[1] The Court is seized with an appeal from the judgment of the Superior Court, District of Montreal (the Honourable Madam Justice Chantal Corriveau), rendered on June 28, 2013, which maintained the respondents’ action, homologated a certain alleged agreement and rendered a variety of accessory orders.
[2] For the reasons of Bich J.A., with which Rochette and Gagnon JJ.A. agree, THE COURT:
[3] ALLOWS the appeal, without costs;
[4] SETS ASIDE the judgment of the Superior Court;
[5] DISMISSES the respondents' action, without costs.
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REASONS OF BICH, J.A. |
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[6] Around mid-November 2010, the parties allegedly entered into an agreement the nature of which is at the heart of the dispute. Was this agreement a binding and executory contract or was it a pre-contractual arrangement by which the parties simply decided to pursue the negotiations undertaken a few weeks earlier, while outlining the terms of their future discussions? Could this contract or arrangement bind the impleaded party, either as the consequence of a mandate or apparent mandate, or because of the indoor management rule? Could it bind its shareholders? Finally, if the arrangement was not a contract, can the appellant be held personally liable for the losses, if any, incurred by the respondents because of his allegedly reprehensible conduct during negotiations?
I. Facts, PROCEEDINGS, JUDGMENT
[7] The appellant is the founder and president of Kripa Energy Inc., the impleaded party, a small oil-drilling company constituted under the Canada Business Corporations Act (“CBCA”).[1] We know very little about its shareholders. There are 26 of them, each of whom holds a certain number of “units” of 10,000 shares, for a total of 30 units or 300,000 shares. Together, the appellant, his wife and his daughter hold a total of 13 units, which he controls. Some of the other shareholders appear to be relatives, friends or acquaintances of the appellant. There is no evidence, however, that (apart, perhaps, from his wife and daughter) any of them is a nominee shareholder for the appellant.
[8] A Re-Amended Shareholder Agreement dated August 9, 2009 binds Kripa's shareholders. In its preamble, the shareholders (with the exception of the appellant) are described as “silent investors”, but the true meaning of this characterization remains unclear in light of the agreement itself, which gives them considerable powers. The appellant, for his part, is described as the “founding shareholder” as well as the Chief Executive Officer of the company. He sits on the board of directors and also has the privilege of naming one of the other directors.
[9] In the fall of 2010, the appellant was looking for new investors and planning for Kripa to issue 10 more units. According to the shareholder agreement, the issuance of new units would not only require a “special resolution” of the company's board of directors,[2] but also a two-thirds majority shareholders' resolution.[3] The additional capital would allow Kripa to convert its current vertical wells into horizontal ones and activate other wells, thus substantially increasing production and revenues. A monthly dividend of $7,560 per unit was forecast.[4] The respondents[5] showed interest and negotiations between the parties ensued. It was soon clear that the respondents wanted more than the mere acquisition of some of Kripa's shares.
[10] It is worth noting that, at the beginning of the negotiations, the appellant forwarded a copy of Kripa's shareholder agreement to the respondents, who admit receiving it. According to the trial judge, however, the appellant also represented to the respondents that his co-shareholders were “silent investors”, that he controlled them and that they would abide by his decisions. This, apparently, was his stance throughout the negotiations.
[11] The respondents offered to buy 4.5 units for a total price of $675,000 upon the condition that they share control of Kripa with the appellant. How was this condition to be fulfilled, practically speaking? According to the trial judge, the respondents specifically required 50% of the voting rights allotted to the shareholders of the company.[6] The evidence, however, is unclear. It can equally suggest that the respondents sought a de facto control to be achieved by a seat on the board of directors as well as an active involvement in the day-to-day operations of Kripa and the management of its affairs (especially financial), on an equal footing with the appellant. For instance, in an email dated November 9, 2010, respondent Kohli wrote the following to the appellant:
You can be rest assured that any and all information we exchange will be totally confidential and bound by non-disclosure and non-circumvention norms.
Based on your assurances, listing following specifically (without limitations as there were others, which are not listed here below)
Your acceptance that our participation will be active in nature and not “as sleeping partners’.
The application of NEW FUNDS is specifically for the horizontal wells and others project associated costs and corporate costs as agreed
Banking papers to have two signatures for payments and others
Contracts to require two signatures of the members of the Board
Daljit has more time on hand and will be considered as one of the Member for above corporate duties.
Office relocation, etc.
A formal shareholders/unit holder’s agreement will be prepared to ensure proper segregation of duties with buy-back provisions and others.
Trio/Kohli Group will act as ONE and JD/Existing group as TWO
Right of first refusal to purchase any of the 6 units that are not ‘PAID’ for or ‘COMMITTED’ in favour of TRIO/KOHLI .. The interested parties to be given a deadline.
All accounting / legal matters to be segregated and payments to be supported by invoices.
Previous obligations / income tax and others to be listed and are to be paid by the existing unit holders to the Company from distributions or as per recommendations of the Company accountants /attorney
JD to provide copies of sample invoices for some of the major expenditures covering ‘contractor fees’, etc. for purposes of to seeing how costs are segregated between Kripa wells and the other two.
Please consider selling the two other wells to Kripa Group. This will give you needed cash personally and you will still retain 13/40TH share of the two units or above 32%. Perhaps the other unit holders may not be willing to accept this in which case, Trio/Kholi would like to have this option anyway.
THE ABOVE IS IN BRIEF SOME POINTS THAT WE HAVE DISCUSSED.[7]
[Transcribed as written; emphasis added.]
[12] The Memorandum of Understanding dated November 12, 2010 (“MoU”), which, despite its title, was a draft “not to be construed as an Offer or Proposal by TRIO/KOHLI”,[8] used similar words:
MEMORANDUM OF UNDERSTANDING
Dated: November 12, 2010
Between Kripa Energy Inc. (represented by JOGINDER SINGH) and TRIO/KOHLI (represented by Subhash Khanna for TRIO and Daljit Kohli for KOHLI.
As discussed and agreed between the two parties on November 11, 2010, KRIPA ENERGY INC. will effective immediately authorize the legal firm of STIKEMAN ELLIOT to make all the changes deemed necessary in the Corporate By Laws and minutes to reflect following:-
- Your acceptance that the participation of TRIO/KOHLI will be active in nature and not “as sleeping partners’ and that TRIO/KOHLI will be involved in all decision making.
- The application of NEW FUNDS is to be specifically applied for the horizontal wells and others project associated costs and corporate costs as agreed.
- Banking papers to have two signatures for payments and others.
- Contracts to require two signatures of the members of the Board (namely JD Singh or one other from TRIO/KOHLI group.
- Appointment of officers JD SINGH, President, DALJIT KOHLI, Secretary Treasurer, LLOYD PRIZANT, Vice President
- Daljit has more time on hand and will be considered as one of the Member for above corporate duties and will work closely with JD to evaluate proposals for future expansion in order to enhance the value of the Kripa Energy for the benefit of all the shareholders.
- Office and head office relocation, to TRIO OFFICE.
- A formal shareholders/unit holder’s agreement will be prepared to ensure proper segregation of duties with buy-back provisions, arbitration,etc.
- JD/KRIPA will be PARTY NUMBER ONE and TRIO/KOHLI will be PARTY NUMBER TWO
- Right of first refusal to purchase any of the 6 units that are not ‘PAID’ for or ‘COMMITTED’ in favour of TRIO/KOHLI. The interested parties to be given a deadline.
- All accounting / legal matters to be segregated and handled by TRIO in-house accounting department. AUDITORS will be appointed.
- Previous obligations / income tax and others to be listed and are to be paid by the existing unit holders to the Company from distributions or as per recommendations of the
- JD will give an option to TRIO/KOHLI to buy the two wells owned by JD through a Company controlled by him at a price to be agreed by KRIPA ENERGY and/or TRIO/KOHLI group. The purpose of this is to avoid any notion of “conflict of interest”.
TRIO/KOHLI will have the exclusive right to purchase 4.5 units or more (if available, from the 10 units that are presently being offered). The payment for these is subject to immediate implementation of the changes above (CORPORATE STRUCTURE, SPECIFICALLY AND BANKING). The unit price is $ 150,000.00.
The two parties further agree to be bound by standard non-disclosure and non-circumvention norms.[9]
[Transcribed as written; emphasis added.]
[13] At trial, respondent Kohli testified that he intended to be “an active member in the organization because I was not interested in any Ponzi schemes”.[10] He also explained that:
Q. [218] […]
And for you that is the fifty percent (50%) control that you referred to?
A. We never… we never basically said control in that… in that way. All we said at all times, that decisions will be joint. When you talk about control, we were not talking about control of the voting shares or control of, you know, the company, a fifty percent (50%) ownership of the company, we were always talking that all the… all the decisions should be made by two people.
Q. [219] And who are those two people?
A. It was… at that meeting, at the meeting between us…
Q. [220] At what meeting?
A. One of the meetings that we had, we had several meetings, at all the meetings that we had it was one person would be J.D. [the appellant] and the other person would be Khanna.[11]
Q. [359] I see. So now we've heard Mr. Kohli's testimony and I want you to tell the Court what your dealings were with Mr. Singh starting with your first meeting.
A. […]
And he also showed me the statements from Toronto Dominion Bank that how much money he's collecting and how much he's distributing. So at that meeting, my major concern was that, you know, you're collecting let's say net of expenses a hundred dollars ($100) and you're distributing a hundred dollars ($100), so you are distributing the whole revenue which is not right, and I am not interested to invest in anything where I don't have the signing authority.
So that was clearly told to him in the first meeting that if you are looking for investment from our company or from my group, then I would like to be on the Board and have the signing authority of the bank or any non-negotiable or any negotiable instruments.[12]
[15] Whatever form of control the respondents intended to secure over Kripa, it remained an essential part of their proposal, without which they would not acquire Kripa's units.
[16] The appellant did not agree with the November 9 proposal, nor the November 12 MoU. He was concerned by the tax consequences of the proposal on Kripa's shareholders, he considered that the respondents should share in Kripa's existing liabilities, he was reluctant to share equal control of Kripa with the respondents (who would hold 11.25% only of the company's shares), he worried about the general impact of the proposal on his co-shareholders, whom he intended to consult with, etc. He advised the respondents accordingly.
[17] On November 14, 2010, there was still no agreement between the parties.[13] The situation was the same on the morning of November 15, when respondent Kohli sent the following email to the appellant:
To review the points that you raised yesterday at the meeting. Purpose of the review is to better explain our reasoning and perhaps assist you in yours views:-
AA: Corporate Income taxes
==
You explained in your email of Nov 10th, that your accountant has started that there will be no income taxes payable. For income tax purposes KRIPA will take a depreciation charge as the Net Book Value shown is that as at September 30, 2009 and not Sept 30, 2010. The net book value will be reduced by $ 253,000 plus $ 63,000.00 or by $ 316,000.00. In effect the net income before taxes will be $ 385,638.00 and not $ 701,638.00. Using the same rate for provision of income taxes, the corporate taxes now payable would not be ZERO but ˜ $ 34,000.00.
In your email of Nov 03, 2010, you accepted that the present shareholders shall look after this liability. (In spite of the decrease in book value of net assets, we accepted your offer to sell new units at $ 150,000.00.) Perhaps your accountant can give you an explanation of why there will not be “any taxes to pay”.
