The sale of real estate assets usually starts with a preliminary contract, more specifically, a promise to purchase signed by the seller and the purchaser, which sets out most of the terms and conditions of the deed of sale to be entered into. However, it may happen that an owner will go back on his word and choose to sell to a third party whose offer for the assets is more favourable.
If the owner sells his property to the third party purchaser, what are the remedies of the original purchaser? Can he or she seek to have the sale to the third party voided? Can he or she claim damages from the third party?
In a judgment issued on September 8, 2011, the Quebec Superior Court considered the case of a company (GLS) that had signed a promise to sell assets to a purchaser (Midbec) and, a few days later, sold them to a third party purchaser (Reliable) under more favourable terms. Midbec instituted an action for damages against GLS and Reliable solidarily. As GLS had gone bankrupt, only a judgment ordering Reliable to pay damages could compensate Midbec for the harm it suffered.
Reliable invoked the absence of a legal relationship between itself and Midbec since Reliable was not a party to the first promise to purchase, which, moreover, its representatives had not read. In addition, Reliable considered that there had been no complicity or collusion between itself and GLS and that, accordingly, it was not in bad faith within the meaning of section 1397 of the Civil Code of Québec, which reads as follows: "A contract (the sale to Reliable) made in violation of a promise to contract (the GLS/Midbec promise to purchase) may be set up against the beneficiary of the promise (Midbec), but without affecting his remedy for damages against the promisor (GLS) and the person (Reliable) having contracted in bad faith with the promisor."
(The text in italics has been added and is not part of the quotation)
The evidence showed that in fact, although Reliable's representatives had not seen the promise to purchase entered into between GLS and Midbec, Reliable knew of its existence and was even aware of some issues of concern for GLS. It also made sure to remedy such issues in its own promise to purchase and, at the request of GLS, agreed not to sue GLS in the event that Midbec instituted proceedings. The parties closed the transaction quickly to avoid being prevented from doing so by proceedings instituted by Midbec.
The Court came to the conclusion that Reliable had acted with full knowledge of the situation and that the facts were sufficient to demonstrate its bad faith. Reliable was ordered to pay Midbec, for loss of profit, an amount of $784,703 in damages with interest at the legal rate plus the additional indemnity.
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