This is the third and final contribution focusing on some differences between North American common law regimes and Quebec’s civil law system in the area of IT contracting. The first two contributions dealing with the same subject-matter can be found at: Seller Liability for Software Integrators? and Use Best Efforts Not To Rely On “Best Efforts”.

I thought I would use my last contribution on the specificities of Quebec’s legal regime to provide a quick snapshot of selected key issues which IT practitioners should be aware of when negotiating a contract governed by the laws of the Province of Quebec.

Traditionally in common law, the contract is the law of the parties and the law of the land serves to complement and supplement the contract if necessary. While this is also generally true in Quebec, the impacts of the law of the land in Canada’s only civil law jurisdiction are slightly greater given the Civil Code’s precedence over certain contractually-negotiated terms. As a matter of fact, the Civil Code contains of wide array of provisions which constitute implied terms of every contract governed by the laws of Quebec. To an experienced IT practitioner, certain “implied” terms (for ex. the general duty of “good faith” discussed below) can be surprising because similar terms have been consistently rejected by the Courts as implied terms in contracts governed by common law regimes.

This short article is in no way an exhaustive review of the provisions which may affect IT contracts in Quebec, but the following issues are noteworthy and some may have a significant impact in the negotiation and interpretation of IT contracts governed by the laws of Quebec:

1. Good Faith

Since the early versions of the Civil Code, the notion of “good faith” has always been one of the cornerstones of La Belle Province’s legal regime. Articles 6, 7 and 1375 of the Civil Code together create an implied duty of “good faith” in contractual relations. Article 1375 constitutes the broadest expression of this implied duty of “good faith” in contractual relations:

“Art. 1375. The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.”

What this means is that parties must act in good faith not only in performing a contract, but also when they negotiate or terminate it. For those interested in the leading judicial application of the pre-contractual duty of good faith, please see Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554), which stands for the proposition that good faith requires a party to disclose to the other, as part of the negotiating process, non-available material information. In the IT context (like any other), the duty of “good faith” therefore has impacts on how the parties negotiate, perform and terminate their agreements.

2. Consumer Protection

Quebec has a fairly strong consumer protection regime in place. Not only does the Civil Code contain certain provisions applicable to “consumer contracts”, but there is also an extensive Consumers’ Protection Act (“CPA”) in force in Quebec. Almost every contract entered into by a merchant in the course of business with a consumer located in Quebec is governed by Quebec’s consumer protection laws. While the mandatory provisions of the CPA may not be relevant to sophisticated IT contracts, they nonetheless may apply in the context of IT-driven agreements such as end-user license agreements or maintenance services offered directly to the end-users.

The application of the CPA to a contract can have very significant consequences. For example, Section 10 of the CPA prohibits limitations of liability in consumer contracts, while Section 11.1 prohibits arbitration clauses. Section 19 renders illegal a “governing law” clause which stipulates that the contract is subject to the laws of a jurisdiction other than the Province of Quebec and the laws of Canada applicable therein.

3. Good and Valuable Consideration

The common law concept of “good and valuable consideration” is well anchored in contract drafting and is often used even in Quebec. Not a lot of IT practitioners know that the concept of “good and valuable consideration” has no real meaning under the laws of Quebec. The Civil Code does not make it a condition to the validity of a contract that consideration exists. Instead, the Civil Code requires that a contract has a “cause” and an “object” in order to be valid and binding. The cause of the contract is “the reason that determines each of the parties to enter into the contract” (Article 1410 of the Civil Code). The “object” of the contract is quite simply its subject-matter, which in the IT world means either the products delivered and/or the services provided. While this may seem like semantic, it means that contracts can be perfectly valid in Quebec despite the absence of any consideration. For example, the general practice of assigning rights for the amount of one dollar ($1) has no justifiable existence under the laws of Quebec; assignments can take place without any exchange of money provided that the parties have valid reasons (i.e. a “cause”) for entering into such a bargain.

