“The [person drafting] the documents for a transaction has a duty to inform the co-contracting parties of any changes he makes to these documents.’’ [1] – this is how the Honourable Ian Demers, J.C.S., began his judgment dated April 23, 2024, in Maçons Patrimoniaux Inc. v. Aliston Investissement Inc., 2024 QCCS 1447.
In this case, the plaintiff Maçons Patrimoniaux Inc. (the “Vendor“) had sold the assets of its business to one of the defendants, a company specially created for the purposes of this sale-purchase transaction (the “Purchaser“). The asset purchase agreement provided for a balance of sale of $200,000, payable 2 years after the transaction closed. There was also an indemnity agreement under which a company and two individuals acted as guarantors for the Purchaser, guaranteeing payment of this balance to the Vendor.
The Purchaser’s personnel drafted all the documentation relating to this transaction, which was shared with the Vendor for the last time on the eve of closing. However, on the day of closing, the Purchaser’s sole director instructed his in-house legal counsel to withdraw the indemnity agreement and replace it with a release agreement, thereby removing any guarantee of payment of the balance of the price of sale. The Purchaser and its representatives did not inform the Vendor of this change until the latter had signed it at the closing of the transaction.
Since the Purchaser declared bankruptcy before paying the balance of the price of sale, the Vendor was not paid in full and had no guarantee due to the substitution of the indemnity agreement for the release agreement.
In this case, the Vendor was mainly asking the Court to condemn all the defendants jointly and severally to pay the balance of the $200,000 price of sale. The Honourable Judge Demers ruled that only the Purchaser’s sole director could be held liable, since the other defendants were not involved in the faulty substitution of agreements, and there was therefore no legal relationship between them and the Vendor.
Indeed, the instructions given by the sole director of the Purchaser to substitute the indemnity agreement for the release agreement, without notifying the Vendor, constituted a serious breach of the obligation of good faith, constituted fraud within the meaning of article 317 of the Civil Code of Québec, and justified the Purchaser’s lifting of the corporate veil.
In addition, the Purchaser, its sole director and its legal advisor all breached their duty to inform. They were required to warn the Vendor of the substitution of the agreements, particularly since the Vendor could not have known of the existence of the release agreement and could not have informed itself of the Purchaser’s internal instructions, decisions and actions. In the judge’s opinion, “[the Vendor] could at least take it for granted that [the Purchaser] would not substitute one document for another”[2].
However, although the sole director was responsible for the fault committed by the Purchaser and the prejudice suffered by the Vendor, it must be stressed that the Vendor’s conduct was not irreproachable. The Vendor’s representatives signed the transaction documents without reading them, and therefore committed a contributory fault.
The Purchaser’s sole director was held liable for 75% of the damage caused and was ordered to pay the Vendor $150,000 (i.e. 75% of the balance due). The Vendor had to assume 25% of the liability (i.e. the balance of 25% of the balance due), since its representatives, acting on its behalf, were not as prudent and diligent as they should have been.
The reader must remember that it is unacceptable to make major changes to contractual documents that have already been negotiated without notifying the co-contractor. Furthermore, although the co-contractor’s lack of diligence is neither a defense nor an exoneration for such wrongful conduct, it may justify a reduction in the amount awarded to the “victim”.
[1] Par. 1 of the decision; free translation from French.
[2] Par. 62 of the decision; free translation from French.