Friedmann Equity Developments Inc. v. Final Note Ltd.

Friedmann Equity Developments Inc. v. Final Note Ltd.
Collection
Supreme Court Judgments
Date
2000-07-20
Neutral citation
2000 SCC 34
Report
[2000] 1 SCR 842
Case number
26971
Judges
Gonthier, Charles Doherty; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil; Arbour, Louise
On appeal from
Ontario
Subjects
Contract
Notes
SCC Case Information: 26971
Decision Content
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. e