Nicholas Reynolds*
Good faith law poses many fundamental questions: what is good
faith? If it is based on the parties’ expectations, then whose
expectations count? Must those expectations be reasonable, and if
so, what constitutes “reasonable”? Notwithstanding the measure of
clarity that Bhasin v. Hrynew arguably brought, a specific
conceptualization of good faith remains elusive — and the way
forward remains unclear. This article proposes a way forward by
arguing for an extension of the organizing principle of good faith to
negotiations, making it more aptly characterized as an organizing
principle of contracting. Canadian law recognizes reasonable
expectations as an underlying thread of good faith, notwithstanding
the vagueness of “reasonable expectations”. Thus, to the extent
reasonable expectations in tort give rise to reasonable reliance in the
form of a contract — which itself produces the reasonable
expectations that underpin good faith — the organizing principle
should therefore be recognized as applying to tort. The question then
turns to what constitutes reasonable expectations in tort, given that
private law still largely operates under a paradigm where negotiation
is a zero-sum, adversarial game. Given the long-term, relational
nature of much (though not all) commerce in the 21st century, it is
apparent that the common law has not caught up to the empirical
expectations of modern commercial parties. Recognition of such
expectations is therefore attractive, even in the face of several
common policy concerns. Lastly, this article re-conceptualizes the
organizing principle as an analogue to the neighbour principle in tort
law, from which courts may formulate a similarly principled,
formally rigorous test to delineate new good faith duties.
*
LL.M. student, University of Toronto. Many thanks to Professor Margaret Jane
Radin for her encouragement and guidance through several drafts of middling
quality, and to the participants of her Academic Scholarship Seminar at the
University of Toronto Faculty of Law for their thorough feedback on those same
drafts.
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THE NEW NEIGHBOUR PRINCIPLE: REASONABLE
EXPECTATIONS, RELATIONALITY, AND GOOD
FAITH IN PRE-CONTRACTUAL NEGOTIATIONS
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The New Neighbour Principle
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Good faith is a concept deeply rooted in the common law and
contracts in particular, serving as a fundamental regulator of
private parties’ behaviour between and amongst each other. It was
fitting, then, that the Supreme Court of Canada recently affirmed
this fact in Bhasin v. Hrynew1 by recognizing good faith contractual performance as an organizing principle that underpins the
more specific pre-existing legal doctrines of good faith in contracts,
as well as the duty of honesty in contractual performance that
flows from it. But it is perhaps equally curious that in the wake of
such a fundamental decision, the law on good faith remains
unsettled and uncertain, providing no principled approach on how
to develop good faith in the future. In the wake of the Bhasin
decision, courts have been faced with many arguments for new
good faith duties, yet have taken Cromwell J.’s “incremental
approach” to simply mean a staunchly conservative attitude in the
face of novel arguments.2 This is due in large part to the fact that,
although Bhasin brought some measure of clarity and coherence, it
nonetheless left unanswered some of the fundamental questions
that have historically plagued good faith: what is good faith? If it is
based on the expectations of the parties, then whose expectations
count? Must those expectations be reasonable, and if so, what
constitutes “reasonable”? It is largely due to these uncertainties
that conceptualizing good faith remains elusive, and consequently
the way forward for good faith law remains unclear.
This article therefore proposes a more coherent approach to
good faith by advocating that good faith should be recognized
within tort in respect of certain tort doctrines, to the extent that
they are applicable to contractual negotiations. In short, the organizing principle of good faith extends to negotiations, and is
therefore more aptly characterized as an organizing principle of
contracting that encompasses both contract and part of tort.
1.
2.
2014 SCC 71 (S.C.C.).
See, e.g., Bank of Montreal v. Javed, 2016 ONCA 49 (Ont. C.A.), leave to appeal
refused Shah v. Bank of Montreal, 2016 CarswellOnt 9666, 2016 CarswellOnt
9667 (S.C.C.), where the court refused to extend the doctrine of unconscionability
to the performance of contracts; and see e.g., Moulton Contracting Ltd. v. British
Columbia, 2015 BCCA 89 (B.C. C.A.), at para. 68, leave to appeal refused 2015
CarswellBC 3021, 2015 CarswellBC 3022 (S.C.C.), where the court refused to
modify the test for implied terms. While there is plenty to be said with respect to
the arguments in these cases on their merits alone, the salient point is that, to
date, the application of Bhasin has been highly deferential and conservative with
respect to the “incremental approach”.
