Most Letters of Intent (LOI) in Ontario are non-binding regarding the final corporate sale. However, they almost always contain strictly binding clauses for confidentiality and exclusivity. If a buyer walks away in bad faith or breaches exclusivity to buy a competitor, you can sue them in the Superior Court of Justice for significant damages.
Mergers and acquisitions (M&A) are complex, high-stakes transactions. When two businesses in Ontario decide to explore a deal, they usually sign a Letter of Intent (LOI) or a Term Sheet. Whether you are selling a tech startup in Waterloo, merging manufacturing plants in London, or acquiring a financial firm in Toronto, an LOI sets the roadmap for the transaction. Unfortunately, many business owners falsely assume that once an LOI is signed, the deal is guaranteed.
When a deal collapses after months of expensive due diligence, emotions run high. Business owners often want to sue the other party for “breaking the contract.” However, Ontario courts look very closely at the exact wording of the LOI to determine what was legally binding and what was merely an expression of hope. Understanding how to litigate a broken LOI is crucial for recovering your wasted legal fees, accounting costs, and the lost opportunity to sell to a different buyer.
Step-by-Step Process for Litigating a Broken LOI in Ontario
If an M&A deal falls apart and you believe the other party acted unlawfully, your legal team must systematically build a case for breach of contract or bad faith. Here is how the process unfolds in the province.
Step 1: Identify the Legally Binding Clauses
The first step in any LOI dispute is separating the binding provisions from the non-binding ones. While the actual agreement to buy the company for a set price is almost always conditional (subject to due diligence and financing), other clauses are immediately legally enforceable. Your lawyer will look for binding terms such as the Exclusivity Period (a “no-shop” clause stopping you from talking to other buyers), Confidentiality agreements, and clauses dictating who pays for the legal and accounting expenses if the deal dies.
Step 2: Prove a Breach of the Duty of Honest Performance
In Canada, the Supreme Court has established that all contracts carry an organizing principle of good faith and a duty of honest performance. This means parties cannot lie or actively deceive each other during negotiations. If a buyer signed an LOI with you but secretly used the due diligence period to steal your trade secrets, poach your key employees, or stall your company while they bought your biggest competitor in Mississauga, they have breached their legal duty and can be sued.
Step 3: Calculate Your Reliance Damages
Because the final sale was never guaranteed, an Ontario court usually will not force the buyer to pay you the full purchase price of the business. Instead, your lawyer will sue for “reliance damages.” This is the financial compensation required to put you back in the position you were in before you signed the LOI. You must meticulously calculate your out-of-pocket expenses, including massive legal bills, forensic accounting fees, and the measurable financial loss of turning away other legitimate buyers during the exclusivity period.
Step 4: Send a Litigation Demand Letter
Before filing a lawsuit, your legal counsel will draft a comprehensive demand letter outlining the breaches of the LOI and the exact financial damages incurred. In the corporate world, litigation is a distraction. If your evidence of bad faith or a breached confidentiality agreement is strong enough, the offending party’s corporate counsel may advise them to settle the dispute quietly out of court rather than risk public exposure of their unethical business practices.
Step 5: File a Statement of Claim
If settlement negotiations fail, your lawyer will formally file a Statement of Claim at the Ontario Superior Court of Justice (often on the Commercial List in Toronto, which specializes in complex business disputes). This begins the formal litigation process, moving through documentary discovery, examinations under oath, and eventually to a trial before a judge.
How Much Does M&A Litigation Cost in Ontario?
Litigating a broken corporate transaction involves high-end commercial lawyers and significant financial documentation.
| Litigation Expense | Estimated Cost (CAD) | Details |
|---|---|---|
| Expert Business Valuation | $10,000 – $25,000 | Hiring a forensic accountant to prove the financial damage caused by the broken deal. |
| Pre-Trial Discoveries | $20,000 – $50,000 | Lawyer fees for reviewing thousands of corporate emails and conducting depositions. |
| Full Commercial Trial | $100,000+ | Taking a complex M&A dispute to a final verdict in the Superior Court. |
How Long Does the Litigation Process Take?
Commercial litigation in Ontario is not a fast process. From the moment the Statement of Claim is filed, getting through the discovery phase and mandatory mediation usually takes 12 to 18 months. If the case requires a full trial, you can expect the process to take anywhere from 2 to 4 years. For this reason, most broken LOI disputes are ultimately settled through private arbitration or mediation to save time and protect corporate privacy.
Frequently Asked Questions (FAQ)
Can I force the buyer to complete the purchase?
Almost never. Unless a definitive Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) was signed and all conditions were met, a court will not use an LOI to force a company to buy another business.
What happens if they break the Non-Disclosure Agreement (NDA)?
Confidentiality clauses embedded in an LOI are strictly binding. If the prospective buyer leaks your client list or trade secrets, you can sue them immediately for significant financial damages and seek an injunction to stop further leaks.
What is a “break fee” in an LOI?
A break fee is a pre-negotiated penalty clause stating that if a party walks away from the deal without a valid, contractual reason, they must pay a specific sum (e.g., $50,000) to cover the other party’s wasted expenses.
Can I sue if they just change their mind?
If the LOI explicitly states that the deal is subject to the buyer’s absolute discretion or satisfactory due diligence, they are legally allowed to change their mind and walk away, provided they do so honestly and without breaching exclusivity or confidentiality.
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