BB: Value of screw pumps ($ 240,000.00), pump jacks ($ 50,000.00) and Manitoba performance deposit ($ 62,000.00)
==
Referring to your email of Nov 10th, 2010. You had informed us on more than one occasion that the value of KRIPA is $ 4.5 and on that basis you offered 10 new units at $ 150,000.00 a piece and were increasing the number of units from 30 to 40. Some of these units have already been sold for the offered price of $ 150,000.00 and KRIPA has already started receiving payments on account of the purchase price, TRIO/KRIPA has also accepted to the same price. I am glad to see that you agree with us that the above items have already been taken into consideration when determining the cost of each new unit offered by you. This should be explained to the other present shareholders.
CC: Corporate structure
==
From the very beginning, based on the information given to us, we informed you that the structure of the Company has to be formalized as there were too many gaping holes. You agreed 100% with us as well and assured to us that this will be done and has to be done, and that the lack of funds had prevented you from doing this earlier. We accepted your assurances that there will no problems as all other unit holders are “sleeping partners and have no say in the management” and that we could buy them out, if they did not agree. We confirmed that we will go ahead and on the basis our agreement, we prepared a Memorandum of Understanding together. TRIO/KOHLI also agreed to support you and buy the units of those who wish to sell.
In your meeting yesterday, you informed that some unit holders had raised an issue in this regard. Many of these unit holders have already received bulk of their investments. The weakness of having no structure of the company has now been exposed. The other weakness is that some of the unit holders that hold more than one, fail to understand that they have all taken bulk of their investment and the new unit holders will be injecting $ 1,500,000.00 or $ 150,000.00 per unit versus their stake (which could be approx $ 15,000.00 per unit or $ 14,000.00 per unit after allowing for $ 34,000.00 for income taxes. Total long term debt per financial statement $ 460,000.00 divided by 30 units). It is clear that very near in the future they will have to bear the consequences of income taxes for the distributions they will receive in future.
This further makes it more important for you to structure the company properly as future distributions would be favourable mainly to the new investors as the present unit holders would be paid in less than 4 months from today’s date based at the present rate of distribution. It also underlines, why TRIO/SUBHASH are concerned as this will appear to others as “unfair” when it is NOT.
DD: Holding co.
==
May make sense for some unit holders as each one should make their own decision based on their tax position.
EE: Lodgepole Investments Ltd.
==
Should they put up 100% of the cost of the wells, they will get the right to write off depreciation and not KRIPA for income tax purposes.
I will be busy in the day till noon, as I have someone from Toronto to meet.[14]
[Transcribed as written.]
[18] The respondents argue that on that same date, however, and during the course of a private meeting with Mr. Khanna, the appellant changed his mind and finally agreed to the terms set out in the MoU. He also agreed to meet with the respondents' lawyer in order to finalize the transaction.
[19] The evidence remains unclear about the manner in which this meeting was scheduled. Was it, as the respondents assert, a last-minute, impromptu appointment following the appellant's change of mind, on November 15, or had the meeting been set up one or two weeks before, for other purposes, as suggested by the appellant? Whatever the answer to this question, the parties (i.e. the appellant, respondent Kohli and Mr. Khanna for respondent Trio Properties) met at the lawyer's office on November 16. The lawyer (who did not have a copy of the existing shareholder agreement) testified that they all seemed in accord over the terms of the MoU and that he reviewed the document with them in order to draft a new shareholder agreement. During cross-examination, he explained what this review had covered:
Q. [324] Okay. In the Memorandum… let me just take out my copy here, did you read through every point with the parties?
A. I don't think so. I mean I don't think we went through each point specifically, I think we just kind of had an understanding… again our mandate wasn't to draft a Memorandum of Understanding or to draft the Purchase Agreement or anything, I mean we had specifically said we're not representing either of the shareholders, our goal is to represent the company and draft a Shareholders Agreement. So I remember walking through and asking some questions that were relevant to drafting the Shareholders Agreement itself but I mean in terms of transaction terms, it wouldn't have been my duty to negotiate that as we began. I mean we were told here's the deal, you're not representing either shareholders in making the investment, that's done, we're just talking about a Shareholders Agreement.[15]
[20] He also testified that the appellant, once again, vouched for his co-shareholders, who would, he said, do as he decided.
[21] The transaction, however, was never finalized. On November 27, 2010,[16] the appellant advised Mr. Khanna that “there would be no deal”[17] because his co-shareholders did not want him to share control of Kripa with the respondents. And that was the end of that.
* *
[22] The respondents sued the appellant and Kripa, asking the Superior Court to:
WHEREFORE, PLAINTIFFS PRAY FOR JUDGMENT TO BE RENDERED HEREIN:
GRANTING the present Re-Amended Motion;
DECLARING the Mise-en-cause to be bound by the terms of the Memorandum of Understanding (Exhibit P-4);
ORDERING the Mise-en-cause to issue four and one half (4½) units of the Mise-en-Cause to Plaintiffs upon payment of six hundred and seventy-five thousand dollars ($675,000.00), subject to reduction as hereinafter provided, the whole within ten (10) days of receipt of the accounting hereinafter referred to;
ORDERING the Mise-en-cause to provide Plaintiff with a full and complete accounting of the operations of the Mise-en-cause, including a profit and loss statement and statement of the income that Plaintiffs would have earned or realized on the four and one half (4½) units of the Mise-en-cause, from December 2010 until the date of judgment herein, the whole within such delay as it may please this Honourable Court to fix;
DECLARING that the sum of $675,000.00 payable by Plaintiffs for the four and one half (4½) units be reduced by the amount of the income that Plaintiffs would have earned or realized on their four and one half (4½) units of the Mise-en-cause, had they owned same from December 2010 to date of judgment herein, as established in the accounting;
PRAYING ACTE (…)
RELIEVING Plaintiffs of any obligation to furnish security;
ORDERING Defendant to pay to Co Plaintiffs the sum of $100,000.00 in moral
and punitive damages;
ORDERING Defendant to pay to Co Plaintiffs’ legal fees in the amount
of $40,000.00, sauf à parfaire;
ORDERING the provisional execution of the judgment to intervene herein, notwithstanding appeal;
AND, ALTERNATIVELY, BUT ONLY IN THE EVENT THAT THIS HONOURABLE COURT CONCLUDES THAT THE MEMORANDUM OF UNDERSTANDING (EXHIBIT P-4) IS NOT BINDING UPON THE MISE-EN CAUSE:
DECLARING Defendant exceeded his authority in holding himself out as being able to bind the Mise-en-cause to the Memorandum of Understanding (Exhibit P - 4) and, as a result, has rendered himself personally liable towards Plaintiffs;
CONDEMNING Defendant to pay unto Plaintiffs the sum of one million three hundred and sixty-six thousand two hundred dollars ($1,366,200.00);
CONDEMNING Defendant to pay unto Plaintiffs the sum of one hundred thousand dollars ($100,000.00) in punitive and/or moral damages;
CONDEMNING Defendant to pay unto Plaintiffs the sum of four thousand dollars ($40,000.00), representing Plaintiffs’ legal fees;
RESERVING unto Plaintiffs their right to claim from Defendant additional damages, by way of loss of income that they would have earned had they owned the four and one half (4½) units of the Mise-en-cause in virtue of the Memorandum of Understanding (Exhibit P-4), since December 2010, if and when same are ascertained;
THE WHOLE with costs.[18]
[Transcribed as written.]
[23] On June 28, 2013, the trial judge granted the respondents' action in part. She concluded that, on November 15 and 16, 2010, the appellant acquiesced to the MoU, which became a binding contract:
[58] The Court concludes that Mr. Singh agreed to the terms of the MOU.
[59] When Mr. Singh left the meeting on November 16, it was understood that he would send the shareholders' agreement and the minute book to the attorney.
[60] Even though Mr. Singh never transmitted these documents, his acceptance had been given and a contract had been formed.
[24] Referring to article 2163 C.C.Q. and the concept of apparent mandate, as well as the indoor management rule, she also concluded that:
[65] This case presents the elements of an implicit mandate given the representations made to the plaintiffs by Mr. Singh, the president of Kripa. From the evidence, the Court believes that Mr. Singh told the plaintiffs that he could bind Kripa.
[66] The question is whether the plaintiffs were entitled to believe that Mr. Singh was able to bind Kripa.
[67] From the evidence, the Court concludes that Mr. Singh told the plaintiffs he had the power to bind Kripa, despite the terms of the shareholders agreement.
[68] He told the plaintiffs that the shareholders agreement was not binding; indeed it had not been signed by all shareholders. Mr. Signh told the plaintiffs that the other shareholders were silent investors and that he took all decisions alone. Mr. Singh told the plaintiffs that he was the only person who had signing authority for Kripa.
[69] Mr. Singh told the plaintiffs that the shareholders were only interested in receiving their monthly dividends.
[70] At trial, Mr. Singh was the only witness for Kripa. The plaintiffs never met any other Kripa shareholder.
[71] The Court concludes that the plaintiffs were led to believe by Mr. Singh that he was acting for Kripa with full authority. The good faith of the plaintiff cannot be questioned given Mr. Singh's representations to them.
[72] When Mr. Singh agreed to the plaintiffs’ proposition to sell 4.5 units and give them 50% of the controlling vote in Kripa, the plaintiffs understood that Mr. Singh was binding Kripa's “silent” shareholders.
[References omitted.]
[25] Nevertheless, she dismissed the respondents' claim for moral and punitive damages. She also dismissed their claim for extra-judicial costs, reserving their right to claim such costs in the context of the rendering of account that she ordered in respect of all dividends paid to the shareholders since December 2010 (i.e. the date on which the actual purchase of the units would most likely have taken place).
[26] In the end, she disposed of the matter in the following manner:
[95] HOMOLOGATES the memorandum of agreement (exhibit P-4);
[96] ORDERS the defendant to cause Kripa to issue four and one half (4½) units of Kripa to the plaintiffs upon payment of six hundred and seventy-five thousand dollars ($675,000.00);
[97] ORDERS the defendant to provide a full and complete accounting of any dividend distributions made to the other unit holders of Kripa from December 2010 until the date of judgment herein;
[98] RESERVES the plaintiffs' right to claim their extra-judicial costs in the course of the rendering of account that will follow;
[999] THE WHOLE with costs against the defendant.
II. Analysis
[27] For the following reasons, I am of the view that the appeal should be allowed:
- The provisions of the MoU were not sufficient to constitute a binding and executory contract and could at best be construed as a pre-contractual arrangement that required further negotiations between the parties as well as the approval of the other Kripa's shareholders, whose rights under the existing shareholder agreement were directly affected.
- Even if the MoU were binding upon Kripa, neither article 2163 C.C.Q. (apparent mandate) nor the indoor management rule could make the MoU binding upon Kripa's shareholders, and the respondents were not legally justified to rely on the appellant's representations in this regard.
- Although the appellant could, in theory, be held personally responsible (at least in part) for having misled them, the respondents did not prove any prejudice and are not entitled to any compensation.
1. Nature of the MoU
JD [this is the appellant's nickname]
The Memorandum of Understanding is the understanding between the two parties agreed to today and is a draft. It is not to be construed as an Offer or Proposal by TRIO/KOHLI and as agreed was to serve as a basis of discussion By JD with existing unit holders and others who have agreed to purchase one or part of unit offered by KRIPA.
The Memorandum of Understanding is confidential and is not to be circulated.
Please let me know if anything develops.[19]
[Emphasis added.]
[29] According to the trial judge, the appellant, who expressed many reservations about this draft and rejected it at first, finally accepted the terms of the MoU on November 15 and 16, 2010. Yet, many things, obviously, remained to be worked out by the parties, first and foremost the nature of the control that the respondents would exercise over Kripa. The respondents testified as to the importance of this condition, which was essential to their investment, and the judge came to the same conclusion: they would not purchase Kripa's units without gaining shared control of the company.