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I. INTRODUCTION
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Canadian common law does not recognize pre-contractual
negotiations as falling within the ambit of good faith. Though
Bhasin signaled a fundamental shift in how the Canadian common
law of contracts understands good faith with respect to contractual
performance, it did not address this very important facet of
contracting — the nature of which places negotiation in a paradoxical space as non-contractual while simultaneously integral to
contracts. The issue remains, per Martel Building Ltd. v. Canada, a
question for another time.3 Notwithstanding the Supreme Court of
Canada’s reluctance to address the issue directly, though, it
appears that the landscape of Canadian common law might now
be more open to this move on the same grounds that Cromwell J.
justified the court’s decision in Bhasin: namely, the desire for
doctrinal coherence and certainty, as well as consistency with
reasonable expectations.4 Ultimately, the goal of this article is to
re-conceptualize the organizing principle of good faith broadly as
an analogue to the neighbour principle in tort law, from which
courts may formulate a similarly principled test to delineate new
good faith duties and thereby illuminate the way forward.
An extension of the organizing principle of good faith beyond
contractual performance and into contracting (i.e., including
negotiations) could (and should) be accomplished under the
Canadian jurisprudential framework by arguing for the place of
reasonable expectations in tort. Although analysis of the jurisprudence and academic literature reveals that the concept of reasonable expectations escapes a specific narrow definition and instead
incorporates several possible definitions, it becomes clear that the
concept of reasonable expectations is an underlying thread that has
tied together good faith throughout its history in Canadian law.
Reasonable expectations of the parties are consulted by courts
3.
4.
Martel Building Ltd. v. R., [2000] 2 S.C.R. 860, 2000 SCC 60 (S.C.C.), at para. 73.
In Martel, Martel Building Ltd. owned a building and leased space to the
Department of Public Works. Near the end of the lease’s term, the parties entered
into negotiations to renew the lease. The Department of Public Works led Martel
to believe that it would be amenable to renewing the lease on a certain set of
terms, but upon Martel making an offer on those terms, the Department of
Public Works rejected the offer and called for tenders. It ultimately accepted the
tender of an unrelated third party. Martel argued that there was a duty of care in
negotiations. The Supreme Court of Canada found that there was a prima facie
duty of care, but that it should be denied based on policy considerations that such
a duty would be antithetical to the nature and purpose of negotiations. In its
reasons, the Supreme Court of Canada expressly noted that such a duty of care
resembles a duty to bargain in good faith, but since a breach of that specific duty
was not alleged, it was therefore “a question for another time”.
Bhasin, supra, footnote 1, at para. 41.
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after a contract is formed, when conflict arises during performance
— this is where doctrines of good faith manifest. Reasonable
expectations of the parties are also consulted by courts in adjudicating disputes arising during negotiations, before a contract is
formed — yet the label of good faith has never attached. For
disputes arising from negotiations, courts explicitly apply tort
doctrines such as civil fraud/deceit. Implicitly, through the use of
reasonable expectations, these tort doctrines addressing harmful
behaviour in pre-contractual negotiations are also addressing bad
faith in the same way as the good faith doctrines relating to
contractual performance.
In recognizing this, the analysis then turns to identifying the
reasonable expectations that exist in tort as a means for recognizing good faith. To the extent that reasonable expectations in
tort give rise to reasonable reliance in the form of a contract, which
itself produces these same reasonable expectations that underpin
contractual good faith, the principle of good faith should therefore
be recognized as covering reasonable expectations in tort. In other
words, if reasonable expectations exist along a continuum from the
pre-contractual to the contract itself, then recognizing good faith
in tort (i.e., in respect of pre-contractual negotiations) would
ensure greater conceptual coherence and clarity along this
continuum.
The question then turns to what constitutes reasonable expectations in tort, given that in a general sense, private law still largely
operates in the classical paradigm of freedom of contract, where
negotiation is understood as a zero-sum game and questions of
morally dubious conduct are often resolved by recourse to the
apparent economic utility that they generate. In effect, the
adversarial model, even in negotiation, reigns supreme. This view
of contracting and commerce, however, is no longer appropriate
for the modern age. If it is true that commercial parties expect a
basic level of honesty and good faith in contractual dealings, then
it is also reasonable to say they may expect some measure of good
faith in pre-contractual dealings. In short, the common law must
recognize the reasonable expectations of commercial parties in the
21st century.
This article concludes by remarking on the potential future of
good faith in light of this proposed change, identifying the
similarities between this proposed principle of good faith in
contracting and the neighbour principle. On this ground, it is
argued that the principle of good faith could generate a test for
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new good faith duties much the same way that the neighbour
principle generated the Anns test for duties of care.5 While the
shape of new good faith duties to come are unpredictable, such a
test could be beneficial as a means of guiding the development of
good faith law, much as the duty of care test provided some formal
rigour to the process of dealing with new potential duties as they
arise.
