Business Law

Letters Of Intent - Acting In Good Faith and Reasonably

Mar 18th, 2013

By Morris Szwimer

Often times, at the embryotic stages of a potential commercial transaction, clients may require the drafting of a letter of intent (“LOI”) which commits to writing certain terms and conditions regarding the first phase of negotiations.  The LOI may, but does not always, contain or describe the purchase price and certain other conditions which may be important to the parties.  The LOI does however often contain a provision stating that the LOI is simply a statement of “mutual intention” and does not constitute a “binding commitment” on either party to enter into the contemplated transaction.

In the event that the negotiations are derailed, clients may often consult counsel to determine or provide advice as to whether a party to the LOI may withdraw from negotiations and terminate the LOI without exposure to litigation and ultimately, damages.  As opposed to common law provinces and cross-border transactions, it seems clear in the Province of Quebec that prior to withdrawing from negotiations, a party must be seen as having had acted in good faith and reasonably, the whole in accordance with Article 1375 of the Civil Code of Quebec.

This reasoning in terminating pre-contractual negotiations was confirmed in the decision of Friedman vs. Ruby (2012 QCCS 1778) where the negotiations which followed the execution of a LOI terminated after months of discussions.  The Court found that the potential purchaser in the transaction (plaintiff) had the burden of proving that in fact the vendor (defendant) had acted in bad faith.  The simple fact that the vendor had only consulted counsel late in the discussions and in close proximity to the ultimate failure of the deal, did not translate in vendor having acted in bad faith.  In fact, the Court found that defendant acted in a prudent and diligent manner raising certain tax considerations before proceeding with final revisions to the documentation.

As such, it is important to remember that simply inserting language in the LOI confirming the non-binding nature of the document or that no legal obligations have or will be created by the LOI’s execution may not necessarily exculpate one from their obligation to act in good faith and in a reasonable manner.

 Morris Szwimer is a corporate lawyer at Spiegel Sohmer working primarily in domestic and cross-border transactional work.