[30] As indicated earlier, the judge concluded that the respondents had required 50% of the voting rights allotted to all shareholders. That “shared control” could mean “equal voting rights” is not an unreasonable inference, at least theoretically, in that “shared control” might otherwise turn out to be precarious. In the present case, however, the evidence is far too ambiguous to support such a conclusion, on a balance of probabilities (art. 2804 C.C.Q.). As we have also seen earlier,[20] it is equally compatible with the conclusion that the respondents would have been satisfied with holding a seat on the board of directors, arranging for respondent Kohli's tenure as officer of the company (one of three), and having “signing authority” with the appellant, all measures that would ensure their active participation in the control of Kripa's day-to-day operations.
[31] The respondents themselves, whether in their demand letter[21] or original, amended or re-amended introductory motion, did not allege that they wanted to hold 50% of the voting rights nor did they testify that such had been their specific intention. The only practical control measure that they mention in their proceedings is the signing of all cheques or negotiable instruments by both the appellant and either respondent Kohli or Mr. Khanna, or the sharing of the signing authority.[22]
[32] The MoU itself does not mention the 50% voting rights, but lists a certain number of measures that would grant effective control to the respondents in the conduct of Kripa's affairs, on a par with the appellant. On the one hand, the mention of the new shareholder agreement followed by the mention that the appellant would be “party number one” and the respondents “party number two” may perhaps be construed as an allusion to a sharing of the voting rights. On the other hand, the same mention may also be understood as indicating that the new shareholder agreement would modify the composition of Kripa's board of directors, or provide for the appointment of a management committee on which one of the respondents would sit with the appellant, or designate the officers named in the MoU, therefore securing equal control of the operations of the company.
[33] Finally, in light of the existing capital structure and the shareholder agreement, the least that can be said is that if the respondents' true intent was indeed to obtain 50% of the voting rights allotted to all shareholders, while holding only 4.5 units out of 40, one is left to wonder why they would have chosen not to set it out clearly in the MoU (which they drafted).
[34] All in all, considering that “shared control” was an essential condition of the purported agreement with the appellant, it is impossible to conclude that there was a meeting of the minds on the subject. The parties had not yet decided what the nature and modalities of this control were to be.
[35] The same conclusion must be reached with regard to the new shareholder agreement. The evidence does not reveal what was actually going to appear in that agreement (except, as evidenced by the MoU, for the addition of buyback and arbitration provisions - which are not part of the existing shareholder agreement - as well as provisions ensuring “proper segregation of duties”). The testimony of the lawyer who met with the appellant, respondent Kohli and Mr. Khanna, on November 16, 2010, remained vague and did not offer anything but general explanations about the precise contents of this future shareholder agreement. This is no minor matter, in the circumstances, considering, in particular, the fact that some of the most important terms of the MoU directly affected the shareholders' rights or contradicted the existing shareholder agreement, and would require their approval.
[36] For instance, the MoU is based upon the assumption that 10 units will be issued, 4.5 of which will be bought by the respondents, who will be granted a right of first refusal to purchase any of the 6 remaining units. As indicated above, however, according to the existing shareholder agreement, the issuance of any unit requires the approval of 2/3 of the existing shareholders,[23] who also have a right of first refusal on all newly issued units[24] (both measures affording protection against dilution of their capital).
[37] The MoU also provides that “[p]revious obligations/income tax and others to be listed [which never were] and are to be paid by the existing unit holders to the Company from distributions or as per recommendations of the [the sentence is left unfinished]”. Certainly, the existing shareholders could not be bound, without their consent, by such vague and incomplete language, and neither could the appellant.
[38] There is also the matter of the last provision of the MoU, which states that:
TRIO/KOHLI will have the exclusive right to purchase 4.5 units or more (if available, from the 10 units that are presently being offered). The payment for these is subject to immediate implementation of the changes above (CORPORATE STRUCTURE, SPECIFICALLY AND BANKING). The unit price is $150,000.00
[Emphasis added.]
[39] The MoU does not elaborate on the nature of the changes that were to be brought to Kripa's corporate structure: on what precisely did the parties agree? Were those changes restricted to the fact that the persons named in the MoU would act as officers of the company and that respondent Kohli would become a member of the board of directors? Had the parties something else in mind? Did that refer to the unequal distribution of dividends among the shareholders, a topic which is touched on in some detail by respondent Kohli in his November 15 email?[25] We do not know and the evidence at trial does not answer these questions. And, again, if the above sentence was meant to refer to the fact that the respondents, with their 4.5 units (out of the 40 that were contemplated), were to acquire 50% of the voting rights allotted to the shareholders, then, certainly, it was not clear and, in any event, it could not have been done without the existing shareholders' consent.
[40] One of the emails exchanged between the parties may offer another indication of what the respondents had in mind. In his email of November 15, 2010, as we have seen earlier (see supra, para. [17]), respondent Kohli wrote the following:
BB: Value of screw pumps ($ 240,000.00), pump jacks ($ 50,000.00) and Manitoba performance deposit ($ 62,000.00)
Referring to your email of Nov 10th, 2010. You had informed us on more than one occasion that the value of KRIPA is $ 4.5 and on that basis you offered 10 new units at $ 150,000.00 a piece and were increasing the number of units from 30 to 40. Some of these units have already been sold for the offered price of $ 150,000.00 and KRIPA has already started receiving payments on account of the purchase price, TRIO/KRIPA has also accepted to the same price. I am glad to see that you agree with us that the above items have already been taken into consideration when determining the cost of each new unit offered by you. This should be explained to the other present shareholders.
CC: Corporate structure
==
From the very beginning, based on the information given to us, we informed you that the structure of the Company has to be formalized as there were too many gaping holes. You agreed 100% with us as well and assured to us that this will be done and has to be done, and that the lack of funds had prevented you from doing this earlier. We accepted your assurances that there will no problems as all other unit holders are “sleeping partners and have no say in the management” and that we could buy them out, if they did not agree. We confirmed that we will go ahead and on the basis our agreement, we prepared a Memorandum of Understanding together. TRIO/KOHLI also agreed to support you and buy the units of those who wish to sell.
In your meeting yesterday, you informed that some unit holders had raised an issue in this regard. Many of these unit holders have already received bulk of their investments. The weakness of having no structure of the company has now been exposed. The other weakness is that some of the unit holders that hold more than one, fail to understand that they have all taken bulk of their investment and the new unit holders will be injecting $ 1,500,000.00 or $ 150,000.00 per unit versus their stake (which could be approx $ 15,000.00 per unit or $ 14,000.00 per unit after allowing for $ 34,000.00 for income taxes. Total long term debt per financial statement $ 460,000.00 divided by 30 units). It is clear that very near in the future they will have to bear the consequences of income taxes for the distributions they will receive in future.
This further makes it more important for you to structure the company properly as future distributions would be favourable mainly to the new investors as the present unit holders would be paid in less than 4 months from today’s date based at the present rate of distribution. It also underlines, why TRIO/SUBHASH are concerned as this will appear to others as “unfair” when it is NOT.
[…]
[Emphasis added.]
[41] Nowhere in the MoU (which was drafted on November 12, 2010) is there any indication, directly or indirectly, of the possibility that the respondents would have the right to acquire the units of the shareholders who disagreed with whatever it was that the parties were discussing, unless this is covered by the mention of an eventual buyback provision to be included in the new shareholder agreement. And as we can see from the above email, at least some of the shareholders were reluctant and the appellant had definitely not obtained their consent. The respondents were aware of this reluctance. Surely, there cannot have been any meeting of the parties' minds or a common intention on that point. And, certainly, the shareholders themselves, who were conspicuously absent from the discussions between the parties, never agreed to any of this.
[42] It is also worth pointing out that, during the hearing before the Court, respondents' counsel conceded that, in fact, the MoU was incomplete, that many points remained to be defined, and that his clients would deal with these questions later. Counsel, indeed, is right, and questions remain to be resolved, which, however, are not mere details, but affect the very essence of the “agreement” between the parties.
[43] In short, even if the parties agreed on the terms of the MoU, and, in particular, on the number and price of the shares to be purchased by the respondents should the deal go through, much remained to be determined, within the meaning of art. 1373 C.C.Q., and much was not determinable without further negotiations by the parties, including the exact nature of the control that the respondents deemed a sine qua non condition of their decision to invest.[26] In addition, most of the terms of the MoU, which also sought to bind the other shareholders, were conditional upon and could not be implemented without their agreement or a special majority thereof.
[44] Therefore, considering
- that the MoU was either vague or silent on many important and substantial issues, on which no conclusive evidence of a meeting of the minds of the parties was tendered,
- that, to borrow a phrase from Jolicoeur v. Rainville,[27] the MoU never attained “sa pérennité contractuelle puisqu'une partie importante de son contenu obligationnel restait encore à convenir”,
- that it necessarily required further negotiations to set out the respective obligations of the parties and those of the other shareholders, and
- that it also required the latters' approval since it purported to affect their personal rights and would necessitate a new - and different - shareholder agreement,
I am of the view that this MoU was not a contract, nor a promise to contract. It was, at best, an arrangement by which the parties signalled their intent to continue negotiating along the lines set out therein and try to conclude a final, all-encompassing agreement - a contract - with all concerned (including the shareholders). The MoU was a sort of “mise au point” or game plan, drafted by the respondents at one point in order to provide a summing-up of the discussions between the parties as well as the terms on which they might eventually agree. It also allowed the appellant to consult with his shareholders. In that sense, the MoU had something of the letter of intention and also of the “punctation” described by professor Brigitte Lefebvre in La bonne foi dans la formation du contrat.[28] What it most certainly was not is the contract that the respondents counted on or a promise to contract. Neither did it guarantee that the contract that the respondents were hoping for would be concluded. In the end, the final, binding contract that the respondents wished for never materialized.
[45] The situation of the parties in the present case is in no way comparable to that of Billards Dooly's inc. v. Entreprises Prébour ltée,[29] where long negotiations had produced five contracts, later revoked by a formal protocol pursuant to which the parties agreed to sign two franchise contracts the basic terms of which had been fully agreed upon. The necessary documents were prepared and further negotiations were to ensue in order to settle the details, but, in the end, one of the parties refused to sign the franchise contracts. As Dalphond J.A. wrote:
[96] J’endosse la conclusion du juge sur une rupture fautive du protocole résultant du comportement de Bourdon en avril 2005. Je tiens à ajouter que, dans cette entente, les parties avaient uniquement convenu d’une révision du contrat de franchise standard pour chacune des deux franchises, en prenant soin d’énoncer de façon détaillée la liste des modifications à faire et en ajoutant que pour chaque établissement (Aylmer et Hull), un nouveau contrat de franchise devait intervenir. En d’autres mots, il ne s’agissait pas d’une obligation de participer à une négociation tous azimuts, ouverte, où chacune des parties conservait sa liberté contractuelle, comme le dit le juge, mais uniquement de convenir de modifications à un contrat standard bien connu par toutes les parties et dont la liste des sujets requérant des modifications avaient été précisées par elles. La possibilité pour Bourdon d’exiger de nombreuses autres modifications était exclue.
[46] The MoU was nothing of the sort and though it purported to provide a framework for the parties' future discussions, it did not compel them to actually achieve a final contract.
[47] For this reason alone, the principal conclusions of the respondents' action, which were predicated on an unenforceable arrangement, should have been dismissed.
