Canada: Can You Engage Your Liability By Walking Away From Contractual Negotiations? An Important Confirmatory Judgment From The Quebec Court Of Appeal

In a judgment dated June 30, 2015 in the case of Singh v. Kohli (2015 QCCA 1135), the Quebec Court of Appeal issued very interesting and up-to-date statements about the inherent risks of entertaining business discussions and then terminating same.

The appellant Singh is the founder and president of Kripa Energy Inc. ("Kripa"), a small oil-drilling company, who in the fall of 2010 engaged into discussions with the respondent Kohli and his related company (the "Respondents") on the possible acquisition of new units and corresponding injection of capital. The Respondents soon indicated they wanted to discuss sharing control of Kripa with Singh. Singh had initially presented his co-shareholders as silent investors and mentioned that they would follow any recommendation he would make.

At some point during the discussions, on November 12, 2010, the Respondents provided a draft Memorandum of Understanding ("MoU") setting out the general terms of the transaction they were proposing, but Singh did not agree with same. Amongst other things, he advised that he would need to consult with his co-shareholders given the Respondents' demands on shareholder structure to address control of Kripa. A few days later on November 15, 2010, during a meeting between the parties, Singh apparently changed his mind and agreed to the terms set out in the MoU. He also agreed to meet with the Respondent's lawyer to discuss a new shareholder agreement and finalize the transaction. The Respondent's lawyer testified at trial that during this meeting, which took place the next day on November 16, 2010, everybody seemed in agreement over the terms of the MoU and that he reviewed the document with the parties in order to draft the new shareholder agreement. He also testified that Singh vouched again for his co-shareholders who would do as he decided.

However, the transaction was never finalized as Singh never followed up on the documentation he had undertook to deliver and on November 27, 2010, 11 days after the meeting with the Respondent's lawyer, Singh advised the Respondents that there would be no deal because his co-shareholders did not want him to share control of Kripa.

The Respondents took action against Singh, with Kripa called as an impleaded party. They asked the Superior Court to force Singh and Kripa to comply with the MoU and proceed to the transaction, and also claimed damages against Singh. The trial judge found that the MoU constituted a binding contract and forced the issuance of additional shares of Kripa in consideration of the amount of money the Respondents were willing to invest. Hence the appeal procedures instituted by Singh.

In its judgment, the Court of Appeal discusses the binding nature of the MoU, the concepts of the apparent mandate and indoor management rule, as well as Singh's liability for having terminated the negotiations the way he did. In this article, we will limit ourselves on discussing the Court of Appeal's position on the latter, but we certainly recommend that you read the judgment on these other points if they are of interest to you, as the Court of Appeal provides great insights and up-to-date analysis on these matters.

The issue at hand with regards to the personal liability of Singh resulting from his termination of the contractual negotiations is summarized as follows by the Court of Appeal:

"[65] (...) under the general rules of the Civil Code of Québec, can the appellant be personally liable for the prejudice, if any, caused by his conduct during the negotiations with the respondents, including his refusal to enter and have Kripa enter into the contract that his counterparts were hoping to conclude? (...)"

The Court of appeal states that the general rule is the freedom of contract which, as a demonstration of free will, also entails freedom not to enter into a contract. As such, refusal to enter into a contract is not considered blameworthy and no personal liability may result from such a refusal, whatever the reasons may be (except in exceptional circumstances which are not present in this case, such as for instance when one has contractually agreed to enter into a subsequent contract). However, failure to negotiate in good faith and to collaborate loyally may be sanctioned, as a violation of the provisions of the Civil Code of Québec which stipulate that every person is bound to exercise his or her civil rights in good faith, that no right may be exercised contrary to the requirements of good faith, and that parties must at all times conduct themselves in good faith.

The Court of appeal acknowledges that even though negotiations are generally undertaken with the anticipation that a contract will result from same, this does not mean that one party cannot change his or her mind along the way, even at the last minute. Good faith will not limit freedom to contract or not to contract, but will ensure that parties act honestly and loyally during the negotiations.

In that context, the Court poses that disagreement between parties and failure to reach an agreement cannot, in and of themselves, be taken as a sign of lack of collaboration, bad faith or abuse from one party or the other. Also, to determine whether a party did not act in good faith, the conduct of both parties, and not only that of the party who ended the discussions, must be examined as well as the general context of the negotiations. The Court also indicates that the threshold to conclude to bad faith is high and will depend on a case-by-case, multi-factored analysis.

