Anonymised, illustrative composite. A compliant exclusivity clause did not protect a seller from a buyer that kept saying the deal was on track while it worked a different target — because the duty that reached that conduct was not written into the LOI at all.
At a glance
The founder of an Ontario specialty manufacturer signed a letter of intent granting a strategic buyer a 90-day exclusivity period — comfortably inside the market range for a deal of this size, with defined interim milestones for a financing commitment letter and a draft purchase agreement. This is the fact pattern a well-drafted exclusivity clause is supposed to produce, and it is deliberately different from a case where the seller's complaint is about the length of the period itself or the absence of milestones inside it: here, the clause was reasonable and the buyer never missed a milestone date on paper.
Sixty days in, the seller's advisors began asking why the buyer's diligence requests had slowed and why no financing commitment letter had circulated despite the milestone date having passed. The buyer's development lead responded, more than once, that the file was “still on track” and that the lender was “just finishing credit committee.” Three weeks later, and four days after the exclusivity period expired without a signed agreement, the seller learned through a mutual advisor that the buyer had been in exclusive negotiations to acquire a direct competitor's business for the preceding six weeks — negotiations that had, by then, produced a signed agreement.
The exclusivity clause itself gave the seller no claim. It restrained the seller from soliciting or negotiating with other buyers; it said nothing about what the buyer could do with its own time, and the buyer had not, on any reading of the clause's words, breached it. This is the mirror image of the more familiar exclusivity dispute, where a seller is caught shopping the business during a no-shop period and the clause's own terms decide the case. Here the clause was silent on the conduct that actually damaged the seller, because no drafter had written a milestone-integrity or good-faith-negotiation term into it.
The gap the clause left open is not a gap in Canadian contract law generally. In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court of Canada recognised a duty of honest performance in the performance of every contract, independent of what the contract's own terms say — a duty not to lie to or knowingly mislead a counterparty about matters bearing directly on the performance of the contract. In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the Court applied that duty to a course of conduct rather than a single false statement, holding that a party can breach it through active steps, including silence combined with misleading conduct, that create a false impression in the other party's mind about a matter connected to the contract's performance — not only through an outright lie.
There is no statutory formula here; the exposure was the deal itself. The seller had received one other credible approach in the eight months before signing the LOI, from a regional buyer that made a lower but still viable offer and moved on once exclusivity was granted. By the time the seller learned what the buyer had been doing, that alternative buyer had completed its own unrelated acquisition and was no longer in the market. The seller's realistic alternative at the point of discovery was a fresh sale process, run from a standing start, in a business now known in its sector to have been “shopped and not sold” — a fact that a re-launched process could not fully hide from a informed buyer pool.
The rule that decided the seller's position was that the honest-performance duty operates independently of the exclusivity clause's own terms, so the buyer's technical compliance with the no-shop wording was not a defence to it. What mattered was whether the buyer's repeated “on track” and “finishing credit committee” statements, made while the buyer was in fact substantially committed elsewhere, amounted to the kind of active misrepresentation Callow addresses, as distinct from mere silence about its other discussions, which the duty does not by itself require a party to volunteer.
That distinction is real and it is where the seller's claim had to be built carefully: the duty does not impose a general obligation of disclosure or loyalty, and a buyer that had simply gone quiet, or had declined to answer questions about its other activities, would have a materially stronger defence than one whose team affirmatively represented the file's status in terms that were, at the time they were made, false.
The parties resolved the dispute short of litigation, with the buyer paying a negotiated settlement tied to the seller's documented costs of the lost process window and a discount against the value the alternative buyer had been prepared to pay eight months earlier. The settlement was reached on the strength of a contemporaneous email record — the “on track” and “finishing credit committee” messages, timestamped against the buyer's own internal records showing when its competing negotiation had actually begun — rather than on any argument about the exclusivity clause's drafting.
Without the contemporaneous written record, the seller's claim would have been a credibility contest the buyer was well positioned to win: a claim that a counterparty's optimistic status updates were dishonest, made months later and without dated evidence of what the buyer knew and when, is a hard case to prove on a balance of probabilities. Relying on a clause redraft for future deals — adding stricter no-shop language on the buyer's side — would not have reached this conduct at all, because the buyer's own courting of a third party was never inside the four corners of what the clause restrained; the honest-performance duty, not a tighter contract term, was the source of the seller's remedy.
The tell was the mismatch between specific status language and an absence of the documents that language implied. “Finishing credit committee” is a statement about a concrete, verifiable process step; a seller's advisor who hears it repeated for three weeks without ever seeing a commitment letter, a lender name, or a term sheet has grounds to ask for the underlying document, not just the next status update. The gap between what was said and what was ever produced in writing is what later supported the claim that the statements were not merely optimistic but false when made.
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