2. Apparent mandate and indoor management rule
[48] Supposing, however, that the MoU could be construed as containing the essential elements of a contract, even though some “details” remained to be settled (which actually raises serious questions about whether the judgment of the Superior Court was enforceable), could it bind Kripa and the existing shareholders?
[49] As far as Kripa is concerned, the appellant was never formally mandated to negotiate or agree to the MoU in its name. He was, however, a director (one of five)[30] and officer (president) of the company, and, as such, its mandatary and representative.[31] In the absence of an express mandate, directors and officers nevertheless bind the company, even if they breached its internal rules, at least towards third parties in good faith who are not cognizant of such rules, either because of the indoor management rule (s. 18 CBCA),[32] the doctrine of implied mandate (art. 312 and 321 C.C.Q.) or the application of article 2163 C.C.Q. (apparent mandate).[33]
[50] In the present case, however, respondent Kohli and Mr. Khanna, who acted for respondent Trio Properties, were fully aware and indeed had a copy of Kripa's Re-Amended Shareholder Agreement. They could not ignore that the MoU infringed upon it or that many, if not most, of its terms would require the board of directors' and the shareholders' approval (for instance: issuance of new units, right of first refusal, election of directors, etc.), and that the appellant could not bind the company without their approval.
[51] They also knew that the appellant intended to consult with his co-shareholders, whose rights - and not only those of Kripa - were to be affected directly by the MoU (for instance: existing liabilities to be assumed by existing shareholders to the exclusion of the respondents, conclusion of a new shareholder agreement). This is one of the reasons why respondent Kohli, on November 12, 2010, emailed the MoU, as a draft, to the appellant in order “to serve as a basis of discussion By JD with existing unit holders and others”.[34] The email that respondent Kohli sent to the appellant in the morning of November 15, 2010[35] also shows that both he and Mr. Khanna were well aware of the need to consult with the other shareholders,[36] whose consent was necessary on more than one issue. They were well aware also that some of these shareholders were reticent, as evidenced by that same email.[37]
[52] In that context, could the respondents trust the appellant's representations that he was acting on behalf of both Kripa and its shareholders, and turn a blind eye to the potential difficulties that might result from what they knew of the situation, without ever inquiring further? For instance, could they really be satisfied with the appellant's “assurances that there will [be] no problems as all other unit holders are ‘sleeping partners and have no say in the management’ and that we could buy them out, if they did not agree”,[38] especially in light of the fact that the appellant had informed them that “some unit holders had raised an issue in this regard”?[39] The answer to these questions is plainly no: the respondents could not reasonably believe the appellant without requiring clarifications and inquiring specifically into the matter, which they did not.
[53] Because the respondents were aware of the contents of the shareholder agreement and because they were informed of the limits imposed upon the issuance and devolution of new units, they cannot rely on the indoor management rule nor the doctrine of implied mandate. They either knew or were wilfully blind to the fact that the MoU was not consonant with the company's internal rules. In the circumstances, Kripa cannot be bound by the MoU.
[54] In any event, even if it were, this would be without much practical effect since most of the changes contemplated in the MoU required not only the consent of the company but also the approval of the shareholders, whom the appellant, in his capacity as either director or officer of the company, did not represent.
[55] In addition, the evidence does not show that the shareholders mandated the appellant, either expressly or implicitly, to agree to the MoU. Furthermore, I am of the view that the respondents cannot rely on article 2163 C.C.Q. either:
|
2163. Where a person has allowed it to be believed that a person was his mandatary, he is liable, as if there had been a mandate, to a third person who in good faith has contracted with that person, unless he took appropriate measures to prevent the error in circumstances in which it was foreseeable. |
2163. Celui qui a laissé croire qu'une personne était son mandataire est tenu, comme s'il y avait eu mandat, envers le tiers qui a contracté de bonne foi avec celle-ci, à moins qu'il n'ait pris des mesures appropriées pour prévenir l'erreur dans des circonstances qui la rendaient prévisible. |
[56] In Bois Expansion inc. v. Yaraghi,[40] Chamberland J.A., for the Court, referred to the conditions upon which a court might conclude to the existence of an apparent mandate:
[27] Dans l'arrêt Deslauriers c. Les Coopérants, société mutuelle d'assurance-vie [[1993] R.R.A. 874, p. 879-881], ma collègue la juge Rousseau-Houle résume les conditions à satisfaire pour conclure à l'existence d'un mandat apparent :
On reconnaît généralement qu'un tel mandat existe lorsque les conditions suivantes sont établies : 1) l'absence de pouvoirs de représentation; 2) l'erreur de bonne foi commise par le tiers; 3) les motifs raisonnables donnés par le mandant de croire au mandat.
1. L'absence de pouvoir de représentation
Il ne peut y avoir de mandat apparent lorsque le mandataire agit en fonction d'un véritable pouvoir de représentation. Dans un tel cas, les règles du contrat de mandat s'appliquent et suffisent à lier le mandant. Toutefois lorsque la preuve laisse subsister un doute sur l'étendue des pouvoirs du mandataire ou que ce dernier a agi en outrepassant les pouvoirs de représentation que lui avait donnés le mandant, le tiers de bonne foi qui a raisonnablement cru en l'existence d'un réel pouvoir de représentation peut être admis à invoquer l'apparente autorité du mandataire pour pouvoir tenir le mandant responsable des actes de son mandataire.
(…)
2. La bonne foi des appelants
La condition primordiale de la bonne foi du tiers est qu'il ignore le fait que le mandataire a agi sans pouvoir de représentation ou inversement qu'il a cru en l'existence de tels pouvoirs. (…)
Comme la bonne foi se présume (article 2202 C.c.B.C.), c'est le mandant qui aura, en principe, le fardeau de prouver que le tiers connaissait la carence des pouvoirs du mandataire ou encore qu'il a commis une faute en ne vérifiant pas les pouvoirs du mandataire. Il s'agit de questions de fait qui doivent être décidées selon chaque cas.
[…]
3. Les motifs raisonnables de croire au mandat
Les motifs raisonnables de croire au mandat sont ceux qui rendent vraisemblables pour une personne normalement prudente et diligente l'existence des pouvoirs du mandataire de représenter le mandant dans l'acte en litige et non pas ceux qui la rendent certaine. Comme la condition précédente, il s'agit d'une question de fait qui doit s'apprécier à la lumière des circonstances.
Les motifs raisonnables peuvent être fondés sur des apparences intellectuelles, telle l'attribution par le mandant d'un titre ou d'une fonction comportant des pouvoirs inhérents de représentation. Des apparences intellectuelles peuvent encore résulter d'une pratique établie par le mandant et qui laisse croire que le mandataire est autorisé.
Lorsque le mandant voit se créer des circonstances dans lesquelles il est prévisible, en raison de la fonction du mandataire apparent, que les tiers puissent raisonnablement croire au mandat apparent et qu'il laisse les tiers s'enfoncer dans une apparence prévisible, son omission de prendre les moyens de dissiper cette apparence peut devenir un motif raisonnable au sens de l'article 1730 C. C. C'est ainsi qu'on a jugé que lorsqu'un agent d'assurance avait le pouvoir de percevoir des primes ou lorsque sa signature était nécessaire à la validité du contrat, le tiers pouvait présumer qu'il avait la qualité d'agent jouissant de toute l'étendue des pouvoirs inhérents à cette fonction.[41]
[Emphasis added.]
[57] In the present case, as we have just seen, Kripa is a legal person distinct from its shareholders, and is not their mandatary. That the appellant, as director and officer, may bind the company does not make him the shareholders' mandatary, even implicitly. There was here no “pouvoir de représentation” as Chamberland J.A. used that phrase in Bois Expansion inc. v. Yaraghi.
[58] Nor does the evidence support the finding that the other Kripa's shareholders ever allowed it to be believed that the appellant was their mandatary and that they would abide by his decisions concerning their own personal rights, pursuant to the shareholder agreement or otherwise. There were here, to borrow again from Bois Expansion inc. v. Yaraghi, no “circonstances dans lesquelles il est prévisible, en raison de la fonction du mandataire apparent, que les tiers puissent raisonnablement croire au mandat apparent”.
[59] The respondents' alleged belief that the appellant could bind Kripa (if we are to give credence to it) could not legitimately extend to the shareholders. The appellant's statements to the contrary, in the circumstances, ought to have raised their suspicions, especially in view of the fact that, at the beginning of the negotiations, they were provided with a copy of the shareholder agreement, knew that the appellant consulted with his co-shareholders, knew that some of them were reluctant, and were indeed ready to buy them back if they disagreed (which showed that they were aware of the possibility that the appellant might not convince them, or, at least, some of them).
[60] For these reasons, the MoU could not bind Kripa nor Kripa's shareholders, and, without the latter's approval, it could not come into force or be executed in any manner.
[61] Finally, I must also underline the fact that the respondents did not bring action against the shareholders, who were not impleaded in any way in the present proceedings. In my opinion, this is fatal to the respondents' case. Certainly, the respondents could not ask the Superior Court to order that the MoU be implemented, nor could the Superior Court homologate such without the shareholders being formally brought as parties to the action, and given the opportunity to defend their interests, since their own personal rights were at stake.
3. Appellant's personal liability
[62] Subsidiarily, the respondents' action relies on the personal and extracontractual liability of the appellant for the prejudice caused by his misbehaviour. This liability is rooted in the bad faith and gross misconduct of the appellant, who, it is alleged, deliberately misrepresented the situation to the respondents, then abusively put an end to the discussions between the parties and prevented the conclusion of the contract. Hence, because of the personal fault of the appellant, the respondents assert that they lost an investment opportunity in that they could not buy Kripa's units and were therefore deprived of the dividends that they would have received otherwise. They also claimed moral damages and the reimbursement of the legal fees that they incurred in pursuing their action against the appellant.
[63] I have concluded that there was no contract between the parties (or, more precisely, between the respondents and Kripa, acting through the appellant), but only, at best, an arrangement to continue negotiating, which arrangement cannot be construed here as a contract or a promise to contract. On that basis, can the appellant's conduct during negotiations, insofar as no contract was ever concluded, result in his personal liability towards the respondents?
[64] Considering that the appellant was not the shareholders' mandatary, his liability cannot rest, in this respect, on the application of articles 2157, 2nd para., or 2158 C.C.Q. Article 2163, as explained earlier, cannot apply either. I also note that article 1443 C.C.Q. (promise for another) was never raised in first instance, nor before this Court. From the evidence, however, one can doubt that the conditions necessary for the application of this provision were fulfilled here.[42]
[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? Although the appellant acted for Kripa during the negotiations, in his capacity as officer and director of the company, his personal liability may result either from a personal extracontractual fault that he committed or from his participation in an extracontractual fault committed by Kripa under its direction.[43] Is there such a fault?
* *
[66] Freedom of contract, as a demonstration of free will, which entails freedom not to enter into a contract, is the rule.[44] In and of itself, refusal to enter into a contract is not considered blameworthy and no personal liability may ensue from such a refusal, whatever the reasons may be (except in circumstances which are not present here).[45]
[67] Failure to negotiate in good faith and to collaborate loyally - which must not be confused with failure to enter into a contract nor with failure to give effect to a contract - may however be sanctioned, as a violation of articles 6, 7 and/or 1375 C.C.Q., pursuant to either article 1457 or 1458 C.C.Q., depending upon the situation. For instance, if the parties are in a fixed-term contract that imposes upon them the duty to negotiate a renewal, failure to do so in good faith may result in contractual liability.[46] In other cases, where parties are not bound by such a contract, extracontractual liability is favoured by most[47] (even in the presence of what are sometimes called “preparatory documents” (“documents préparatoires”).[48]
[68] On the subject, Professors Jobin and Vézina write that:
136 - Bonne foi dans les négociations. État de la question - Traditionnellement, le droit québécois n’a traité de la question de la bonne foi lors des négociations que par la théorie des vices du consentement ou la responsabilité, mais à la condition qu’il y eût mauvaise foi (au sens étroit) dans la rupture des négociations. On ne pouvait donc sanctionner un comportement condamnable lors des négociations que si un contrat avait été conclu ou alors si les négociations avaient été rompues avec une intention malicieuse. Aujourd’hui, de nombreux textes doctrinaux et la jurisprudence reconnaissent que le principe de la bonne foi s’impose dans la phase des pourparlers et qu’il peut mener à la responsabilité.
