Walking Away From The Table: Pre-Contractual Documents And The Duty To Negotiate In Good Faith

When negotiating a deal, it is common for parties to execute pre-contractual documents, such as a letter of intent, memorandum of understanding, or term sheet, reflecting the principal terms of the proposed transaction. Often, though not always, these pre-contractual documents provide that they are "non-binding" and that the deal is subject to, for example, due diligence and the execution of definitive agreements. It is also common for parties to provide in pre-contractual documents that they "agree to negotiate in good faith."

In the event of a dispute resulting from a breakdown in negotiations, parties should be aware of the fact that under Québec law (this is not the case in Ontario), while a properly drafted "nonbinding" pre-contractual document may preclude a court from finding that the terms of the precontract are enforceable, there is an independent duty for parties to negotiate in good faith even in the absence of an express clause to this effect in a pre-contractual document. As such, and notwithstanding the "non-binding" nature of a pre-contractual document, a party that breaches its duty to negotiate in good faith, or that unreasonably breaks off negotiations, can potentially be held liable, extra-contractually, for damages caused to the other party.

The Duty to Negotiate in Good Faith Under Québec Law

The duty to act in good faith is a well-recognized principle under Québec law. Indeed, this duty is expressly codified in the Civil Code of Québec which provides that "no rights may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith" and "the parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished."

Though not expressly defined, the duty to act in good faith is understood, in broad terms, as the duty to act honestly and reasonably and to conduct oneself as would a "reasonable person" in the same circumstances (i.e., according to an objective standard). This duty encompasses the duty to act in good faith in the course of pre-contractual negotiations even where this has not been expressly provided for in pre-contractual documents. It should be noted that good faith is always presumed and, as a result, the party invoking a breach of this duty bears the burden of proof.

The duty to negotiate in good faith, and in particular the duty not to unjustifiably terminate...