Negotiating and Drafting Commercial Contracts in Québec – the Pre-Contractual Obligation to Act and Negotiate in Good Faith

In Québec, every person has a legal obligation to exercise its civil rights in good faith. This obligation obviously applies to rights arising from actual contractual relationships but what about the exercise of one’s rights and one’s conduct during the pre-contractual and negotiation period, when each party is attempting to get the best possible deal?

Pre-contractual obligation to act and negotiate in good faith

The Civil Code of Québec (“C.C.Q.”) provides that every person is bound to exercise its civil rights in good faith¹ and that parties shall conduct themselves in good faith both at the time their obligations are created and at the time they are performed or extinguished.²  Thus, the general obligation to act in good faith applies during the pre-contractual and negotiation period.³ This obligation further imposes a reciprocal duty of loyalty and of active collaboration.⁴

Obviously, every person has the liberty to contract or not and, thus, the commencement of negotiations does not bind the negotiating parties to conclude an actual agreement or contract. So long as a party acts and negotiates reasonably and in good faith, that party has the right to change its mind and withdraw from ongoing negotiations if it is no longer in its interest to execute the proposed contract.⁵ However, the rupture of negotiations originating from a party’s failure to negotiate in good faith may give rise to civil responsibility if such failure causes direct and certain damage to the other negotiating party.

Presumption of good faith of parties to a negotiation

According to Québec law, good faith is always presumed, unless the law expressly requires that it be proved.⁶ A party wishing to invoke a breach of good faith by the other negotiating party (for example in a case where the latter decided to discontinue the negotiations, or decided to contract on the same issues with a different party) has the burden of proving that this latter’s actions or omissions during the negotiation period were excessive and unreasonable so as to amount to bad faith.

Furthermore, parties to negotiations must be conscious that the more the negotiations are at an advanced stage, the greater the chances that a climate of confidence will have developed between the parties, and thus that a greater sense of mutual commitment may arise, which supports the reasonable expectation that the conclusion of a contract is imminent. Accordingly, the more a rupture of, or withdrawal from, negotiations by a party is late, the more it has to be justified on acceptable and reasonable grounds.⁷

Also noteworthy, since parties often negotiate and execute pre-contractual documents prior to actually negotiating and drafting commercial contracts (such as proposals, letters of intent and memorandums of understanding which echo the main terms and obligations of the proposed commercial transaction), these pre-contractual documents may be used to support a claim of bad faith, should the parties fail to follow through with negotiations.

Examples of situations demonstrating a lack of good faith during negotiations

1. A party asks the other party if it is involved in parallel negotiations, which proves to be the case, but this party conducting such parallel negotiations fails to confirm.⁸
   
2. A party does not actually ask, but is led by the circumstances and conduct of the other party to legitimately believe in the exclusivity of the negotiations, and its counterpart fails to inform it that it is involved in parallel negotiations.⁹
3. A party uses confidential information, obtained during the negotiations, for its own profit and where such use causes damage to the other party who disclosed the confidential information¹⁰ (depending on the circumstances of the case, we might refer to such a conduct as a breach of confidence, or of a fiduciary duty.)¹¹
4. A party fails to disclose to the other party information that is material and proves afterwards to have doomed the negotiations from the start (such as a right of first refusal granted to a third party).¹²

Conclusion

When parties enter into negotiations in view of entering into actual commercial transactions, they must act and negotiate in good faith throughout the negotiations, including the execution of pre-contractual documents. A party who negotiates unreasonably and not in good faith, and whose actions or omissions result in direct and certain damages to the other negotiating party, may be exposed to a claim in damages. Such damages can represent, among others, (i) expenses incurred during the ongoing negotiations, (ii) loss of time, (iii) lost commercial or business opportunities, and (iv) damages to reputation.¹³