 3 S.C.R. 654; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210. From these cases, some general principles have emerged. A change in the common law must be necessary to keep the common law in step with the evolution of society (see, e.g., Salituro, at p. 670; Bow Valley, at para. 93), to clarify a legal principle (see Vetrovec, at p. 819), or to resolve an inconsistency (see Jobidon, at p. 733). In addition, the change should be incremental, and its consequences must be capable of assessment.
43 In the recent case of Robinson, Lamer C.J., for a majority of the Court, relied on five factors to justify the reversal of an earlier decision of the Court in MacAskill v. The King, [1931] S.C.R. 330. These factors were the existence of previous dissenting opinions in this Court, a trend in the provincial appellate courts to depart from the principles adopted in the original decision, criticism of the case or the adoption of a contrary rule in other jurisdictions, doctrinal criticism of the case and its foundations, and inconsistency of the case with other decisions. While they are not prerequisites for a change in the common law, these factors help to identify compelling reasons for reform. On the other hand, courts will not intervene where the proposed change will have complex and far-reaching effects, setting the law on an unknown course whose ramifications cannot be accurately measured: see Bow Valley, supra, at para. 93. The rationale for judicial restraint in making changes to the common law was expressed by McLachlin J. (as she then was) in Watkins, supra, as follows, at p. 760:
The court may not be in the best position to assess the deficiencies of the existing law, much less problems which may be associated with the changes it might make. The court has before it a single case; major changes in the law should be predicated on a wider view of how the rule will operate in the broad generality of cases. Moreover, the court may not be in a position to appreciate fully the economic and policy issues underlying the choice it is asked to make.
I will now examine whether there are compelling reasons for the abolition of the sealed contract rule.
44 As the foregoing analysis has demonstrated, there is no conflicting appellate authority as to the application of the sealed contract rule in Canada. The decision in Kootenay appears to be the only inconsistent application of the rule and should not be followed. A number of American states have abolished the sealed contract rule, although most appear to have done so by legislation rather than judicial reform. In England, commentators have confirmed the continued force of the rule: see Bowstead and Reynolds on Agency (16th ed. 1996), at p. 426; Halsbury’s Laws of England, supra, at para. 617. Thus it does not appear that the existence of the sealed contract rule in the common law in Canada is out of step with the developments in the common law in other jurisdictions. The rule does appear to form an exception to the general trend in agency law to make principals liable on those contracts which are entered into on their behalf. However, the rule is also consistent with the system of rules which apply to sealed instruments.
45 One might argue, however, that the practice of sealing documents, and hence the incidents thereof, are now out of step with the fabric of society. Indeed, many of the critiques of the use of the seal state that it is anachronistic. Scarcely anyone in society today would agree that the affixation of a seal is evidence of the greater solemnity and force of a promise. While the rationale for sealing a document may appear to be no longer socially relevant, it is not evident that the rules relating to sealed documents fall victim to the same critique.
46 While our common law rules must be in step with the evolution of society as a whole, when examining a proposed change to a rule of property or contract law, we must also examine whether the rule is consistent or inconsistent with commercial reality. A rule may have a rationale which appears to be anachronistic while continuing to serve a useful commercial purpose. Our common law is replete with artificial rules which, although they may appear to have no underlying rationale, promote efficiency or security in commercial transactions. Such rules, in the circumstances where they apply, must be followed to create a legally recognized and enforceable right or obligation. Parties, therefore, structure their relations with these rules in mind and the rules themselves become part of commercial reality. Commercial relations may evolve in such a way that a particular rule may become unjust and cumbersome, and may no longer serve its original purpose. When the hardship which a rule causes becomes so acute and widespread that it outweighs any purpose that it may have once served, it is certainly open to a court to make an incremental change in the law. However, there must be evidence of a change in commercial reality which makes such a change in the common law necessary.
47 The seal continues to serve a useful purpose in our law. It allows a promise to be enforced without evidence of consideration and, more importantly in the context of this case, grants parties to a contract a simple means of ensuring that they will not be liable to anyone but the parties named therein. In my view, there is no evidence that there has been any change in commercial reality which would warrant the abolition of the sealed contract rule. The rule has been an accepted part of the common law in Canada since at least 1903. Presumably, parties have been aware of the rule and have structured their transactions accordingly. The appellant has not shown the Court that the rule has caused any inconvenience in commercial transactions, nor that it has caused any great hardship. It has shown only that the rule might operate to its detriment in this particular case. In this light, the following caution from B. N. Cardozo (later Justice of the U.S. Supreme Court) in The Paradoxes of Legal Science (1928), at p. 68, is particularly apposite:
Every system of law has within it artificial devices which are deemed in the main and on the average to promote convenience or security or other forms of public good. These devices take the shape of rules or standards to which the individual though he be careless or ignorant, must at his peril conform. If they were to be abandoned by the law whenever they had been disregarded by the litigant affected, there would be no sense in making them.
48 Notwithstanding my view that there has been no change in commercial reality which makes the abolition of the sealed contract rule necessary, to effect such a change could also have unwarranted, far-reaching and complex consequences both in the law of contract and in the law of property. As I have stated above, the sealed contract rule exists within a system of rules which relate to sealed instruments. Many of these incidents of the seal stem from the historic view of sealed contracts, namely that they were enforceable by virtue of the form of the instrument. It is for this reason, for example, that today a contract under seal does not require consideration. In my view, to abolish one of the rules within this system because there no longer appears to be a rationale for it would necessarily call into question the validity of the other rules. For example, were this Court to abolish the rule that only the parties to a sealed contract can sue or be sued on such a contract, on the ground that it does not appear to have a rationale, the enforceability of a sealed contract without consideration could certainly be questioned for the same reason. The abolition of the sealed contract rule would thus amount to a fundamental reform of the common law rather than an incremental change.