II. REASONABLE EXPECTATIONS: THE ORGANIZING
PRINCIPLE OF GOOD FAITH SHOULD EXTEND TO
PRE-CONTRACTUAL NEGOTIATIONS
1. The Legal Role(s) of Reasonable Expectations
The Supreme Court of Canada decision in Bhasin recognized an
overarching organizing principle of good faith in contractual
performance,6 which may manifest itself through existing doctrines
about the types of situations and relationships in which the law
requires, in certain respects, honest, candid, forthright or reasonable contractual performance.7 Cromwell J. summarized the
court’s rationale for these developments as follows:
First, the current Canadian law is uncertain. Second, the current approach to
good faith performance lacks coherence. Third, the current law is out of step
with the reasonable expectations of commercial parties, particularly those
of at least two major trading partners of common law Canada — Quebec
and the United States . . . While these developments which I propose will not
completely address these problems, they will bring a measure of coherence
and predictability to the law and bring the law closer to what reasonable
commercial parties would expect it to be.8 [emphasis added]
Apart from attempting to bring coherence to the disparate
existing doctrines of good faith that were previously “incoherent”
and “piecemeal”,9 Cromwell J. continued the jurisprudential trend
5.
6.
7.
8.
9.
The Anns test, of course, was developed in U.K. law —— a two-stage test
established for determining whether there exists a novel duty of care in
negligence: Anns v. Merton London Borough Council (1977), [1978] A.C. 728,
[1977] 2 All E.R. 492, [1977] UKHL 4 (U.K. H.L.). Though it has since been
rejected in the United Kingdom, it has been adopted and modified in Canadian
law: see, generally, Nielsen v. Kamloops (City), [1984] 2 S.C.R. 2 (S.C.C.); and
Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79 (S.C.C.).
Bhasin, supra, footnote 1, at para. 62.
Bhasin, supra, footnote 1, at para. 66.
Bhasin, supra, footnote 1, at para. 41.
Bhasin, supra, footnote 1, at para. 32, citing Ontario, Law Reform Commission,
Report on Amendment of the Law of Contract (Ontario: Ministry of the Attorney
General, 1987), at p. 169.
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of focussing on the “reasonable expectations” of the parties as a
means of establishing good faith.10 By recognizing the overarching,
organizing principle that underpins the doctrines of good faith,11
Bhasin acknowledged a common thread running through those
doctrines that govern contractual performance. Integral to that
thread are reasonable expectations.
Going further, however, it must be noted that the existing
contractual, tort, and equitable doctrines that address precontractual behaviour demonstrate a consistent attention to
monitoring the parties’ behaviour, so as to ensure that they
interact and negotiate with each other without engaging in conduct
that defies reasonable expectations.12 Each, to varying extents, is
directly concerned with evaluating the quality of the parties’
behaviour in the negotiation phase, to the extent that they apply to
pre-contractual negotiations; this is not to say that these doctrines
are themselves focused on negotiation per se. It is in this specific
capacity that we may deduce the underlying thread of good faith
that runs through them by way of “reasonable expectations”. The
problem, though, is that “reasonable expectations” has always
been, and continues to be, notoriously difficult to conceptualize
both in the jurisprudence and in academic literature.13 As will be
10. As others have noted, the court’s attempt in Bhasin at giving coherence to the
area of good faith in contract law may have been somewhat superficial, grouping
together a hodge-podge of terms without adequately linking them in a
substantive sense: see, for example, John D McCamus, “The New General
‘Principle’ of Good Faith Performance and the New ‘Rule’ of Honesty in
Performance in Canadian Contract Law” (2015), 32:2 J. Contract L. 103.
11. Citing the legal philosophy of Ronald Dworkin, Cromwell J. inductively
reasoned from those existing doctrines to prove the existence of the organizing
principle. Bhasin, supra, footnote 1, at para. 64, citing Ronald M. Dworkin, “Is
Law a System of Rules?” in Ronald M. Dworkin, ed., The Philosophy of Law
(New York, Oxford University Press, 1977), p. 38 at p. 47.
12. Consider, for example, the doctrines of undue influence and duress (economic
and otherwise), which provide redress against bargains obtained as a result of
defective consent flowing from improper negotiations, as well as fraud and the
tort of deceit, which cover tortious conduct committed during negotiations. So
too has the Supreme Court noted that good faith generally underlies doctrines
that explicitly deal with fairness in contracts, such as unconscionability: Bhasin,
supra, footnote 1, at paras. 42-43. Interestingly, the relationship of procedural
unconscionability (disadvantage suffered by a weaker party in negotiations) to
substantive unconscionability (unfairness of the contractual terms) exemplifies a
focus on contracting as a whole rather than simply the contract itself, and thus
anticipates this article’s argument for a principle of good faith that covers
negotiations in addition to contracts.