La question ne se pose guère au stade de la simple manifestation du désir de contracter ou lors d’une quête d’informations sommaires dans le but de contracter éventuellement. Si par contre des négociations sont entamées, il s’agit de savoir quels sont les devoirs de chaque partie. Il faut alors départager le royaume de la liberté contractuelle et celui de la moralité contractuelle véhiculée par les principes de bonne foi et d’équité. On ne doit pas tromper la confiance légitime d’autrui.
En règle générale, la liberté contractuelle permet à une partie de se retirer des pourparlers quand elle veut. Elle lui permet même de mener parallèlement des négociations sur le même projet avec un ou d’autres concurrents sans le divulguer (à condition de ne pas mentir à ce sujet et de ne pas s’être engagée à négocier exclusivement).
Cependant on impose de plus en plus de limites à cette liberté d’action, au nom de la bonne foi, comme on le verra dans un instant. L’obligation de négocier de bonne foi, d’ailleurs, est loin d’être inconnue dans notre droit : par exemple elle est imposée expressément par la loi dans le contexte de la négociation d’une convention collective.
On notera d’abord que la responsabilité sera d’ordre extracontractuel, car aucun contrat n’a encore été conclu au moment où survient la faute. La thèse d’un avant-contrat tacite, ayant pour objet les négociations et comportant en somme les mêmes devoirs, ne semble pas présenter d’avantages mais elle conduit à la responsabilité contractuelle.
[…]
La partie se prétendant victime d’une violation de la bonne foi aura donc le fardeau de prouver faute, dommage et un lien de causalité les unissant. La liberté dans les négociations demeurant la règle générale, il n’est pas toujours facile d’établir une des restrictions dictées par la bonne foi ; ainsi, ne constitue pas une faute le fait de mettre fin aux négociations quand dans les faits elles sont vouées à l’échec.
137 - Droit québécois - On verra plus bas les nombreuses possibilités que le droit comparé offre en matière de bonne foi dans les rapports précontractuels. Au Québec, la jurisprudence, à défaut d’être déjà abondante, est dominée par l’idée de loyauté. Quelques devoirs particuliers ont été reconnus par les tribunaux.
D’abord l’intention malveillante n’est plus une condition nécessaire de la responsabilité. Il est maintenant acquis qu’une partie qui, par son comportement ou ses paroles, a donné à entendre à l’autre que les chances d’aboutir à une entente étaient raisonnables, ne peut rompre les négociations sans justification ; cette formulation, évidemment, évoque l’abus de droit dans l’exécution et la résolution du contrat et permet de s’en inspirer ici. La durée des négociations est un facteur à considérer : plus elles auront duré longtemps, plus il faudra un motif clair et sérieux pour s’en retirer et le juge peut parfois renverser le fardeau de preuve à ce sujet en appliquant la présomption de fait. Deuxièmement et inversement, dans les mêmes circonstances, une partie ne saurait poursuivre des négociations à partir du moment où elle n’a aucune intention de conclure le contrat envisagé : elle doit alors mettre fin aux négociations. Troisièmement, une partie ne peut, sans commettre un abus de confiance, s’emparer d’informations ou d’études confidentielles fournies par l’autre partie pendant les négociations et en faire son propre profit si elle n’a pas obtenu l’accord préalable de l’autre. Il peut donc, selon les circonstances, y avoir faute par action ou par omission.[49]
[References omitted.]
[69] Professors Luelles and Moore, for their part, explain that:
249.3 Dans le cas où les négociations n’aboutissent pas à un contrat, la bonne foi prend alors la forme d’une obligation de négocier loyalement. Si cette obligation peut provenir d’un avant-contrat entre les parties, ou d’une disposition spécifique de la loi, la doctrine et la jurisprudence, quoique bien moins importantes que celles portant sur la bonne foi dans l’exécution du contrat, reconnaissent que les seuls articles 6, 7 et 1375 imposent une telle obligation en général. Cette obligation se manifeste à la fois en imposant des devoirs de discrétion et de cohérence, ou, de façon synthétique, de collaboration. Dans le premier cas, elle prohibe aux négociateurs d’entamer des négociations dans le dessein inavouable de retirer des informations qui seraient autrement inaccessibles. Dans le second cas, elle impose aux parties de ne pas poursuivre indûment des négociations vouées à l’échec. Également, si l’obligation de négocier de bonne foi ne supprime aucunement le principe de la liberté de ne pas contracter et de ne plus négocier, si essentielle à l’autonomie de la volonté et à la liberté du commerce, elle implique de ne pas rompre les négociations « sans justification lorsqu’on a suscité chez le partenaire la confiance dans la conclusion de l’accord » ; on doit assumer les attentes que l’on crée par son comportement. Cette obligation varie essentiellement selon les circonstances soit : l’importance du contrat envisagé, les efforts déployés et les coûts impliqués dans la négociation, ainsi que la durée de celle-ci. On s’entend aussi pour dire qu’en principe, l’obligation de négocier de bonne foi n’implique pas l’exclusivité dans les négociations; les parties peuvent donc mener des négociations parallèles.
249.4 À l’instar du rôle - que nous verrons au chapitre 27 - de la bonne foi dans l’exécution du contrat, il n’est pas nécessaire de prouver une intention malicieuse, une volonté de nuire de la part du débiteur pour conclure qu’il a violé son devoir d’agir de bonne foi. C’est le caractère excessif et déraisonnable de ce que l’on pourrait appeler « l’abus de la liberté » de ne plus négocier, ou de faussement négocier, qui est générateur de la contravention à la bonne foi, norme objective de comportement. Même si la question fait toujours l’objet de discussion c’est par une action en dommages découlant de la responsabilité extracontractuelle que doit être sanctionnée l’obligation de négocier de bonne foi.
250. Les tempéraments. Il existe cependant des tempéraments au principe de la liberté de ne pas contracter. On peut, en effet, s’être juridiquement engagé à le faire. Ainsi, le locataire peut avoir, dans le contrat de bail, pris l’engagement de souscrire une assurance de responsabilité en cas d’incendie du bien loué ; un emprunteur peut s’être engagé, dans la convention dite de prêt, à souscrire une assurance sur sa vie au bénéfice du prêteur. Il s’agit alors de véritables obligations de souscrire un contrat, incluses dans une convention unilatérale (en effet, dans les deux exemples ci-dessus, seul un contractant s’engage à passer un autre contrat). La convention peut aussi bien être bilatérale, auquel cas les deux contractants devront passer cet autre contrat : ainsi en sera-t-il dans le cas d’une promesse de vente bilatérale ou dans une promesse de vente ou d’achat unilatérale, une fois l’option levée. Dans tous les cas, le défaut de conclure le contrat promis sera civilement sanctionné, soit par la nullité du contrat de base, soit par des dommages-intérêts, soit pas la déchéance du terme convenu, soit par la passation même du contrat, le cas échéant.
251. Que l’engagement de passer un contrat soit alors une obligation civile, il n’en demeure pas moins que celui qui a cette obligation se l’est en quelque sorte imposée à lui-même, usant précisément de sa liberté de conclure un contrat. C’est pourquoi, on ne peut parler ici d’exception à la règle, mais plutôt de tempérament.[50]
[References omitted.]
[70] In Compagnie France Film inc. v. Imax Corp.,[51] Rousseau-Houle J.A. wrote that:
[37] L'obligation générale de bonne foi dans la formation des contrats n'impose point de ne pas rompre les pourparlers contractuels mais elle commande de ne pas y mettre fin sans justification lorsqu'on a suscité chez le partenaire la confiance dans la conclusion de l'accord. […]
[71] This oft-cited sentence must be read in context, however, and it is worth repeating that 1) except in circumstances which are themselves the result of the freedom to contract (or not to contract),[52] no one has to enter into a contract or make a promise to contract,[53] and 2) that there is a correlative right to terminate negotiations. That such 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. 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.
[72] This was recognized in France Film,[54] where two competitors (France Film[55] and Naturalium) were simultaneously negotiating with Imax Corporation for the opening of a movie theater in Quebec City. The evidence revealed that, at one point, Imax's representative sent a draft contract to France Film, indicating that a final decision would be made on December 22. Imax also sent a similar draft to Naturalium. On December 17, Imax and Naturalium signed a contract. France Film sued Imax, alleging that it had concluded a contract with the latter and that, in any event, Imax had acted in bad faith in sending the draft contract, falsely saying that it would wait until December 22 and contracting with Naturalium in the meantime. The Court concluded that:
[37] […] Les appelantes, en l'espèce, savaient depuis le début des pourparlers qu'Imax négociait également avec Naturalium. L'insistance qu'elles ont mise afin d'obtenir une clause d'indemnisation et de même que leur empressement à obtenir l'acceptation d'Imax le 10 décembre démontrent bien qu'elles voulaient empêcher Naturalium de conclure une entente finale avec Imax avant elles.
[38] Les appelantes ne démontrent pas que le juge a erré en décidant que « la position d'Imax vis-à-vis les deux concurrents a été correcte, chacune avait sa chance. Il s'agissait de voir qui arriverait le premier à faire un dépôt et à signer un contrat.»
[73] This conclusion certainly puts into perspective the Court's earlier assertion that “[l]'obligation générale de bonne foi […] commande de ne pas […] mettre fin [aux négociations] sans justification lorsqu'on a suscité chez le partenaire la confiance dans la conclusion de l'accord”.
[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.[56]
[75] Needless to say, the fact that one of the parties may have had high expectations about the outcome of the negotiations[57] is not conclusive in itself: one's disappointment does not indicate bad faith in the other. Furthermore, before concluding that negotiations were conducted or ruptured as a result of or in a manner indicating bad faith or abuse (within the meaning of art. 6 and 7 C.C.Q.), the conduct of the parties (and not only that of the party who ended the discussions) must be examined, as well as the general context of the negotiations.[58] The threshold, needless to say, is high and depends on a case-by-case analysis. On this point, Professor Lefebvre wrote that:
L'intensité de cette obligation de négocier de bonne foi varie selon les cas. Plusieurs facteurs peuvent avoir une influence sur le degré de bonne foi requis, voire même sur l'obligation de poursuivre les négociations. En effet, la confiance qui s'établit entre les partenaires peut être due aux documents précontractuels qui ont été échangés ou à d'autres facteurs propres à la négociation en elle-même, à la qualité des parties, à l'existence de liens d'affaires antérieurs et même aux termes d'un contrat qui prévoit la renégociation de certaines clauses ou son renouvellement.[59]
[76] Speaking of the obligation to negotiate, Lefebvre added:
Nous croyons devoir nuancer ces propos. L'obligation de négocier ne doit s'imposer qu'une fois les pourparlers solidement amorcés. Il existe une période de temps plus ou moins longue où les parties « vont à la pêche » et où elles tentent de voir s'il existe une base de négociation possible entre elles. Durant cette période, les cocontractants doivent pouvoir se retirer en tout temps. Ce n'est que lorsque les négociations sont véritablement entamées que l'on pourra possiblement parler d'obligation de négocier ou de discuter.[60]
[77] In an article published in 2003, she also commented that:
L'obligation de bonne foi au stade des négociations ne remet pas en cause cette liberté de conclure ou non une entente. Comme norme de comportement, la bonne foi veille plutôt à ce que cette liberté soit exercée correctement. Ainsi, c'est la façon dont se déroule la négociation, les raisons qui la motivent, et les comportements des négociateurs lors de la rupture de celle-ci, qui importent.[61]
[78] These remarks are well illustrated by the case of Blum Lussier v. Lirange,[62] where the Superior Court relied on such a multi-factored analysis in order to find that the defendant acted in bad faith when he refused to sign a contract that had been under negotiation for months, after having knowingly let the plaintiff carry out important infrastructure work that would have been required had the parties reached an agreement.
