Anonymised, illustrative composite. The same kind of buyer conduct, the same depressed metric, and a seller's claim that does not need the common law's discretion-and-purpose analysis to exist at all, because Quebec had already codified the obligation.
At a glance
A national buyer acquired all the shares of a Quebec-based commercial printing and packaging business for $6.5 million, structured with $4.5 million paid at closing and up to $2 million payable as an earn-out tied to EBITDA over the following two fiscal years. The founder stayed on through a transition period, financially interested in a smooth handover of client relationships built over two decades.
The purchase agreement, drafted from the buyer's own template, said nothing about how the buyer had to operate the business during the earn-out — the same gap that shows up in almost every earn-out deal regardless of governing law, because the buyer's counsel drafts the template and has no reason to constrain itself voluntarily.
In the first year of ownership the buyer began charging the target a $180,000 annual corporate services fee for shared back-office functions, and reassigned two of the target's delivery vehicles to a sister subsidiary the buyer judged under-equipped ahead of its own peak season. Both decisions reduced the target's reported EBITDA for the earn-out year: the fee directly, the vehicle reassignment indirectly, by slowing order turnaround during the months that generate most of its annual revenue.
The founder's position was that both decisions were made to benefit the buyer's broader group at the target's expense, in a year when he had no operational control over either one. The purchase agreement had no operating covenant to point to. In a common-law province the founder would be arguing for an implied duty to exist; in Quebec, his counsel did not need to argue one into existence.
The $180,000 fee reduced reported EBITDA directly. The vehicle reassignment was estimated by the founder's accountant to have cost a further $240,000 in delayed and lost orders during the affected season, based on the target's own fulfilment capacity in the two prior years. Against a sliding EBITDA scale, the combined effect moved the founder's year-one earn-out payment from the top of its range to roughly the midpoint — a difference counsel put at approximately $340,000 of the $2 million maximum.
Read the source of the obligation, because it is not the same source in both legal systems, and that changes what has to be proven. Article 1375 of the Civil Code of Québec provides that “the parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished”. It is not confined to discretionary clauses; it attaches to the performance of the earn-out obligation itself, from formation to final payment. It sits alongside two general provisions in the Code's opening articles: article 6, “every person is bound to exercise his civil rights in accordance with the requirements of good faith”, and article 7, “no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith”.
None of the three articles asks the question the common-law test in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, starts from — whether the contract granted the buyer a specific discretion, connected to the purpose for which it was granted. That question, recognised as a distinct organizing principle in Bhasin v. Hrynew, 2014 SCC 71, is what a common-law version of this same dispute turns on. In Quebec the obligation does not need to sit inside a contractual discretion at all: article 1375 attaches to the performance of the obligation directly, and article 7's bar on an “excessive and unreasonable” exercise of a right reaches the buyer's general conduct of the business, not only a clause that hands it a choice.
That is a structural difference, not a semantic one. A common-law claim over conduct the agreement is silent on has to first establish that some contractual discretion exists for an implied duty to attach to — Wastech itself lost because the discretion being exercised there was found to be connected to the purposes the contract intended it to serve. A Quebec claim under articles 6, 7 and 1375 does not need a discretion clause to hang the obligation on; the obligation runs with the performance of the contract as a whole. No Quebec court decision applying these articles to an earn-out dispute is cited or quoted here — CanLII and decisions.scc-csc.ca both refuse requests from this environment, so what follows is the statutory text and the structure it creates, not a reported outcome.
The parties settled before the claim reached a Quebec court. The buyer agreed to credit back the $180,000 fee against the year-one EBITDA calculation and to return one of the two reassigned vehicles for the remainder of the earn-out, restoring most of the founder's lost value without either side conceding the legal question. Going forward, the buyer documented a written rationale for any further intercompany allocation affecting the target, shared with the founder's counsel before it took effect.
Had the parties not settled, Quebec counsel would have needed to prove only that the buyer's decisions were, viewed against the earn-out's evident purpose, excessive and unreasonable under article 7, or a failure to perform the earn-out obligation in good faith under article 1375. Neither route requires proving the agreement handed the buyer a discretion in the first place — the threshold question a common-law claim over the same facts would have to clear first.
The tell was the purchase agreement itself: drafted from the buyer's standard template, built around common-law assumptions about what has to be negotiated versus what the law will imply, and never adapted for a Quebec target governed by the Civil Code. Quebec counsel reading that template for the first time does not need to ask whether an implied duty might exist the way common-law counsel has to ask whether Bhasin and Wastech reach the conduct in question — the codal obligation is already there.
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