13. There exists ample literature debating the meaning and utility of “reasonable
expectations” as a concept. Some have argued that the term is highly ambiguous,
admitting different bases such as rational, normative, and moral expectations:
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shown below, defining reasonable expectations has always suffered
from the tension between factual conceptions of reasonableness
that are highly particular to a given interaction, and normative
understandings of reasonableness that are plagued by vagueness.
There appears to be no middle ground or solution that adequately
resolves the tension between these two ends of the spectrum of
reasonableness.
Notwithstanding such uncertainty, the analysis below demonstrates that reasonable expectations play a legal role in both
contract and tort, bridged by reasonable reliance, and it is on this
basis that good faith exists not only in contract but in tort as well.
To extend the organizing principle of good faith to the negotiation
phase would therefore only constitute recognition that reasonable
expectations, far from being the exclusive domain of contract, act
as an underpinning concept of good faith in both contract and tort.
Extending the principle of good faith simply amounts to
recognition of what is already there. Much like contractual good
faith was cured of its “incoherent” and “piecemeal” pre-Bhasin
nature14 by recognizing the underlying thread running through
good faith doctrines, so too should the existing doctrines that
protect against improper negotiation be recognized for the same
underlying thread and thereby be cured of the same disparate,
piecemeal nature. Since the court offered a similar rationale in
Bhasin, an argument on such grounds might very well find
favour.15
Stephen A Smith, “‘The Reasonable Expectations of the Parties’: An Unhelpful
Concept” (2009), 48 C.B.L.J. 366. Others have suggested, however, that the
Canadian jurisprudence incorporates these different types of reasonable expectations into a single, unstable concept: Catherine Valcke, “Contractual Interpretation at Common Law and Civil Law – An Exercise in Comparative Legal
Rhetoric” in J. Neyers, ed., Exploring Contract Law (Oxford, Hart Publishing,
2008), p. 77 at p. 79.
14. Bhasin, supra, footnote 1, at para. 32, citing Ontario, Law Reform Commission,
Report on Amendment of the Law of Contract (Ontario, Ministry of the Attorney
General, 1987), at p. 169.
15. It is worth noting here that, as a member state of UNIDROIT, Canada is already
politically committed to the harmonization of international private law (including contracts), which includes good faith in negotiation as a principle of contract
law. See, generally, art 1.7 UNIDROIT, Principles of International Commercial
Contracts (Rome, International Institute for the Unification of Private Law,
2010), online: <http://www.unidroit.org/english/principles/contracts/principles2010/integralversionprinciples2010-e.pdf4.
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A central obstacle to tracing a thread of good faith throughout
contract and into tort is the lack of agreement on the definition of
good faith in contractual performance generally. However, the
survey below of the academic literature and Canadian jurisprudence suggests that of the available definitions, reasonable
expectations underpins each of them and is therefore a central
element of good faith in Canadian common law.16 With respect to
the gap between contract and tort that good faith would have to
bridge for such an organizing principle to be recognized, such a
concern may be over-stated. Notwithstanding that contract and
tort fundamentally differ in the fact that their obligations are
created by request and imposition respectively, the similarity they
share in creating both positive and negative obligations suggests
that this convergence has undermined a hard and fast distinction
between the two areas.17 The analysis below concludes that reasonable expectations exist as a component of certain tortious doctrines
and are manifested in the form of reasonable reliance; accordingly,
those tort doctrines that address pre-contractual behaviour are apt
to fit under the scope of an organizing principle of good faith.
Reasonable expectations thereby act as an underlying thread
linking good faith doctrines of contract with those tort doctrines
that might fall under the ambit of the organizing principle of good
faith.
16. Much of the academic literature bears this out. Even though most of such writing
comes from American academia, it is worth noting that Cromwell J. relied on this
literature in part in Bhasin, and perhaps more importantly, this American
literature was the context in which Canadian law first began to move towards
admitting good faith into contract law. The first moves towards accepting a
broad role for good faith in contracts occurred via the Ontario Law Reform
Commission, in two separate reports, both of which drew heavily on the
American academic literature, which is discussed below. Those two reports were
the Ontario Law Reform Commission, Report on Sale of Goods, vol. 1 (Toronto,
Ministry of the Attorney General, 1979), ch. 7 and Ontario Law Reform
Commission, Report on Amendment of the Law of Contract (Toronto, Ministry of
the Attorney General, 1987), ch. 9.
