As a general rule, silence will not lead to any legal liability. Indeed, the image of lawyers telling their clients “not to say a word” is part of almost every courtroom drama. In the context of contractual negotiations, however, it is important to verify that material statements made to the other side are accurate and comprehensive.
A Duty to Disclose
Generally in a contractual relationship between sophisticated parties there is no duty to disclose anything to the other side. Mere silence does not constitute misrepresentation. However, once a representation is made, as typically happens in the context of negotiations, it must be accurate. The Alberta Court of Queen’s Bench in Opron Construction Co. v. Alberta has interpreted this act of making a representation as giving rise to a duty of disclosure. This duty is an ongoing obligation that extends beyond the negotiating table; any accidental misstatements must be clarified once they are discovered so that the other party has accurate information on which to rely. Similarly, any statements which, although true when made, have been rendered inaccurate due to changing circumstances, must be corrected. In the context of complex negotiations that may take months and result in significant volumes of documents, parties should take careful note of what has been said on key issues so that liability is not accidentally incurred.
The Whole Truth
Merely ensuring the accuracy of statements is not enough, however. Any statement made must also be comprehensive. The Supreme Court in National Bank of Canada v. Soucisse held that once a party to a contract has disclosed some information, it has a duty to disclose all of that information, completely, because “partial information is misleading information.” Similarly, where a direct question is asked in the process of negotiations, it must be answered truthfully, honestly, and fully. In other words, it must be both accurate and comprehensive.
When Misrepresentation is Actionable
Not every statement made in the course of negotiations attracts liability as a misrepresentation. This is sensible given the time and cost that would be needed to vet every representation. Rather, misrepresentations will only attract liability if they are (1) material, and (2) induced the other side, relying on the misrepresentation, to enter into the deal.
According to the Alberta Court of Appeal in L.K. Oil & Gas v. Canalands Energy Corp, in order to be material, a “statement must be of such a nature that it would be likely to induce a person to enter into a contract.” Therefore, trivial or insignificant details should not give rise to concern. Any statements concerning significant issues, however, must be vetted for accuracy to prevent the possibility of liability.
Proper diligence concerning the statements made during negotiations should be a focus of any company. Indeed, employing proper safeguards to prevent actionable misrepresentations is relatively straightforward. Firstly, employees and representatives involved in negotiations should be kept up to date on information pertinent to central issues surrounding the contract so that representations or responses to questions by the other party can be answered fully the first time. Secondly, representations made concerning material issues, should be recorded and reviewed so that errors may be corrected and accurate statements may be kept up to date with changing circumstances.