49 To abolish the sealed contract rule for the reasons that the appellant has suggested would also have the effect of creating great uncertainty both in commercial relations and in the law itself. There are many rules in contract and property law which are historical, technical and which no longer appear to have any modern day rationale. However, they remain a part of the law. For example, an inter vivos gift is not valid until it is delivered. In my view, to abolish the sealed contract rule on the ground that it is technical and anachronistic could have the effect of creating uncertainty as to the validity of these other technical rules which do not appear to have a modern day rationale.
50 While a contract for personal property or personal obligations may be executed without a seal as long as there is valid consideration, in Ontario the conveyance of an estate in real property must be executed by deed: see, e.g., Anger and Honsberger: Law of Real Property (2nd ed. 1985), vol. 2, at p. 1263; Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, ss. 2, 3 and 9; Statute of Frauds, R.S.O. 1990, c. S.19, s. 2. The formal requirement that such deeds be executed under seal has been eliminated by legislation in Ontario: see, e.g., Land Titles Act, R.S.O. 1990, c. L.5, s. 79(1); LRRA, s. 13. However, as the foregoing analysis shows, such conveyances are deemed to be specialty contracts to which the sealed contract rule would apply. The sealed contract rule, therefore, applies in the majority of property law transactions. Certainty in real property transactions is essential. Parties and solicitors must be able to rely upon the title documents and to be secure in knowing that the terms of a deed which is registered are conclusive both as to the parties and as to their rights and liabilities. To abolish the sealed contract rule would no longer allow them to do so, by making it possible for parties not appearing on the face of the deed to have rights and obligations under it.
51 The abolition of the sealed contract rule could also have far-reaching effects on existing contractual relationships. The sealed contract rule has provided a valid means for undisclosed principals to avoid personal liability and has most probably been invoked in transaction after transaction. To abolish the rule could expose such undisclosed principals to potential liability for as long as twenty years. In the United States, some of the courts that were asked to abolish the sealed contract rule refused to do so for this very reason. For example, in Crowley v. Lewis, 146 N.E. 374 (1925), the Court of Appeals of New York found that it was not at liberty to change the sealed contract rule, which was so well understood and so often enforced. Andrews J. stated as follows, at p. 374:
Thousands of sealed instruments must have been executed in reliance upon the authority of Briggs v. Partridge. Many times the seal must have been used for the express purpose of relieving the undisclosed principal from personal liability. It may not be unwise to preserve the distinction for this especial purpose. But whether wise or unwise the distinction now exists.
Similar reasoning led both the District Court of Appeal of Florida in McMullen v. McMullen, 145 So.2d 568 (1962), and the Supreme Court of Pennsylvania in Toll v. Pioneer Sample Book Co., 94 A.2d 764 (1953), to conclude that the sealed contract rule should not be abolished. I agree with the reasoning of these three decisions. The abolition of the sealed contract rule would have the unfair result of creating uncertainty for those who had relied on the rule in executing their contracts. To avoid uncertainty and any unfairness to those parties who have structured their commercial relationships in accordance with the sealed contract rule, any change to the law should operate prospectively. Only the Legislature has the power to create a prospective change in the law.
52 The foregoing analysis has focussed on the effects of the abolition of the sealed contract rule. In my view, the need to preserve certainty in commercial relations must be considered when a court is asked to make a change to the sealed contract rule. For example, a statement that the sealed contract rule does not apply to corporations would create uncertainty as to the potential liability of all those individuals who had corporate agents insulate them from any obligations under the contract by executing it under seal. While such uncertainty may not be as widespread as that which would result from the outright abolition of the rule, such a change in the law could still have the effect of frustrating the intentions of those parties who entered into their agreements with the understanding that the rule applied. Courts should be loath to make even smaller modifications to the sealed contract rule without clear evidence that such a change is necessary to keep in step with evolving commercial reality and that it will not have unwarranted far-reaching effects.
VII. Application of the Sealed Contract Rule to the Mortgage in this Case
53 Final Note’s officer affixed the corporation’s seal to the mortgage at issue in this case; it was argued at trial that it is necessary to determine whether Final Note intended to create a sealed instrument in doing so. However, the mortgage is in the form prescribed under the LRRA and is subject to its provisions. Section 13(1) of the Act has the effect of deeming all instruments governed by its provisions to be documents under seal, for all purposes. It is not in dispute that “person” as used in s. 13(1) of the Act means both individuals and corporations. Section 13(1) of the Act, therefore, has the substantive effect of deeming the mortgage to be an instrument under seal for all purposes, including the application of the sealed contract rule. Notwithstanding Final Note’s intention in affixing its corporate seal to the mortgage, the sealed contract rule applies. The only parties to the mortgage are Final Note and FED. Since only the parties to an instrument under seal may be sued upon it, the appellant cannot maintain an action on the covenant in the mortgage against the respondent group of beneficial owners.
VIII. Disposition
54 I would dismiss the appeal with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Goodman Phillips & Vineberg, Toronto.
Solicitors for the respondents Dr. Almas Adatia, also known as Almas Adatia, Peter Bortoluzzi, Sultan Lalani, in Trust, 808413 Ontario Inc. and Crown Freight Forwarders Ltd., previously known as 808548 Ontario Inc.: Goldman, Sloan, Nash & Haber, Toronto.
Solicitors for the respondents Mohamed Rajani, Shorim Investments, in Trust, and Shorim Investments Limited, in Trust: Orbach, Katzman & Herschorn, Toronto.
Solicitors for the respondents Lionel C. Larry and Robins, Appleby & Taub: Torkin, Manes, Cohen & Arbus, Toronto.