* *
[79] What about the conduct of the parties in the present case?
* *
[80] The appellant and the respondents (more precisely Mr. Kohli and the representative of Trio Properties, Mr. Khanna), who are all businessmen, were not in any sort of commercial relationship before the negotiation process began in October 2010. They dealt with one another on equal terms (although one may have the impression that the respondents, as would-be purveyors of funds that Kripa needed in order to expand, might have had the upper hand).
[81] Until the morning of November 15, 2010, the appellant's conduct may have been somewhat muddled, but cannot be described as dishonest or abusive. The evidence does not indicate that he entered into the negotiations in bad faith or that, from the start, he intended not to conclude a contract with the respondents. He sent them the shareholder agreement at the beginning of their negotiations and, though he may have boasted about this or that on some occasions, he cannot be said to have misled the respondents and he appears to have negotiated seriously. Until November 15, 2010, he never agreed to the MoU and, on the contrary, expressed many valid reservations about the terms proposed by the respondents, as evidenced by the exchange of emails between them. The trial judge concluded - and I fully agree with her on this point - that on November 14, 2010 (and actually up to November 15, 2010), there was no agreement between the parties.[63] At that point in time, nobody had been deceived by anyone; the respondents had not succeeded in overcoming the appellant's reservations about the terms of their proposal; the parties simply disagreed and acknowledged that no deal would be forthcoming.
[82] Had the story ended there, there would have been no fault and there would have been no prejudice, the appellant having exercised his right (actually Kripa's right) not to enter into a contract the terms of which he did not accept and refused the respondents' proposal.
[83] The appellant's conduct afterwards, however, is difficult to understand. He abruptly changed his mind on November 15, and, according to the respondents and the trial judge, assented to the MoU. As I have explained above, this MoU was not a binding contract, nor a promise to contract, but at best, an arrangement by which the parties would continue negotiating along the lines indicated therein. Nevertheless, the appellant agreed to it, therefore agreeing to pursue negotiations. He then recklessly vouched for the other Kripa's shareholders (something which he had apparently done since the beginning of the negotiations), when he must have known that their approval was nothing but uncertain (or even improbable).
[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. On November 18, 2010, respondent Kohli wrote to the appellant and required him to forward the minute book of Kripa and other documents to the office of Mtre Silverstein.[64] 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.[65] This was certainly an inelegant manner to end the discussions.
[85] But, then, what about the respondents' conduct during the same period?
[86] As explained earlier, the respondents who are experienced businessmen, had every reason to be suspicious of the sudden, unexpected change of mind of their vis-à-vis on November 15, 2010 and to doubt his renewed assertion (bragging would be a better word) about his co-shareholders. In view of the shareholder agreement (which, as the trial judge remarked, “required the approval of 66% of the unit holders in order to change Kripa's corporate structure or issue more shares”),[66] they could not reasonably believe that the shareholders would simply follow the appellant's lead, nor could they let themselves be deceived by the appellant's statements to that effect - and certainly not without inquiring further. In fact, as we know, the respondents, as evidenced by Mr. Kohli’s morning email of November 15, 2010, were actually aware of the fact that some shareholders, despite the appellant's previous reassurances to the contrary, would disagree and that “we could buy them out, if they did not agree”.[67] Why would they close their eyes to this problem as of the afternoon of November 15, for the only reason that the appellant reiterated his reassurances?
[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.
[88] All in all, there could have been, here, no “confiance dans la conclusion de l'accord”.[68]
* *
[89] Even if I were to conclude that the respondents were justified to entertain such expectations, however, the appellant's conduct could not be sanctioned as there is no evidence that it caused any compensable loss to the respondents.
[90] In La bonne foi dans la formation du contrat, Lefebvre explains that:
La rencontre des volontés n'ayant pu s'opérer, la rupture des pourparlers peut être sanctionnée par un recours en dommages-intérêts. Une première difficulté réside dans la preuve de l'existence du préjudice. Les aléas d'une négociation peuvent, dans un contexte commercial, être un risque normal d'entreprise. Une fois l'existence du préjudice établie, il peut s'avérer difficile de faire la preuve du montant de ce dommage. Pour être indemnisé, on doit avoir subi un dommage direct et surtout certain.
Certains auteurs ont identifié quelques chefs de réclamations susceptibles d'être invoqués dans ce domaine, au nombre desquels on retrouve : 1) les dépenses engagées dans le cadre de la négociation; 2) la perte de temps; 3) les occasions manquées; 4) l'impossibilité d'exécuter un contrat conclu avec un tiers; 5) l'atteinte au crédit et à la réputation, et 6) les profits escomptés du contrat manqué.[69]
[91] What of these heads of damages, or others, in the present case?
[92] Given the outcome, the respondents assuredly wasted their time negotiating with the appellant (although the negotiations did not last long and were not particularly complicated or labour-intensive). This, on the other hand, is an inherent risk of any contractual negotiations and can hardly be considered a prejudice for which compensation may be obtained, except in the most exceptional of circumstances. In the present case, there are no such circumstances and the situation does not fall outside the realm of the risks ordinarily associated with any type of negotiation. In any event, the appellants did not allege any such prejudice.
[93] For the rest, the respondents did not establish that they incurred any disbursements or expenses linked to the negotiations[70] or resulting therefrom, or that they were induced into making expenses in view of the eventual implementation of the expected contract.[71] Nor did they establish that they missed any opportunity of doing business with someone else or lost any business while they were negotiating with the appellant and because of these negotiations (assuming that this kind of prejudice is compensable).[72] As well, they did not establish circumstances that could lead to a finding of “impossibilité d'exécuter un contrat conclu avec un tiers” or “atteinte au crédit et à la réputation” or moral damages (assuming again that such heads of damages can be considered in the context of failed negotiations).[73] Likewise, they did not disclose any confidential information to the appellant that could now imperil their rights or assets (in fact, it is the appellant who disclosed confidential information to the respondents). And, except for the following, they did not allege nor demonstrate any other prejudice resulting for the appellant's conduct and his abrupt termination of the negotiations.
[94] The only remaining question is that of the profits expected by the respondents, who lost the opportunity of purchasing Kripa's shares (which may have been a source of revenue, in the form of dividends) and gaining control of the company. This is the principal basis of their subsidiary claim against the appellant personally.
[95] The respondents certainly lost the opportunity of buying Kripa’s shares and receiving dividends, but, since there never was any binding agreement to that effect nor a promise to contract, this loss is not a prejudice for which, in my opinion, compensation can be awarded. With respect, I disagree with the view that such damages may be successfully claimed as a result of the violation of the duty to conduct negotiations in good faith. If that were the case, there would indeed be little or no difference, as far as prejudice and damages are concerned, between violating this duty and violating a promise to contract (art. 1397 C.C.Q.) or refusing to perform a contract (art. 1590 and 1607 C.C.Q.).
[96] Lefebvre, to whom I will turn again, writes that:
6) Il reste à déterminer si la victime peut réclamer les profits escomptés du contrat manqué. La doctrine et la jurisprudence sont majoritairement d'avis que seul l'intérêt négatif peut être indemnisé, ce qui exclut les bénéfices perdus du contrat projeté. Cette notion d'intérêt négatif a été développée par Ihering et « vise à replacer le bénéficiaire dans la situation qui aurait été la sienne s'il n'avait pas engagé la négociation manquée ». En effet, les parties ayant le droit de rompre les négociations, ce chef de dommages est des plus incertains.[74]
[References omitted.]
[97] Pre-contractual negotiations, even when pursued with all possible honesty, loyalty and good faith, may not succeed, and the right of each party, in the end, not to enter a contract hangs over all negotiations (except in the rare circumstances where, as Lluelles and Moore explain, there is an actual contractual obligation to enter into a contract).[75] The fact that a party may have negotiated more or less loyally or reasonably, and may have abusively exercised his or her right to end negotiations and refuse to enter into a contract, may be a source of damages, as we have just seen, but the prejudice resulting therefrom cannot include the loss of the expected profits or advantages that would have flown from the contract that, ultimately, was not concluded.
[98] French commentators discussed the possibility that this kind of loss might be compensated, which some viewed favourably,[76] a course which was finally rejected by the Cour de cassation (see infra). In Quebec, authors and courts are more reserved on the subject, although recognizing that failure to negotiate in good faith or in a reasonable manner may lead to compensation.
[99] In Industries Dettson inc. v. Courchesne,[77] the Superior Court, relying on Laferrière v. Lawson[78] and the theory of loss of chance, decided that loss of the profits expected from the unsigned contract was compensable and rendered judgment accordingly against the party responsible for the abusive rupture of the negotiations.[79] Respectfully, I do not think that Laferrière v. Lawson can actually support such a conclusion. Instead, I find myself in complete agreement with the Cour de cassation in Société Alain Manoukian,[80] where it was decided that:
[…] les circonstances constitutives d'une faute commise dans l'exercice du droit de rupture unilatérale des pourparlers précontractuels ne sont pas la cause du préjudice consistant dans la perte d'une chance de réaliser les gains que permettait d'espérer la conclusion du contrat;
Attendu que la cour d'appel a décidé à bon droit qu'en l'absence d'accord ferme et définitif, le préjudice subi par la société Alain Manoukian n'incluait que les frais occasionnés par la négociation et les études préalables auxquelles elle avait fait procéder et non les gains qu'elle pouvait, en cas de conclusion du contrat, espérer tirer de l'exploitation du fonds de commerce ni même la perte d'une chance d'obtenir ces gains; que le moyen n'est pas fondé;[81]
[100] Similarly, in Société Antineas,[82] the Cour de cassation wrote:
Vu l'article 1382 du code civil;[83]
Attendu que pour condamner la société Antineas à payer des dommages-intérêts à la SCI l'arrêt retient que la cour dispose d'éléments suffisants pour évaluer le préjudice de celle-ci consistant en la perte d'une chance sur le manque à gagner résultant de la disparition du programme immobilier envisagé;
Qu'en statuant ainsi, alors qu'une faute commise dans l'exercice du droit de rupture unilatérale des pourparlers pré-contractuels n'est pas la cause du préjudice consistant dans la perte d'une chance de réaliser les gains que permettait d'espérer la conclusion du contrat, la cour d'appel a violé le texte susvisé;
[101] Again, in Société Animal Food & System,[84] the Cour de cassation repeated that:
Mais attendu qu'ayant relevé que le préjudice invoqué par la société AFS était constitué par l'impossibilité dans laquelle elle s'était trouvée d'ouvrir le nouvel établissement qu'elle avait prévu d'ajouter à la chaîne de magasins qu'elle exploitait, n'ayant pu acquérir le droit au bail en litige alors qu'il s'agissait d'un immeuble bien placé, qu'elle entendait réaliser une nouvelle implantation destinée à remplacer celle d'Englos, lui permettant d'y transférer ses salariés sans les licencier, et qu'elle avait ainsi perdu son implantation dans la région Nord Pas-de-Calais, ce qui avait un impact sur la notoriété de la chaîne toute entière, la cour d'appel, qui a retenu à bon droit que ces préjudices ne se rattachaient pas à la rupture unilatérale des pourparlers précontractuels par la SCI mais constituaient, pour la société AFS, la perte de la chance de réaliser les gains qu'elle pouvait espérer tirer du transfert de son fonds de commerce dans les locaux de Lezennes, en a justement déduit qu'ils n'étaient pas indemnisables par la SCI;
D'où il suit que le moyen n'est pas fondé;
[Emphasis added.]