4. Scope of Recoverable Damages

In common law, damages are the default mode of compensation for breach of contract. The nature and extent of recoverable damages are assessed by the Courts on a case-by-case basis, except for rare cases where statutory damages are permitted by law (for ex. under the Copyright Act). In Quebec, the nature of recoverable damages is expressly governed by the Civil Code (Art. 1611 to 1625). Article 1607 specifically limits recoverable damages to what is the “immediate and direct consequence” of the nonperformance. Article 1613 adds that in contractual matters, only damages foreseen or foreseeable at the time of the contract are recoverable. 

Therefore by definition in Quebec, “indirect” damages are excluded by law (and excluding “indirect” damages by contract is meaningless). But contrary to what common lawyers might then believe, this does not mean that common law “indirect/consequential” are out altogether. The focus under Article 1613 of the Civil Code is not on the characterization or labelling of the damages caused, but rather on causation and forseeability. As a result, all damages that are the direct and foreseeable will be compensated. If, for example, loss of profits and loss of opportunities can be proven to be a direct consequence of the defaulting act, they may be recoverable under the Civil Code, provided of course they are not specifically excluded by contract. If parties to a contract governed by the laws of Quebec wish to exclude indirect damages such as loss of profits and loss of opportunities, they should specifically state so using clear language. And it should be noted that standard common law exclusion of consequential damages provisions are usually drafted in a manner that is inefficient to exclude these in Quebec.

On the bright side of things, it should be noted that Quebec courts are typically quite rigorous when asked upon to award lost profit-like damages. For even in the absence of a contractual exclusion of lost profits, the only lost profits recoverable will be those proven to be the direct, immediate and foreseeable result of a breach. Nevertheless, good practices obviously dictate to include in every contract an appropriately crafted exclusion of lost-profit like damages. 

5. Conclusion 

Undertaking a complete review of the Civil Code’s impact on IT contracting would be a daunting task which would go far beyond the objectives of this blog. Just like several other jurisdictions, the laws of Quebec are often not adequately drafted to address issues and realities that are specific to the IT field. General legal regimes under the Civil Code may have unwanted and significant effects on IT contracting practices. When it comes to obtaining legal advice for IT issues in Quebec, the fail-proof method of selecting a restaurant in a foreign land is advisable… get a “local” to make the recommendations.

[I would like to thank my colleague Maxime Gagné for his invaluable contribution to this piece, especially given the frantic period of the year we are in now.]

This is the second of three contributions focusing on certain peculiarities of Quebec’s civil law legal environment within North America (Part I can be found here).

While outsourcing and sophisticated professional IT services agreements typically deal with quality and performance issues through mechanisms such as service levels, penalties and credits, warranties and other related concepts, one will occasionally come across a client request to have the vendor commit to using “best efforts” to achieve a certain desired result. Vendors typically bark at this as they fear that such a commitment might be open-ended and require the deployment of resources and efforts beyond what would be reasonable in light of the contract’s value.

In a recent file, a large – and sophisticated – Quebec-based customer was insisting that my client agree to commit to use “best efforts” to meet certain project deadlines. As the draft agreement was heavily drafted in favour of the customer already – and obviously did not feature any vendor-friendly “savings” clause – no one on our side of the table was thrilled at the idea of agreeing to the client’s request. While I had general knowledge of the typical challenges raised by the concept of “best efforts” at common law, I had (strangely) never looked at the issue in my own civil law jurisdiction. To some degree of surprise, what I then discovered was far from the apocalyptic scenarios typically invoked in reference to “best efforts” …

To start with, one needs to understand that obligations (or covenants) in civil law are generally classified in three categories depending on their intensity: obligations of means, obligations of result and obligations of warranty.