17. The history of warranty provides an interesting case study for the permeability of
categorical boundaries between contract and tort: See, for example, Russell
Brown, Pure Economic Loss in Canadian Negligence Law (Markham, Ontario,
LexisNexis, 2011), at pp. 217-218. Though we now understand warranty as a
contractual doctrine, it was originally a “pure action [in tort]” for deceit.
Warranty migrated in the mid-19th century into contract as a matter of
procedural advantages in pleadings.
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2. Good Faith and Liability on the Basis
of Reasonable Expectations
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The academic literature is consistent in its reliance on reasonable
expectations as the basis for formulations of good faith, although
it is unhelpful in defining what reasonable expectations actually
are. Robert Summers, whose definition of good faith served as the
basis for the Restatement (Second) of Contracts, adopted an
objective standard of reasonable expectations in stating that good
faith is “prescribed as a standard for the observance of all men in
their dealings with one another”.18 This remarkably broad conception is expressed even more vaguely in the Restatement’s
comments:
Good faith performance or enforcement of a contract emphasizes faithfulness
to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct
characterized as involving “bad faith” because they violate community
standards of decency, fairness or reasonableness. [Emphasis added]19
The Restatement, however, does not explain what is meant by
“community”, “decency”, “fairness”, or “reasonableness”. If anything, Summers’ position might be taken to mean that “reasonable
expectations” are defined according to the “community” in the
broadest sense of the term, encompassing all of society. Allan Farsworth expressed a very similar conception of good faith that relies
on an “objective standard, based on decency, fairness, or reasonableness of the community”,20 but he too failed to provide a
substantial definition for any of those terms.
A third analysis put forward by Steven Burton attempted to
frame good faith in economic terms, bad faith being “an attempt to
recapture an opportunity that is foregone as a consequence of
entering into the contract.”21 While Burton’s approach came closer
to factual reasonableness (i.e., that specific to the parties in that
specific interaction) than it did to normative reasonableness, it
nonetheless suffered from the same vagueness as Summers and
Farnsworth in its failure to pin down exactly how to determine
18. Robert S. Summers, “‘Good Faith’ in General Contract Law and the Sales
Provisions of the Uniform Commercial Code” (1968), 54 Va. L. Rev. 195, at p.
203, citing First National Bank v. F.C. Trebein Co., 59 Ohio St. 316, 52 N.E. 834
(Ohio., 1898), at pp. 324-325 (Ohio St.).
19. Restatement (Second) of Contracts §205 (1981).
20. Allan Farnsworth, “Good Faith Performance and Commercial Reasonableness
Under the Uniform Commercial Code” (1963), 30 U. Chi. L. Rev. 666, at p. 672.
21. Steven J. Burton, “Breach of Contract and the Common Law Duty to Perform in
Good Faith” (1980), 94 Harv. L. Rev. 369, at p. 373.
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(a) The Varied Conceptions of Reasonable Expectations
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reasonableness. Indeed, as Feinman observes, reasonable expectations are exactly that which link the Summers-Restatement
definition and the Burton definition, notwithstanding their
differing approaches to formulating a definition.22 In short,
although there is a clear thread of reasonable expectations that
runs through all three definitions, discussion of reasonable
expectations is plagued with difficulties in identifying a precise
definition for the term. Not only is there no consensus as to the
relationship between normative and factual reasonableness, there
is also no agreement as to the scope of its normative aspects. There
is thus no precise guidance to be found in the academic literature,
apart from the fact that reasonable expectations are central to
shaping and evolving good faith.
The Canadian jurisprudence on good faith, although equally
consistent in its reliance on reasonable expectations as a central
feature of good faith, is unfortunately just as vague and
inconsistent in conceptualizing reasonable expectations. As Hall
observes, there have been at least six circumstances in which good
faith performance has arisen as a contractual duty.23 In four of
those circumstances,24 reasonableness and reasonable expectations
have been central to shaping these duties of good faith, yet have
remained poorly defined (if at all) both on their own and in
relation to good faith. One of the leading cases on the duty to
22. Jay M. Feinman, “Good Faith and Reasonable Expectations” (2014), 67 Ark. L.
Rev. 525, at p. 529.
