Canada: The Importance Of Negotiating In Good Faith

Last Updated: March 10 2013
Article by Jean-Pierre Sheppard

Article 1375 of the C.C.Q. states that parties must generally interact in good faith. Under Québec law, the duty to act in good faith is implicit in every contract and is defined as the absence of malicious intent in a prudent and diligent contracting party. As such, the contracting party's behaviour must be compatible with the achievement of the parties' common goal. The parties must abide by this obligation as soon as pre contractual negotiations begin, even if such an obligation is not expressly provided for in the pre-contractual documents. A party acting in bad faith can be found liable for any harm caused to the other party by such behaviour.

The Québec Superior Court examined the duty to negotiate in good faith in the recent decision of Desjardins Sécurité financière v. Bergeron (2011 QCCS 2204). In that case, the lessee had the option to renew his lease according to the terms of the contract. The lessor suggested a lease agreement under different conditions, including an excessive rent increase. Despite repeated demands by the lessee, the lessor never sent any documents justifying the rent increase and failed to take the steps required to reach an agreement. The lessee refused these renewal conditions and the lessor applied to the courts for the eviction of the lessee as a result. The Court found that the lessor acted in bad faith in neglecting to send documents justifying the rent increase to the lessee. Because the negotiations for the renewal of the lease were not carried out in good faith, the lessee was permitted to continue to rent the premises under the conditions of the first renewal agreement.

The contracting party will be considered to be in bad faith if it makes no attempt to seriously negotiate or if it does not address the legitimate demands of the other party. In Garderie à moi mes enfants inc. v. Importations de chaussures Vulcano ltée (2012 QCCS 1833), the lease stated that Defendant had to sell its commercial building to the plaintiff at market value. The lease included an exclusive and irrevocable purchase option benefiting Plaintiff, who had, at all times, consistently expressed its interest to purchase the building at the end of the lease. The discussions relating to the purchase price were abruptly interrupted by Defendant but Defendant nevertheless confirmed its intention to proceed with the transaction.

However, rather than respecting the agreement and presenting Plaintiff with the option to acquire the building, Defendant presented Plaintiff with another offer to lease. This offer was not accepted by Plaintiff, who wanted to purchase the building outright. The Court held that Defendant failed to abide by its duty to negotiate in good faith by not engaging in serious discussions with Plaintiff and refusing to respect the lease clauses entitling Plaintiff to acquire the building.

The duty to negotiate in good faith also carries with it the duty not to break off negotiations without a valid reason. This principle was endorsed by the Superior Court in Friedman v. Ruby (2012 QCCS 1778). In that case, the Court specified that a party who engages in reasonable discussions and does not bring those discussions to a standstill will not be considered to have acted in bad faith.

With the collaboration of Isabelle Gauthier- Brancoli.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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