Obligations of means only require a debtor to act prudently and diligently and to use all reasonable means so as to endeavour to achieve a certain result. No result is guaranteed, however. Examples of this include where one hires an artist to do a painting, a doctor for treatment, an employee for a certain job, or even – but only in certain cases – a service provider to design, implement or integrate a system. The (primary) interesting consequence – from a vendor’s standpoint – of having an obligation classified as an obligation of means is that the debtor will be deemed to have duly and fully performed its obligation as long as it can show that it acted prudently and diligently and used all reasonable means so as to endeavour to achieve the intended result, regardless of whether or not the result was actually achieved after all. Needless to say, customers are typically not found of obligations of means (that being said, through mechanisms such as specifications-focused warranties, exclusive remedies and SLAs, most sophisticated IT contracts practically end up favourably putting the vendor in an “obligation of means” position when compared to the customer’s initially intended business objective).

Obligations of result, to the contrary and as their name rightfully suggests, require a debtor to actually achieve the bargained for result except only where the debtor can rightfully invoke a force majeure or the creditor’s fault to be excused. But, other than force majeure scenarios or for the fault of the creditor, the debtor must achieve the intended result, regardless of the amount of effort required. Most contractual obligations actually fit in this category (including – in most cases and for this crowd’s particular interests – a service provider’s obligation to design, implement or integrate a system).

Lastly, obligations of warranty represent the most stringent category. Here, force majeure is not even a defence. Only the creditor’s fault could serve to excuse a debtor’s failure to achieve the contracted for result!

Curiously, when we reviewed the issue at the time, we found very little case law – let a lone any elaborated case law – discussing “best efforts” under Quebec law. The few cases identified in Quebec and touching upon this concept generally took the view that this concept could be seen as requiring the debtor of an obligation of means to use somewhat greater efforts than is generally required at law, but without going so far as requiring it to use “unreasonable” means in doing so. Given the fact that – as is most generally recognized – most contractual obligations are obligations of result anyway, this analysis suggested two very positive consequences for debtors (or vendors, in our case). First, by qualifying an obligation with a requirement to use “best efforts” one is probably impliedly labelling it as an obligation of means, not an obligation of result. Second, having to use “best efforts” probably doesn’t require a debtor to use “unreasonable” or exaggerated” means to endeavour to achieve an intended result. 

Back to our file – and with the above in mind – the large Quebec customer and the vendor were eventually able to agree on the following definition of “best efforts” in the contract:

“Best Efforts” means all required reasonable efforts that a prudent and diligent party must use to meet its obligations under this Agreement but without warranty to the other party that any result will actually be achieved”

So next time you hear a vendor barking at the possibility of having an agreement governed by Quebec law, make sure it uses its “best efforts” to consider all implications first … 

In light of Quebec’s unique legal environment in North America (i.e. Quebec is a civil law jurisdiction with French as its official language), I thought I would use my first three contributions to Slaw to address certain issues peculiar to Quebec in relation to sophisticated IT contracts such as systems integration and outsourcing agreements. I have chosen not to discuss language related issues at any length for, except in Government related procurement scenarios, the contracting and negotiation process can be conducted in English in Quebec based on forms of agreements consistent with industry standards. I will rather focus on a number of substantive legal issues fairly unique to Quebec in the North American context.

As the second largest provincial economy in Canada – Quebec’s GDP is roughly half that of the province of Ontario, and is comparable to those of jurisdictions such as the State of Washington, Norway or Hong Kong – Quebec remains a significant market for large international integrators and outsourcers. Yet, certain specificities of the province’s legal system will typically require vendors to pause to review their typical legal risk tolerance analysis and adapt their practices slightly to appropriately address these in the Quebec context. 

For starters, I have selected a legal issue unique to Quebec that has yet to be appropriately discussed or analyzed at any length in the province. Needless to say, this legal issue hasn’t yet had any echo in case law. In fact, it hasn’t even hit the radar screen of most legal practitioners in Quebec. And from my discussions with a few who are familiar with the issue – experienced IT practitioners, essentially – it isn’t clear what the outcome will be if and when it is ever brought before a Court here.