The Court considers that until the morning of November 15, 2010, Singh's conduct may have been "somewhat muddled", but cannot be qualified as dishonest or abusive. Until that time, Singh had never agreed to the MoU and had, on the contrary, expressed many reservations about the terms proposed by the Respondents. However, the Court finds Singh's conduct afterwards to be difficult to understand: he abruptly changed his mind on November 15, 2010 and accepted the MoU, even though same did not contain complete and comprehensive terms of the transaction. Nevertheless, by agreeing to the MoU, Singh was agreeing to pursue negotiations. He also at that moment "recklessly" vouched for the other Kripa's shareholders.

As the Court of Appeal puts it:

"[84] If the appellant committed a fault, it was then. And when he realized that he had gone too far (this is the only possible explanation for his next step), he discontinued the negotiations, but did so in an underhanded way that was also blameworthy. Rather than speaking frankly to the respondents, he decided not to follow through on his commitments to send the required documentation to Mtre Silverstein, after the November 16 meeting, and remained silent. (...) Nothing ensued, and as far as we know from the documents filed in appeal, the appellant did not respond to his former vis-à-vis before November 27 and confirmed his refusal in writing on December 7, 2010. This was certainly an inelegant manner to end the discussions."

But the Court of Appeal also looks into the Respondents' conduct during the same period. They are experienced businessmen who had every reason to be suspicious about the sudden and unexpected change of mind of Singh during the November 15, 2010 meeting and his renewed claim that his co-shareholders would simply follow his instructions. The Respondents had been provided in the past with a copy of the current shareholder agreement which provided for the approval of 66% of the unit holders in order to change Kripa's corporate structure or issue more shares. In that context, the Court remarks that the Respondents could not reasonably believe that the shareholders would simply follow Singh's lead, nor could they let themselves deceived by Singh's statement to that effect, and certainly not without any further inquiry. In fact, previous email correspondence exchanged between the parties hinted to the fact that some shareholders would disagree despite Singh's reassurances to the contrary. This apparently impacted the Court's reasoning, which wonders why the Respondents would decide to close their eyes on this problem as of the afternoon of November 15.

This lead to the Court's concluding as follows:

"[87] In short, until the morning of November 15, 2010, there was no meeting of the minds, no agreement and no expectations of an agreement anymore. On November 15 and 16, because of the appellant's change of mind, expectations were revived and the parties agreed to pursue their negotiations along the lines set out in the MoU. In the absence of the shareholders, however, neither party could reasonably expect that an agreement would ensue (which remained a mere possibility), and the respondents could not reasonably trust the appellant's claim in this regard. In fact, considering the terms of the MoU, the appellant, in the absence of the shareholders, had actually no other choice but to withdraw from the negotiations. That he was not exactly forthright with the respondents is certainly not commendable, but did not actually affect the outcome of the negotiations."

Therefore, it this context, the Court of Appeal refuses to hold Singh's liable for his termination of the negotiations, as the respondents were not justified to entertain any reasonable expectations that the negotiations would lead to a favorable outcome.

Interestingly enough, the Court also indicates that even if it were to conclude that the Respondents were justified to entertain such expectations, Singh's conduct could not be sanctioned as there is no evidence that it caused any compensable loss to the Respondents. Wasting time in negotiations is an inherent risk of any contractual negotiations and cannot be considered a prejudice for which compensation may be obtained, except in the most exceptional of circumstances. As for the profits expected by the Respondents, the Court acknowledges that the Respondents certainly lost the opportunity of buying Kripa's shares and receiving dividends, but since there was never any binding agreements to that effect nor a promise to contract (contrary to the trial judge, the Court of Appeal ruled that the MoU was not comprehensive enough and left too much to be negotiated to be considered as a binding contract), this loss is not a prejudice for which compensation can be awarded.

This judgment is a clear illustration of the case-by-case, multi-factored analysis that must be carried out before concluding to the bad faith of a party, and of the importance of the specific fact matrix of a case. Singh's conduct was certainly not commendable, but there was some wilful blindness on the part of the Respondents about the co-shareholders' approval. Overall, the Court of appeal made sure to look at both parties' behaviour to resolve the issue.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.