Have recent cases imposed a duty to negotiate in good faith?

Have recent cases imposed a duty to negotiate in good faith?

Two recent decisions from courts in Ontario and Saskatchewan merit a closer look at when a party may have a pre-contractual duty to negotiate in good faith. Although there is no general duty to negotiate in good faith when negotiating commercial agreements, these recent cases explore exceptions to the rule.

Recap on duty to negotiate in faith

While the Supreme Court has recognized good faith with respect to contractual performance in Bhasin v Hrynew,[1] Canadian courts do not recognize a general pre-contractual obligation to negotiate an agreement in good faith. The Supreme Court has left the question of whether such a duty exists unanswered until “another time”.[2]

In Alberta, the existence of a duty to negotiate in good faith is seen as incompatible with the adversarial nature of negotiations between parties who deal at arm's length. The Aberta Court of Appeal has stated that such a duty is at best “controversial and of limited scope”.

In Ontario, there is no general duty to negotiate in good faith. The Court of Appeal has held that “[g]enerally, parties negotiating a contract expect that each will act entirely in the party's own interests.”[3]  Nevertheless, such a duty may be found if there is a “special relationship” between the parties, particularly if:[4]

  • the manner in which the parties were brought together reasonably imply an expectation of such a duty in the relying party;
  • “trust and confidence” knowingly has been reposed by one party in the other;
  • a party has special knowledge of important facts;
  • a party has no ability to readily inform itself;
  • an explicit assumption by one party of advisory responsibilities for the other party; or
  • a party’s ability to access or comprehend important information is compromised by the counterparty.

Must you bring onerous terms to the other party’s attention?

The Ontario Court of Appeal recently considered when a party to a commercial contract needs to bring “extremely onerous or unfair” contractual terms to the attention of the other party prior to execution.[5]

MedviewMD Inc. (“Medview”) agreed to supply Durham Drug Store (“Durham”) with equipment to provide remote medical services to customers. Durham had to lease the equipment from Macquarie Equipment Finance Limited (“Macquarie”). MedView sent Durham a Master Services Agreement (“MSA”) for its review and advised that a representative from Leasecorp (an intermediary) would attend to collect Durham’s signature. Notably, the MSA contained a provision allowing for its early termination. Instead of the MSA, the Leasecorp representative had Durham sign a lease agreement with Macquarie that eliminated Durham’s ability to terminate the lease early.

Durham sought early termination of its agreement with Medview after learning that it did not have the necessary regulatory approvals. Macquarie sued, relying upon the lease’s elimination of Durham’s ability to terminate or cancel the lease during its term “for any reason, including equipment failure, damage or loss”. Durham argued that the lease (and the no-cancellation provision within) was unenforceable because it was led to believe it had entered into an MSA with Medview, not a lease with Macquarie.

The Court of Appeal concluded that the no-cancellation provision was unenforceable because it had not been adequately brought to Durham’s attention.[6] Even though the lease was a commercial contract between two relatively sophisticated commercial parties, the Court of Appeal applied principles from ‘contracts of adhesion’ (standard form contract) cases to hold that the no-cancellation provision was “harsh and oppressive” in light of the circumstances preceding the execution of the lease, including that:[7]

  • the only agreement that Durham was sent and thought Leasecorp would bring for its signature was the MSA;
  • the lease was signed in a “hurried manner”;
  • there was no opportunity to negotiate the terms of the lease;
  • there was no opportunity to seek legal advice; and
  • the entire lease was “in two tightly-packed pages in extremely small font” which could “only be read with difficulty”.

The Court of Appeal ruled that even though Macquarie had not sought to mislead Durham, in these “unusual circumstances”, Durham should have been directed to the no-cancellation provision and explained that it would remain obligated to pay for the equipment under the lease even if Medview defaulted on its obligations.[8]

Can you use “strategically uncertain language” in an agreement?

The Saskatchewan Court of the Queen’s Bench considered whether a party is obliged to avoid using strategically uncertain language in an agreement.

The University of Regina entered into a non-exclusive licensing agreement with HTC Purenergy Inc. (“HTC”). HTC entered into a sublicense agreement with Doosan Heavy Industries & Construction Co. Ltd. (“Doosan”). Prior to the execution of the sublicense, HTC and Doosan asked the University to provide a confirmation letter regarding the rights and obligations in the license and sublicense agreements. The University provided the confirmation letter. Litigation ensued when the parties’ relationship broke down.

The University alleged that Doosan had engaged in bad faith negotiations by using “strategically uncertain language” in the confirmation letter.[9] The Court disagreed that such a duty exists.[10] The Court also concluded that there was no “special relationship” between the parties to justify imposing a pre-contractual duty to negotiate in good faith, noting:[11]

  • the parties had not had any past dealings;
  • Doosan had not assumed an advisory role for the University;
  • Doosan did not have any special access to information that the University was excluded from;
  • the University had not placed its trust and confidence in Doosan; and
  • there was nothing to suggest that Doosan had any influence over the University or that the University was rendered vulnerable because of Doosan.[12]

Takeaways

Although there is no general obligation to negotiate in good faith, the scope of exceptions to that rule are still being tested.

A duty to negotiate in good faith may be imposed even when sophisticated parties are negotiating a commercial agreement.

The following factors may influence a Court’s determination on whether a duty to negotiate in good faith exists:

  • there is no opportunity to negotiate or review the terms of the contract;
  • where the final terms of the contract differ materially from previous versions, or are particularly onerous;
  • the contract is signed without the benefit of legal advice because the counterparty is not given the opportunity to seek such advice;
  • there is an explicit assumption of advisory responsibilities by one party, upon which the other party reasonably relies; or
  • there is otherwise a “special relationship” of “trust and confidence” between the parties which involves the dependence of the first party on the second, and the ability of the second party to influence the first.

[1] Bhasin v Hrynew, 2014 SCC 71.

[2] Martel Building Ltd. v Canada,  2000 SCC 60 at para. 73.

[3] 978011 Ontario Ltd. v. Cornell Engineering Co., 2001 CanLII 8522 (ONCA), at para. 32.

[4] 978011 Ontario Ltd. v. Cornell Engineering Co., 2001 CanLII 8522 (ONCA), at paras. 34-5.

[5] Macquarie Equipment Finance Ltd. v. 2326695 Ontario Ltd. et al., 2020 ONCA 139.

[6] Macquarie Equipment Finance Ltd. v. 2326695 Ontario Ltd., 2020 ONCA 139, at para. 37.

[7] Macquarie Equipment Finance Ltd. v. 2326695 Ontario Ltd., 2020 ONCA 139, at para. 38.

[8] Macquarie Equipment Finance Ltd. v. 2326695 Ontario Ltd., 2020 ONCA 139, at para. 37.

[9] University of Regina v. HTC Purenergy Inc., 2019 SKQB 126, at para. 161.

[10] University of Regina v. HTC Purenergy Inc., 2019 SKQB 126, at para. 162.

[11] University of Regina v. HTC Purenergy Inc., 2019 SKQB 126, at para. 179.

[12] University of Regina v. HTC Purenergy Inc., 2019 SKQB 126, at para. 178.

contracts negotiations good faith Court of Appeal Bhasin v. Hrynew Saskatchewan Court of Queen’s Bench Ontario Court of Appeal Supreme Court of Canada duty of good faith Scope of the Duty of Good Faith

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