CONTRACTS: The consequences of failed negotiations

A recent decision of the Quebec Court of Appeal (Singh v. Kholi, 2015 QCCA 1135) deals with three interesting legal issues arising out of a failed negotiation with a view to arriving at an investment in a mining company.

In this case, the investors propose to invest an amount of $675,000 in in a company called Kripa, of which the Defendant Singh the president. However, under the shareholders agreement, it was clear that he did not have authority issue the new shares that would be required without the consent to the other shareholders. Nonetheless he represented to Mr. Kohli that he did have such power.

A Memorandum of Understanding regarding the investment, which was clearly indicated as being a draft and not a contract, was entered into. When the parties could not agree on the definite terms, a meeting was held at a lawyer’s office to attempt to conclude an agreement. 

The trial judge concluded that an agreement had been reached at this meeting, and awarded the plaintiff damages based on the anticipated loss of profit of the investment.

The appeal raised numerous issues including:

a)   the nature of the Memorandum of Understanding and whether a contract was concluded,
b)   the issue of an apparent mandate, andc)   the issue of what damages are available against Singh personally in the event that a contract is not concluded and that he had negotiated in bad faith.

The Court of Appeal concluded that the Memorandum of Understanding did not constitute a contract, the criteria of apparent mandate were not met, and no damages could be claimed, in particular damages for loss of profit.

The particular issue of interest was whether a) by withdrawing at the last minute, Singh had acted in bad faith and b) what were the damages that could be awarded.

On this issue, the Court posed the question as follows:

[65] Therefore, the only remaining question is the following: 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?

Ultimately the Court dismissed the claim.

The Court notes that:

a)    freedom of contract entails the freedom not to enter into a contract,

b)    failure to negotiate in good faith and collaborate loyally (which must not be confused with failure to enter into a contract or failure to give effect to a contract) may however be sanctioned as a violation of articles 6, 7 and 1375 of the Civil Code of Quebec, and

c)    the fact that negotiations are generally undertaken with the anticipation that a contract will ensue does not mean that one party cannot change his or her mind along the way, even at the last minute.

The Court expressed it as follows:

[71] Good faith, in that sense, is not meant to limit freedom to contract or not to contract but to ensure that parties act honestly and loyally during the negotiations…

[74] In summary, entering into negotiations always raises hopes of a contractual happy ending, and both parties may be confident that a contract will be concluded. Parties who enter negotiations must act in good faith and collaborate with one another towards that objective. They may be sanctioned if they do not. Disagreement, as such, and failure to reach an agreement, however, cannot, and cannot either, in and of themselves, be taken as a sign of lack of collaboration, bad faith or abuse from one party or the other. A finding of bad faith or abuse requires more than that, freedom to contract or not to contract being the ultimate discretionary right.

The Court then goes on to consider that, even if there had been a fault, whether there were any damages caused by the fault. The principal question that the Court considers is whether the claim for the loss of profits for lost opportunity can be granted. On this issue the Court concludes:

[106] The French solution is applicable under the Civil Code of Québec in all respects. Quebec law may recognize, in general, that the loss of an advantage that could reasonably be anticipated may be compensated,[89] but the rupturing of negotiations does not lead to the loss of such an advantage and, certainly, does not allow for compensation of the profits that the “négociateur déçu” was hoping for, had the contract been concluded, or the loss of the chance to make such profits.

[107] I hasten to say that, of course, I am not asserting that loss of the profits expected from an unsigned contract can never lead to a condemnation for damages. It may, for instance where a public body, contrary to the terms of a public call for tenders (or the law), does not award the contract to the lowest conforming bidder,[90] or tries to circumvent the bidding process altogether.[91] It may also, in a situation such as Billards Dooly's inc. v. Entreprises Prébour ltée,[92] where there was more than an “accord de principe”, but an actual contract, flowing from a meeting of the minds, which one of the parties refused to formalize. But those are entirely different contexts, in which arose, at one point, an obligation to contract which did not exist in the present case.