[102] Reviewing the question and the evolution of the Cour de cassation's views on the subject, professor Denis Mazeaud wrote that:
3- Cette solution, dont on peut donc considérer qu'elle est désormais fermement établie en droit positif, tranche donc par la négative la question de la réparation d'un préjudice spécifique causé par la rupture d'une négociation précontractuelle. Cantonné à cette seule catégorie de préjudice, l'arrêt commenté n'est pas dénué d'intérêt car, avant l'arrêt de 2003, et même depuis celui-ci, la solution ne s'imposait pas avec la force de l'évidence, à tel point que certaines grandes plumes du droit de la responsabilité se prononçaient même en sens contraire. Mais, outre le rappel de la règle selon laquelle la perte de chance précontractuelle n'est pas un préjudice réparable (I), l'arrêt commenté, tout comme son prédécesseur, se révèle particulièrement stimulant en raison de la portée dont il peut légitimement être doté à l'avenir. En effet, si on le prend au pied de la lettre, on peut se demander s'il ne réduit pas la réparation des préjudices précontractuels à une peau de chagrin (II).[85]
[103] Professors Ghestin, Loiseau and Serinet add that:
755. — La jurisprudence des cours d'appel a longtemps été partagée. Il semble qu'elle s'orientait vers la réparation de la perte de la chance qu'avait le négociateur déçu de tirer un profit de la conclusion du contrat. La Chambre commerciale de la Cour de cassation, le 25 février 2003, s'était prononcée de façon claire en faveur de cette réparation. La 3e Chambre civile, de son côté, le 12 novembre 2003, avait admis que le demandeur avait « subi un préjudice du fait […] de la perte de chance de réaliser une opération immobilière envisagée pour loger sa famille et percevoir des revenus locatifs intéressants ». Cette résolution est toutefois écartée depuis l'arrêt Manoukian du 26 novembre 2003.[86]
[References omitted; emphasis added.]
[104] Furthermore:
758. — […]
Le Rapport de la Cour de cassation pour 2006 précise le fondement juridique de cette solution. Il rappelle d’abord que « la responsabilité fondée sur l’article 1382 du code civil exige non seulement la preuve d’une faute et d’un préjudice, mais l’existence d’un lien de causalité certain entre les deux, qui doit être caractérisé par les juges du fond ». Il précise ensuite que, « en censurant, par l’arrêt rapporté, la cour d’appel qui avait réparé la perte d’une chance, pour la victime de la rupture fautive, de réaliser les gains espérés du programme immobilier envisagé, la 3e chambre civile, réunie en plénière de chambre, affirme à son tour le droit qu’ont les partenaires de rompre à tout moment des pourparlers pré-contractuels. Ceci la conduit à exclure toute relation de cause à effet entre la perte des avantages attachés à la conclusion du contrat et les conditions de la rupture qui seules sont fautives ». Ce sont seulement les circonstances rendant abusif le droit de rompre les pourparlers qui justifient la réparation du préjudice subi par le demandeur.
[…][87]
[105] According to Ghestin, Loiseau and Serinet, this would be true even in the presence of an “accord de principe” (which is particularly interesting in our case, where the MoU might perhaps have been viewed as such an “accord de principe”):
762. — Le revirement de jurisprudence résultant de l'arrêt Manoukian s'applique-t-il également en cas d'inexécution d'un accord de principe.
Un auteur a cru voir dans l'arrêt Manoukian la consécration d'une solution différente, en cas d'accord de principe, de celle que la Cour de Cassation faisait prévaloir au cas de simples pourparlers. Selon cet auteur, la formule de l'arrêt réservant la situation où un « accord ferme et définitif » aurait été conclu viserait, non seulement la conclusion du contrat en cours de négociation, mais également celle de l'accord de principe imposant de négocier. Il semble cependant qu'en mentionnant expressément un « contrat ferme et définitif », la Chambre commerciale ait entendu au contraire se limiter au contrat « définitif », c'est-à-dire à celui à conclure, par opposition à un accord de principe dont l'objet est par définition préliminaire et provisoire.
Ce même auteur soutient encore qu'en l'absence d'accord de principe les probabilités de conclusion du contrat seraient « trop infimes pour fonder un droit à réparation au titre de la perte de chance » alors que « la passation d'un avant-contrat » serait « significative de la volonté des parties de faire aboutir leurs discussions ». Cette affirmation ne correspond pas à la spécificité des accords de principe qui ne sont pas des avant-contrats formalisés et qui ne peuvent préjuger du résultat des négociations dont ils se bornent à imposer l'ouverture. C'est pourquoi il semble logique de soumettre la rupture abusive des négociations engagées en exécution d'un accord de principe aux règles posées par la jurisprudence inaugurées par l'arrêt Manoukian.
[…][88]
[References omitted; emphasis added.]
[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.
[108] In the absence of any compensable loss, the subsidiary claim of the respondents will thus be dismissed.
III. Conclusion
[109] To summarize:
- The Memorandum of Understanding dated November 12, 2010 lacked many of the essential stipulations that could have made it a binding contract;
- At best, this Memorandum was a pre-contractual arrangement by which the parties agreed to continue working towards a final agreement that would require the consent of the other Kripa's shareholders;
- The Memorandum, which purported to affect the personal rights of these shareholders, could not be binding upon them, as they never consented to its terms and were absent from the negotiations;
- Neither the rules governing apparent mandate nor the indoor management rule could make the Memorandum binding upon the shareholders, or Kripa itself, inasmuch as the respondents were well aware of the situation and of the internal workings of the company in that respect;
- The respondents were not legally justified to rely on the appellant's representations that he would secure the other shareholders' approval;
- Appellant's conduct during the negotiations between the parties, especially after November 14, 2010, was reprehensible;
- The respondents, however, did not establish that the appellant's fault caused them any loss and, therefore, they are not entitled to compensation;
- In particular, they are not entitled to damages for the profits that they allegedly lost when they failed to acquire the opportunity to buy Kripa's shares, such loss not being compensable under the Civil Code of Quebec (except in circumstances which do not exist here).
* *
[110] Finally, one last comment is in order.
[111] The November 12, 2010 MoU also contained the following:
JD will give an option to TRIO/KOHLI to buy two wells owned by JD through a Company controlled by him at a price to be agreed by KRIPA ENERGY and/or TRIO/KOHLI group. The purpose of this is to avoid any notion of “conflict of interest”.
[112] In his email of November 9, 2010, respondent Kohli indicated that:
Please consider selling the two other wells to Kripa Group. This will give you needed cash personally and you will still retain 13/40TH share of the two units or above 32%. Perhaps the other unit holders may not be willing to accept this in which case, Trio/Kholi would like to have this option anyway.[93]
[Transcribed as written.]
[113] The wells in question are owned by 6660894 Canada Ltd., a company whose shares are held by the appellant (who apparently is not the majority shareholder) and another person.[94] 6660894 Canada Ltd. is not a subsidiary of Kripa.
[114] This portion of the MoU was not the focus of the dispute between the parties at trial (nor in appeal), but one thing is certain: on that point, it could not be homologated nor rendered executory, as the judgement purported to do, without 6660894 Canada Ltd. being a party to the proceedings, which it was not.
* *
[115] For these reasons, I would allow the appeal and dismiss the respondents' action.
[116] In light of the circumstances, there is, of course, no reason to grant the appellant's cross-demand for damages pursuant to article 54.1 and ff. C.C.P.[95]
[117] Finally, considering that, in all likelihood, the litigation would not have been undertaken had it not been for the appellant's conduct, I would make no order as to costs in appeal nor in the Superior Court. The same ruling should apply to the dismissal of the appellant's cross-demand.
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MARIE-FRANCE BICH, J.A. |
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[1] R.S.C. 1985, c. C-44.
[2] Sub-s. 2.5(r) of the Re-Amended Shareholders Agreement. See also: s. 104(1)(c) CBCA.
[3] Sub-s. 2.8 of the Re-Amended Shareholders Agreement.
[4] Considering what we know, now, of Kripa and its financial statements, this estimate was probably highly inflated. Furthermore, the “Solicitation to Investors” pamphlet (consisting of two pages, exhibit P-2), which apparently sparked the respondents' interest, seems quite amateur (despite the geological report attached thereto).
[5] It appears that the appellant contacted respondent Kohli in mid-October 2010 and presented him with his proposal, by email. See exhibit P-1, email of October 13, 2010 from the appellant to respondent Kohli.
[6] Judgment of the Superior Court, paras. 17, 43 and 46.
[7] Exhibit D-8.
[8] Those are respondent Kohli's exact words in the email addressed to the appellant on November 12, 2010 at 19:25:00 (exhibit P-5). See also, infra, para. [28].
[9] Exhibit P-4.
[10] Testimony of Daljit Kohli, March 25, 2013, q. 19, p. 11-12.
[11] Id., p. 80 in fine and 81. See also q. 59, p. 23.
[12] Testimony of Subhash Khanna, March 25, 2013, p. 129 in fine and 131.
[13] Judgment of the Superior Court, paras. 27 and 48.
[14] Email of November 15, 2010, 7:44 AM, from respondent Kohli to appellant (exhibit D-1).
[15] Testimony of Warren Silversmith, March 25, 2013, p. 119-120.
[16] This is the date mentioned in the letter of demand addressed by respondents' counsel to the appellant (exhibit P-7).
[17] See exhibit P-7 (letter of demand addressed by respondents' counsel to appellant on December 22, 2010).
[18] Re-amended motion for the issuance of a permanent injunction, March 21, 2012.
[19] Exhibit P-5.
[20] Supra, paras. [11] to [14].
[21] As far as control is concerned, the demand letter (exhibit P-7) contains the following only:
After meetings and emails as to the nature of Kripa and its needs, our clients were prepared to invest but, conditional on various unequivocal factors, such as one (1) of our clients together with yourself would execute all negotiable instruments and contracts on behalf of Kripa.
You were particularly interested in not only receiving these investments, but also the opportunity to professionalize Kripa by moving your head office to the premises of Trio.
In that way, the accounting, bookkeeping and possibilities of banking facilities would be more readily available to Kripa through the intervention of our clients.
[22] See paras. 27 and 34 of the original introductory motion, of the amended introductory motion, and of the re-amended introductory motion.
[23] S. 2.8 of the Re-Amended Shareholder Agreement.
[24] S. 3 of the Re-Amended Shareholder Agreement.
[25] See supra, para. [17].
[26] This is in sharp contrast to the situation in Kechichian v. RRX Medical Inc., 2012 QCCA 2077, J.E. 2012-2240, where the Court found that the essential elements of a commercial lease had been agreed upon, even though many details remained to be negotiated. See also: 2425-3726 Québec inc. v. 9172-5234 Québec inc., 2012 QCCA 1110, J.E. 2012-1276.