23. Geoff Hall, Canadian Contractual Interpretation Law, 3rd ed. (Toronto,
LexisNexis, 2016), at pp. 39-45. Those six circumstances are as follows:
1. Duty to exercise a discretionary power in good faith
2. Duty to act in good faith in complying with a condition precedent
3. Duty to act in good faith when invoking a rescission clause in an agreement of
purchase and sale for real property
4. Duty of good faith in respect of a right of first refusal
5. Duty of good faith in the performance of franchise agreements
6. Duty of good faith in employment contracts at least in respect of termination
by the employer.
Interestingly, Hall also observes that there may possibly be a duty of good faith
with respect to negotiation within the confines of an existing contract, but the
case law is inconsistent on this point: see, for example, Empress Towers Ltd. v.
Bank of Nova Scotia (1990), 50 B.C.L.R. (2d) 126, [1990] B.C.J. No. 2054 (B.C.
C.A.), leave to appeal refused (1991), [1991] 1 S.C.R. vii (note), [1990] S.C.C.A.
No. 472 (S.C.C.).
24. The other two, which are (1) performance of franchise agreements and (2) the
termination of employment contracts by the employer, are duties imposed by law
as a paternalistic measure to militate against power imbalances. See, for example,
Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533, [2003] O.J.
No. 1919 (Ont. C.A.), additional reasons 2006 CarswellOnt 2627 (Ont. C.A.); and
Keays v. Honda Canada Inc., [2008] 2 S.C.R. 362, [2008] S.C.J. No. 40 (S.C.C.).
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In any given transaction, the category into which such a provision falls will
depend upon the intention of the parties as disclosed by their contract. In the
absence of explicit language or a clear indication from the tenor of the
contract or the nature of the subject-matter, the tendency of the cases is to
require discretion . . . to be reasonable.25
While the contract, if sufficiently clear and explicit, can import a
highly subjective form to contractual discretion, the default rule is
one of reasonableness. Quite confusingly, the Court of Appeal
went on to state that “[a]part altogether from the question of
reasonableness, a discretion must be exercised honestly and in
good faith”, but indicated that good faith was so fundamental that
it “require[s] no elaboration”. 26 Thus, although the court
distinguished good faith from reasonableness, it was in fact
reasonableness that drove the court’s analysis27 in the absence of
any actual definition of “good faith”. The court, however, only
went so far as to say that reasonableness entailed an objective
standard; whose objective standard that was, is unclear.
Similarly, other seminal cases such as Gateway Realty Ltd. v.
Arton Holdings Ltd.28 and LeMesurier v. Andrus29 relied on “community standards of honesty, reasonableness, and fairness”30 to
ground a duty of good faith performance,31 but much like the
Restatement, failed to explain what exactly those terms meant and
how they relate to good faith, which was always poorly defined.
25. Greenberg v. Meffert (1985), 18 D.L.R. (4th) 548, [1985] O.J. No. 2539 (Ont.
C.A.), at p. 554 (D.L.R.), leave to appeal refused (1985), 30 D.L.R. (4th) 768
(note), [1985] 2 S.C.R. ix (note) (S.C.C.).
26. Greenberg v. Meffert, supra, footnote 25, at p. 556.
27. See, generally, John McCamus, “Abuse of Discretion, Failure to Cooperate and
Evasion of Duty: Unpacking the Common Law Duty of Good Faith Contractual
Performance” (2004), 29 A.Q. 72, at p. 83 for a similar argument that
reasonableness in this context implies a duty to exercise discretion honestly and
in light of the purposes for which it was conferred.
28. (1991), 106 N.S.R. (2d) 180 (N.S. T.D.), affirmed (1992), 112 N.S.R. (2d) 180
(N.S. C.A.).
29. (1986), 25 D.L.R. (4th) 424, 54 O.R. (2d) 1, 12 O.A.C. 299 (Ont. C.A.), leave to
appeal refused (1986), 63 O.R. (2d) x (note) (S.C.C.).
30. Gateway, supra, footnote 28, at pp. 191-92.
31. As McCamus importantly observes with respect to Gateway Realty, however, the
result of the case rested on Arton’s express undertaking to use “best efforts”,
meaning this finding of good faith was obiter and therefore not authority:
McCamus, supra, footnote 27, at p. 79. Indeed, it is equally true that the body of
Canadian case law on good faith pre-Bhasin did not require reference to good
faith in order to resolve the issues: Ibid., at p. 90.
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exercise discretionary power in good faith, Greenberg v. Meffert, is
illustrative of this confusion:
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This same pattern was present across all the other manifestations
of good faith in Canadian common law.32 Despite the lack of an
explicit connection between reasonableness and good faith,
reasonableness has always stood as an analytical placeholder for
the development of good faith in Canadian common law. The
problem (identical to the academic literature) remains that
reasonable expectations and reasonableness are never precisely
defined. In many instances, they are not defined at all — but they
nonetheless have been central in shaping the Canadian common
law of good faith.
