IT Contracting : Focus on Quebec Part III – the Hidden Face of Your Contract: Selected Provisions of the Civil Code, With Impacts on IT Contracting and Beyond

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.]