This issue is specific to systems integrators and outsourcers providing software as part of their service relationship with customers. Simply stated, there is currently a risk in Quebec that systems integrators and outsourcers that provide software as part of a service engagement may be held liable, as sellers under the sales contract regime, for any latent defects in such software … with uncapped liability. 

To fully appreciate the issue – and its origins – let’s first back track and review a few general provisions of the Civil Code of Quebec (the “Civil Code” or “C.c.Q.”).

The Sales Contract Latent Defects Regime in the Civil Code

Under the Civil Code’s sales contract regime, the statutory “quality” warranty imposed on sellers essentially takes the form of a warranty against “latent” defects (Articles 1726 and ff. C.c.Q.). Simply stated, to qualify as “latent” under the Civil Code, a defect must: (i) be latent, (ii) be sufficiently serious, (iii) have existed at the time of the sale, and (iv) have been unknown to the buyer at the time of the sale. Pursuant to Article 1730 C.c.Q. as interpreted by case law, suppliers, resellers, distributors (and other similar intermediaries) of goods/property are also bound to warrant the buyer against latent defects in the same manner as a seller – this rule was originally introduced to improve buyers’ direct recourses against the original seller and manufacturers (i.e. in the past, buyers were often unable to sue these due to the lack of privity of contract). 

While sellers can normally have buyers contractually waive (in whole or in part) the latent defects regime, it is against public policy in Quebec to do so in certain specific circumstances.

Pursuant to Article 1733 C.c.Q., a seller may not exclude or limit its liability “unless [it] has disclosed the defects of which [it] was aware or could not have been unaware”. Article 1728 C.c.Q. complements Article 1733 C.c.Q. by stating that “if the seller was aware or could not have been unaware of the latent defect, [it] is bound not only to restore the price, but to pay all damages suffered by the buyer”.

Case law decided under Article 1728 C.c.Q. has held that all professional sellers (i.e. essentially all sellers, suppliers, resellers, distributors and other intermediaries except for individuals making a sale privately not for business purposes) are presumed to have had knowledge of the latent defect (i.e. they “could not have been unaware” of the latent defect, to use the exact words of Article 1728 C.c.Q.). As a result, professional sellers in Quebec are exposed to being liable for all damages recoverable at law and suffered by buyer as a result of a latent defect – which could include, to the extent there is sufficient causal nexus, lost-profit like damages. It is worth noting that this liability exposure can not be waived, excluded or curtailed in advance by contract vis-à-vis a buyer, whether through a limitation of liability, a disclaimer of warranties or any other like contractual technique. For in the prism of Articles 1728 and 1733 C.c.Q., the seller’s behaviour is then assimilated to fraud or to an intentional fault, the liability for either of which can never be limited in advance contractually anyway in Quebec.

Once the existence of a latent defect has been established against a professional seller, the only way out of liability is for the seller to rebut the “presumption of knowledge”. This is typically not easy to do, in particular for specialized professional, and it requires a showing of (i) fault on the part of the buyer or a third person, (ii) force majeure, (iii) development risks, or that (iv) the professional seller’s selection of goods was reasonable and well informed and there was no way for it to verify the existence of such latent defect. But this is not an easy task as demonstrated by the latest Quebec Court of Appeal decision on this point in Les Entreprises d'Électricité Rial Inc. v. Lumen (500-09-018781-088)(April 7, 2010)(C.A.) 2010 QCCA 655 (CanLII), which ultimately held that a professional reseller of Sylvana light bulbs was responsible for latent defects therein on the above stated ground. See also the leading Supreme Court Case on this issue: ABB Inc. v. Domtar Inc., [2007] 3 S.C.R. 461.

Software Integrators and Outsourcers Liable for Software as Sellers?

I can hear you say: “This is all very interesting, but what do sales contract-related issues have anything to do with software?” Fair point, I agree. And in fact, it has been the law in Quebec since the 90s that (software) licenses are not sales contacts, nor are they leases, but are rather sui generis contracts governed by the legal regime applicable to all contracts generally – as opposed to the “sales” or “lease” contractual regimes in the Civil Code.