[27] J.E. 2000-201 (C.A.), para. 49. See also: Société en commandite de Copenhague v. Corporation Corbec, 2014 QCCA 439, J.E. 2014-470; Greenberg v. Capital d'Amérique CDPQ inc., 2011 QCCA 958.
[28] Brigitte Lefebvre, La bonne foi dans la formation du contrat, Cowansville, Éditions Yvon Blais, 1998, p. 127-128 (“lettres d'intention”) and 128-129 (“punctation”, which is a kind of “contrat de pourparlers”).
[29] 2014 QCCA 842, J.E. 2014-792.
[30] See s. 2.2 of the Re-Amended Shareholder Agreement; see also the examination of the appellant on affidavit, June 21, 2011, FA, p. 550 in fine and 551-552.
[31] See arts. 309 and 321 C.C.Q., and s. 102 CBCA.
[32] S. 18 CBCA states that:
18. (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that
(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;
(…)
(2) Subsection (1) does not apply in respect of a person who has, or ought to have, knowledge of a situation described in that subsection by virtue of their relationship to the corporation.
18. (1) La société, ou ses cautions, ne peuvent opposer aux personnes qui ont traité avec elle ou à ses ayants droit ou ayants cause les prétentions suivantes :
a) les statuts, règlements administratifs et conventions unanimes des actionnaires n’ont pas été observés;
[…]
(2) Le paragraphe (1) ne s’applique pas aux personnes qui connaissent ou devraient connaître la situation réelle en raison de leur relation avec la société.
[33] See: Paul Martel, La société par actions au Québec. Les aspects juridiques, Montreal, Éditions Wilson & Lafleur ltée/Martel ltée, 2015, paras. 25-81 and 26-9 to 26-117.
[34] Exhibit P-5, email of November 12, 2010. Such a consultation had already been alluded to in respondent Kohli's email of November 9, 2010 (supra, para. [11]).
[35] Exhibit D-1, see supra, para. [17].
[36] And, perhaps, with other future shareholders who had already agreed to purchase units from Kripa (see exhibit P-5).
[37] See exhibit D-1.
[38] Id.
[39] Id.
[40] 2008 QCCA 739, [2008] R.J.Q. 912 (C.A.).
[41] See also: Compagnie d'assurances Missisquoi v. Petro-Canada, 2010 QCCA 2085, para. 3; Adrian Popovici, La couleur du mandat, Montreal, Éditions Thémis, 1995, p. 107 and ff.
[42] See: Jean-Louis Baudouin and Pierre-Gabriel Jobin, Les obligations, 7th ed., by Pierre-Gabriel Jobin and Nathalie Vézina, Cowansville, Éditions Yvon Blais, 2013, p. 564 to 566, paras. 475 to 478.
[43] On the personal and extracontractual liability of the director of a company, see: Paul Martel, supra, note 33, paras. 24-252 and ff. and 24-297 and ff. See also: Raymark Xpert Business Systems Inc. v. Brosseau-Nestor, 2011 QCCA 212, J.E. 2011-364, para. 17; Attias v. Basile, 2014 QCCA 1224, J.E. 2014-1178, paragr. 4 and note 4 (on the “autonomous fault” of the director); Syndicat de copropriété de Villa du golf v. Leclerc, 2015 QCCA 366, J.E. 2015-445.
[44] See: Jean-Louis Baudouin and Pierre-Gabriel Jobin, supra, note 42, p. 141-142, 144 and 225-227, paras. 84, 88 and 136; Didier Lluelles and Benoît Moore, Droit des obligations, 2nd ed., Montreal, Éditions Thémis, 2012, paras. 249 and 255.
[45] See for instance, Didier Lluelles and Benoît Moore, supra, note 44, para. 250. Another striking example of these exceptional circumstances is to be found in the system of public call for tenders and bidding process in force in the case of public bodies (see for instance: An Act respecting contracting by public bodies, CQLR, c. C-65.1).
[46] See the examples given in: Brigitte Lefebvre, supra, note 28, p. 122-123. See also: Billards Dooly's inc. v. Entreprises Prébour ltée, supra, note 29, para. 9 (where the parties were engaged in a formal negotiation protocol).
[47] For an in-depth study of the question, see: Brigitte Lefebvre, “La négociation d'un contrat: source potentielle de responsabilité extracontractuelle”, in Pierre-Claude Lafond (dir.), Mélanges Claude Masse, Cowansville, Éditions Yvon Blais, 2003, 573, p. 587 and ff.
[48] The presence of such documents may in the words of Professor Lefebvre, “avoir comme impact d'augmenter l'intensité de l'obligation de bonne foi, car ils peuvent servir à démontrer que les négociations sont sérieuses, qu'elles vont bon train et qu'un aboutissement heureux est plausible” (Brigitte Lefebvre, supra, note 47, p. 591).
[49] Jean-Louis Baudouin and Pierre-Gabriel Jobin, supra, note 42, p. 225-226, 227 and 227-228.
[50] Didier Lluelles and Benoît Moore, supra, note 44, p. 125-127. See also: Brigitte Lefebvre, “La bonne foi”, to be published in Benoît Moore (dir.), Les grandes notions de droit civil, Montreal, Éditions Thémis, 2015, p. 34 to 37.
[51] J.E. 2002-5 (C.A.).
[52] See Didier Lluelles and Benoît Moore, supra, note 44, paras. 250 and 251, p. 126-127, reproduced at para. [69] supra. See also: Billards Dooly's inc. v. Entreprises Prébour ltée, supra, note 29.
[53] See for instance: 2010 QCCA 1816 Construction Canada inc. v. Bibliothèque et Archives nationales du Québec, 2012 QCCA 1228, J.E. 2012-1346 (motion for leave to appeal to the Supreme Court dismissed, 2013-01-17, 34985), para. 40.
[54] Supra, note 51.
[55] And one of its subsidiaries.
[56] On the abuse of discretionary rights, see: Houle v. Canadian National Bank, [1990] 3 S.C.R. 122, and Ponce v. Montrusco & Associés inc., 2008 QCCA 329, [2008] R.J.D.T. 65.
[57] For instance, in cases where negotiations have progressed to a point where the conclusion of the contract appears likely to happen.
[58] See: Brigitte Lefebvre, supra, note 50.
[59] Brigitte Lefebvre, supra, note 28, p. 117.
[60] Id., p. 119.
[61] Brigitte Lefebvre, supra, note 47, p. 578-579.
[62] 2006 QCCS 657, J.E. 2006-719, confirmed by Salvatore-Lirange v. Blum-Lussier, 2007 QCCA 1735, B.E. 2008BE-68.
[63] This was again recognized at the hearing before this Court, as it was before the Superior Court (see para. 27 of the judgment of the Superior Court).
[64] Exhibit P-6, email of November 18, 2010, 11:44PM.
[65] Exhibit D-13 (email dated December 7, 2010).
[66] Judgment of first instance, para. 22.
[67] Exhibit D-1, email dated November 15, 2010.
[68] Compagnie France Film inc. v. Imax Corp., supra, note 51, para. 37. See also: Salvatore-Lirange v. Blum-Lussier, supra, note 62, para. 1.
[69] Brigitte Lefebvre, supra, note 28, p. 157-158.
[70] Mtre Silverstein's services were paid by Kripa.
[71] The present case is not comparable in this respect to that of Blum Lussier v. Lirange, supra, note 62.
[72] French law appears to recognize that such is the case (see: Denis Mazeaud, “Réparation des préjudices précontractuels: toujours moins…?”, in Recueil Dalloz, Éditions Dalloz 2012, 2006, p. 2963, paras. 6 and 11; Jacques Ghestin, Grégoire Loiseau and Yves-Marie Serinet, Traité de droit civil (La formation du contrat), t. 1, 4th ed., Paris, LGDJ, Lextenso éditions, 2013, paras. 766 and ff.), but, no such loss having been established here, I do not need to decide whether or not the same is true under Quebec law.
[73] Damages in the nature of harm to reputation, which led to the loss of business opportunities, were granted in Immobilière (L'), société d'évaluation conseil inc. v. Évaluations BTF inc., 2009 QCCA 1844, J.E. 2009-1835 (motion for leave to appeal to the Supreme Court dismissed, 2010-04-08, 33447), paras. 428 and 429 (in the context where a contract was not awarded when it should have been according to the rules of a public call for tenders).
[74] Brigitte Lefebvre, supra, note 28, p. 160-161.
[75] Didier Lluelles and Benoît Moore, supra, note 44, p. 127, para. 250 (reproduced at para. [69] supra).
[76] See infra.
[77] [2001] R.J.Q. 124 (C.S.).
[78] [1991] 1 S.C.R. 541.
[79] Industries Dettson inc. v. Courchesne, supra, note 77, paras. 180-181.
[80] Pourvois J 00-10.243 et B 00-10.949, Cour de cassation, chambre commerciale, 26 novembre 2003, Bull. 2003, IV, n° 186(1), p. 206.
[81] The facts of this case are particularly interesting. The parties to the negotiations, who were planning the sale/purchase of the shares of a company, had agreed to a pre-contractual arrangement of the kind that we have in the present case. The would-be vendors, however, had all along been secretly negotiating with another person to whom they finally sold their shares, which put a brutal end to the negotiations with Société Alain Manoukian. The Cour de cassation concluded to the bad faith of the defendant.
[82] Pourvoi 04-20.040, Cour de cassation, troisième chambre civile, 28 juin 2006, Bull. 2006, III, n° 164, p. 136.
[83] This provision reads as follows: “Tout fait quelconque de l'homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé à le réparer.”
[84] Pourvoi 11-10.532, 994, Cour de cassation, troisième chambre civile, 19 septembre 2012.
[85] Denis Mazeau, supra, note 72.
[86] Jacques Ghestin, Grégoire Loiseau and Yves-Marie Serinet, supra, note 72, p. 545.
[87] Id., p. 548.
[88] Id., p. 549-550.
[89] See: Société du parc industriel et portuaire de Bécancour v. Soterm inc., supra, note 91, paras. 80 to 84; Agri-capital Drummond inc. v. Mallette, s.e.n.c.r.l., 2009 QCCA 1589, [2009] R.R.A. 935 (motion for leave to appeal to the Supreme Court of Canada dismissed (S.C. Can., 2010-02-11) 33392), paras. 48;
[90] For instance, see: Canada (Procureur général) v. Constructions Bé-Con inc., 2013 QCCA 665, J.E. 2013-742, paras. 71 and ff.; Bau-Québec ltée v. Ste-Julie (Ville de), [1999] R.J.Q. 2650 (C.A.). See also: Acier Mutual Inc. v. Fertek inc., J.E. 96-602 (C.A.); Construction Gesmonde ltée v. 2908557 Canada inc., 2005 QCCA 537, J.E. 2005-1010 (in the case of tenders regulated by the Bureau des soumissions déposées du Québec).
[91] For instance, see: Société du parc industriel et portuaire de Bécancour v. Soterm inc., J.E. 2001-1377 (C.A.).
[92] Supra, note 29.
[93] Exhibit D-8 (email dated November 9, 2010, from respondent Kohli to the appellant and Mr. Khanna).
[94] See exhibit D-6, extract for the Registraire des entreprises du Québec for 6660894 Canada Ltd.
[95] Re-re-re-amended plea and cross-demand, March 19, 2013, paras. 72 and ff.
AVIS :
Le lecteur doit s'assurer que les décisions consultées sont finales et sans appel; la consultation du plumitif s'avère une précaution utile.