(b) Whose Expectations Count?
All the above, however, still leaves unanswered some of the most
fundamental questions of this analysis: whose reasonable expectations count, and what makes an expectation reasonable? Indeed,
there exists ample literature debating the meaning and utility of
“reasonable expectations” on both of these points. However, the
answer to this first question seems to lie in answering what
“reasonable” means, exactly. Given the breadth and depth with
which the term has been inserted into all facets of the law, it is
impossible that this analysis could provide any definite resolution
— after all, the “reasonable person” is arguably one of the most
central figures of common law, yet that person has thus far escaped
a clear definition. Nonetheless, it is worth examining the definition
of reasonable expectations in order to establish where that
confusion rests.
Some have argued that the term is highly ambiguous, admitting
different bases such as rational, normative, and moral expectation33 — evidently, this hodgepodge of different considerations has
done perhaps more to confuse than it has to clarify. That being
said, the wide range of these types of considerations is helpful in
mapping out a spectrum of reasonableness from which definitions
32. For greater detail regarding each manifestation of good faith, see the following:
Dynamic Transport Ltd. v. O.K. Detailing Ltd. (1978), 85 D.L.R. (3d) 19, [1978] 2
S.C.R. 1072, 6 Alta. L.R. (2d) 156 (S.C.C.), at p. 28 (D.L.R.) (condition
precedent); LeMesurier, supra, footnote 29, at p. 430, quoting from Freedman v.
Mason (1958), 14 D.L.R. (2d) 529, [1958] S.C.R. 483 (S.C.C.), at p. 486 (S.C.R.)
(rescission clause in purchase and sale of real property); GATX Corp. v. Hawker
Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Gen. Div. [Commercial
List]), at p. 276, citing Landymore v. Hardy (1991), 21 R.P.R. (2d) 174, 110
N.S.R. (2d) 2 (N.S. T.D.) at pp. 16-17 (N.S.R.), additional reasons 1992
CarswellNS 90 (N.S. T.D.) (right of first refusal).
33. Stephen A Smith, “The Reasonable Expectations of the Parties: An Unhelpful
Concept” (2009), 48 C.B.L.J. 366.
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of reasonable expectations are drawn. At one end is a pure,
factual/empirical reasonableness that is largely descriptive: in a
particular interaction, what would the parties expect given the
circumstances, objectively ascertained? Here, the focus admits very
little, if any, broader social considerations, preferring instead to
ask what is an accurate reading of the factual situation.34 Moving
to the other end of the spectrum, reasonableness begins to
accommodate various normative considerations about what should
be expected in a particular interaction, given the social and
community standards that inform the broader context in which the
interaction is taking place. Here, the factual element of reasonableness begins to give way.
But even knowing that reasonableness exists on this spectrum
does little to explain how it is put into practice in actual
jurisprudence, given that reasonableness is never truly explained
(as indicated above). This is perhaps because, as Professor Valcke
has suggested, Canadian jurisprudence incorporates these different
types of reasonable expectations into a single, unstable concept:
“[T]he parties’ reasonable intention” stands for the intention which it is
(normatively) reasonable for the parties to have precisely because that is the
intention which it is (factually) reasonable for each to attribute to the other.
. . . It is this interplay of normative and factual within the notion of objective
intention that arguably causes this notion to be inherently unstable . . .35
Given Professor Valcke’s claim that normative reasonability is
found within the factual reasonableness attributable to the parties’
intentions, “reasonable expectations” appears to be whatever
normative considerations a judge can find — or force into — a
reading of the parties’ intentions.36 But this then presents the
problem that reasonable expectations are what a judge believes
them to be on a reading of the facts, which is highly subjective to
the judge — prone to unpredictable and inconsistent readings.
Accordingly, the answer to “what are reasonable expectations”
and “whose expectations count” is, rather frustratingly, difficult to
pin down. There is significant overlap between factual and
normative reasonableness in common law jurisprudence, but the
34. Burton’s attempt at a formulation of reasonable expectations above probably
comes closest to factual reasonability, although it too seems to admit normative
elements.
35. Catherine Valcke, “Contractual Interpretation at Common Law and Civil Law –
An Exercise in Comparative Legal Rhetoric” in J. Neyers, ed., Exploring
Contract Law (Oxford, Hart Publishing, 2008), p. 77 at p. 79.
36. John Enman-Beech, Three Essays on the Penalty Doctrine (LLM Thesis,
University of Toronto Faculty of Law, 2016) [unpublished], at p. 70.
