Letters of intent in Quebec: what the Civil Code says

The Civil Code of Québec sets rules on good faith, on how a contract is formed, on offers and on promises to contract, and a letter of intent for a business purchase can engage any of them, depending on what it says. This guide walks through those rules in the order a letter meets them. It names the articles so that a lawyer can confirm them, and the table below sets them side by side. It is about Quebec only; if you are outside Quebec, check the rules where you are with a lawyer. It does not say whether any particular letter binds anyone. For the general picture of how letters work, see the letter of intent explained.

Good faith from the first exchange

Article 6 says every person is bound to exercise his civil rights in accordance with the requirements of good faith. Article 7 adds that no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to good faith. Article 1375 says the parties must conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished. The Code also presumes good faith, unless the law expressly requires that it be proved. Because article 1375 speaks of the time the obligation arises, ask a lawyer how it applies to what each side says and does while a letter of intent is being negotiated.

When a letter becomes a contract

Under article 1385, a contract is formed by the sole exchange of consents between persons having capacity to contract. That is subject to two exceptions: the law may require a particular form as a necessary condition of formation, or the parties may subject formation of the contract to a solemn form. The same article adds that it is also of the essence of a contract that it have a cause and an object. Éducaloi, which provides general information about the law that applies in Québec, says most contracts do not have to be in writing, and that a verbal agreement or an email exchange is enough to form one, although certain contracts must be in writing. So the heading on a letter does not settle the question. Ask a lawyer whether a clause making the sale subject to a signed purchase agreement is a form the parties have required.

Offer or not: the essential elements

Article 1388 defines an offer to contract as a proposal that contains all the essential elements of the proposed contract and in which the offeror signifies his willingness to be bound if it is accepted. BDC says a letter of intent is not intended to be fully binding unless otherwise expressly stipulated, but that it can be detailed enough that it is difficult to tell it from a formal purchase offer. If a letter sets out every essential element of the sale, ask a lawyer whether it is an offer under the Code. Article 1390 turns on a term: where a term is attached, the offer may not be revoked before the term expires, and if none is attached, it may be revoked at any time before acceptance is received by the offeror. Article 1391 qualifies that: where the offeree receives a revocation before the offer, the offer lapses, even though a term is attached to it.

An accepted promise binds both sides

Under article 1396, an offer made to a determinate person is a promise to enter into the proposed contract from the moment the offeree clearly indicates to the offeror an intention to consider the offer and reply within a reasonable time or the time stated. A mere promise is not equivalent to the proposed contract. However, where the beneficiary accepts the promise or takes up his option, both he and the promisor are bound to enter into the contract, unless the beneficiary decides to enter into the contract immediately. Article 1397 adds that a contract made in violation of a promise to contract may be set up against the beneficiary, without affecting his remedy for damages against the promisor and the person who contracted in bad faith with the promisor.

Money paid with a promise of sale

Article 1711 says that any amount paid on the occasion of a promise of sale is presumed to be a partial payment on account of the price, unless otherwise stipulated in the contract. That is a presumption, and the contract can displace it. The article does not tell you whether the money comes back if the sale does not close. If a deposit, advance or exclusivity payment accompanies a letter of intent, the letter should say in plain words what the money is for, and a lawyer should confirm how article 1711 applies to those words before anything is paid.

If the other side breaks a binding term

Éducaloi says a claim for damages can be filed on its own or combined with other recourses, and that in many situations you must first send a demand letter (a mise en demeure) to the other party before filing court proceedings. It adds that you have an obligation to limit your damages, and that before going to court you must consider other options for settling the dispute. Whether any remedy is available depends on the facts and on what the letter actually says. The shorter answers linked from this guide cover being held to a price, entertaining a better offer, a buyer’s misrepresentation, a missed milestone and a buyer who strings a seller along.

What to check before you sign

Before signing a Quebec letter of intent, put these questions to your lawyer, using the Code’s own terms.

• Whether the letter states which clauses bind and which do not. BDC notes that where the letter so provides, it can create binding obligations, particularly on confidentiality and exclusivity.
• Whether it contains every essential element of the sale. If it does, ask whether it is an offer under article 1388.
• Whether it sets a time for acceptance, since article 1390 treats an offer with a term differently from one without.
• Whether any money paid with it is described, because article 1711 presumes a partial payment on account of the price unless the contract stipulates otherwise.
• Who signs, and in what language the document is written; see the answer on the language of a Quebec sale agreement.