So, “What is the problem”, I hear you say again? Well, the problem comes for the complete overhaul of the Civil Code that was implemented sixteen years ago. In 1994, after having worked on various drafts for decades, the Quebec Government finally adopted and put into effect the Civil Code in replacement of its prior version. As part of this sweeping reform, the Civil Code implemented a new set of rules governing services contracts and contracts of enterprise (most of the time in the latter case, construction contracts) (See Articles 2098 and ff. C.c.Q.). One of those rules targeted the scenario where a (non-IT) service provider or contactor delivered third party goods or materials to its customer as part of a construction project or service contract. Because the contractor service provider were the only ones with privity of contract with the third party seller from which they had purchased the goods or materials delivered to the customer, this rule was intended to provide the customer with the same “sales contract” recourses against its contractor or service provider as it would otherwise have had directly against the third party seller had the customer – and not the contractor or service provider –purchased such goods or materials itself directly from the third party seller.

The rule is found at Article 2103 C.c.Q. and reads as follows:

2103. The contractor or the provider of services furnishes the property necessary for the performance of the contract, unless the parties have stipulated that only his work is required.

He shall furnish only property of good quality; he is bound by the same warranties in respect of the property as a seller. (…)

In other words, where a service provider or a contractor provides goods or materials as part of its contract with a customer, the law will deem it be a “seller” in respect thereof.

This all works fine in the brick and mortar world. But how should Article 2103 C.c.Q. be applied in the modern IT reality?

Obviously, when Article 2103 C.c.Q. was drafted in the decades leading to 1994, the IT industry was in its infancy. So we can arguably presume that the drafters of Article 2103 C.c.Q. did not have software or other intangible assets in mind when they drafted the provision. Most probably, I argue, when they used the word “property” in Article 2103 C.c.Q., the drafters were thinking about plywood, lumber, machinery, and other tangible goods which were to be purchased by the service provider or contractor, and then resold to the customer as part of the larger service or construction contract. In other words, it is my view that Article 2103 C.c.Q. was meant to apply to property “purchased” by service providers and contractors and then “resold” to customers. Nothing more, nothing less.

But the rule at Article 2103 C.c.Q. could have devastating effects if also applied in the systems integration and outsourcing contexts, where COTS software platforms and products are customarily obtained, procured, installed and/or managed by service providers. In other words, is COTS software procured and then installed by a service provider equivalent, within the meaning of Article 2103 C.c.Q., to property “furnished” by the service provider? I argue that it is not. But if it were to be, we could end up in a nonsensical situation whereby systems integrators and outsourcers could be liable as “sellers” for software that they obtained from third party licensors, while such third party licensors would at the same time continue not to be liable as “sellers”, but only as licensors in accordance with their license agreement with the service provider or the customer. Stated otherwise, if licensors are not liable for latent defects in their software products pursuant to Quebec law, why should systems integrators and outsourcer be so liable solely as a result of having performed procurement and/or integration services in respect thereto? Would it make any sense that systems integrators and outsourcers be faced with potential uncapped liability for latent defects in third party COTS software, when at the same time the relevant third party licensors could not? I believe not.

In the Meantime, Managing The Risk …

Until and unless a consensus develops in Quebec – and especially in Quebec case law –as to the non applicability of the second paragraph of Article 2103 C.c.Q. to the software/licensing environment, systems integrators and outsourcers doing business in Quebec must keep this risk in mind when negotiating IT service transactions with Quebec-based customers.

A number of risk-mitigating mechanism may be envisaged to manage this exposure, such as obtaining an indemnity from third party licensors or having foreign law govern the contract with the customer. But none of these have yet been generally used in relation to this specific risk, and they would each pose various challenges both from an enforceability perspective and from an “adoption” standpoint, whether with the software industry generally or with Quebec governmental customers. But that is a story for another day …