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degree of that overlap is inconsistent and contingent upon a
particular judge’s reading of a particular set of facts. That,
unfortunately, seems to be the best answer that the common law
jurisprudence has to offer. To the extent that this analysis is in line
with doctrine, then, it is therefore a necessary evil to use reasonable
expectations, notwithstanding their conceptual vagueness, as the
basis on which to argue that certain tort doctrines are linked to
good faith.
3. Tort Doctrines are Linked to Reasonable
Expectations through Reasonable Reliance
The central question is how tort doctrines relating to precontractual behaviour may be understood to fall under the ambit
of good faith, if good faith is underpinned by reasonable
expectations. Most basically, the purpose of tort is not to fulfill
unfulfilled expectations, but to restore a victim as far as possible to
the circumstances that existed before the tort.37 There is thus an
apparent gap between the reasonable expectations in good faith
performance and the nature of liability in tort. However, the tort
doctrines that are applicable to pre-contractual negotiations all
share an important linking element: namely, reasonable reliance.
Reasonable reliance is, of course, distinct from reasonable
expectations, but their difference is not a categorical one insofar
as the latter generates the former. With respect to reasonable
reliance, consider that in the case of fraud or deceit, the tortfeasor
makes representations on which they intend the plaintiff to rely
and thereby engage in conduct that flows from those representations. Tort law, however, requires that that reliance be reasonable
in order for the plaintiff to be able to claim relief. In short, the
wronged party develops a reasonable expectation from the
wrongdoer’s representations that certain events or circumstances
will come about, or are true, and this in turn causes the wronged
party to act in reliance on those expectations. Reasonable
expectations may thus give rise to the reasonable reliance that
tort law protects.
At a basic level, then, it seems intuitively appealing that if
reasonable expectations give rise to good faith in contract, then
37. See, generally, Athey v. Leonati, [1996] 3 S.C.R. 458 (S.C.C.), at para. 20. In
instances of intentional torts (such as deceit or fraudulent misrepresentation),
however, punitive damages are more easily obtainable as a matter of public
policy to deter socially undesirable conduct: see, generally, Vorvis v. Insurance
Corp. of British Columbia, [1989] 1 S.C.R. 1085 (S.C.C.), at pp. 1098-1099.
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they should do the same in tort. Put simply: reasonable
expectations generate good faith; reasonable reliance is reliance
on reasonable expectations; torts, as noted above, often require
reasonable reliance; torts (to the extent that they require reasonable reliance) are about reasonable expectations; therefore, certain
torts involve considerations of good faith. Perhaps more persuasive is the fact that the reasonable expectations that good faith
protects are the very same that generated the contract in the first
place: that is, the contract re-instantiates those same reasonable
expectations that gave rise to reasonable reliance.
A contract, it may be said, is a quintessential act of reasonable
reliance; in reliance on the reasonable expectation that party A’s
representations (explicit or implicit) accurately indicate party A
will be able to meet the obligations it has undertaken, party B
binds itself via contract. From this act of reasonable reliance thus
flows the crystallization of those same reasonable expectations in
contract form, insofar as those pre-contractual representations
ultimately make up the terms of the contract. Thus, if reasonable
expectations in economic relations generate good faith duties
where the act of reliance produces a contract, then at a basic level,
it is intuitively appealing to recognize that reasonable expectations
should have a similar effect where the act of reliance produces a
loss (i.e., in tort).
It is perhaps no coincidence that the remedy for misrepresentation in contract law is very similar to that in tort: where the
contract was entered into in reliance on representations from the
defendant, the plaintiff is remedied by restoring the parties to their
positions prior to contract formation (i.e., rescission of the
contract). If reasonable expectations therefore exist along a
continuum from pre-contract to within contract itself, with each
being protected to some extent by doctrinal remedies, then
recognizing good faith in tort (namely, pre-contractual negotiations) would ensure greater conceptual coherence and continuity
along that theoretical continuum.38
38. Similarly (although distinctly), civil law recognizes that sufficiently advanced and
sophisticated negotiations give rise to a reasonable expectation that the
negotiating parties will co-operate with each other to achieve the intended
objective (i.e., form a contract): See, e.g., art. 1375 CCQ; and Pegasus Partners
Inc. v. Groupe Laurem Inc., 2007 QCCS 476 (C.S. Que.), at para. 31, citing PierreGabriel Jobin, Nathalie Vézina, Les Obligations, 6th ed. (Cowansville, Yvon
Blais, 2005), at p. 148. Failing to meet that expectation thereby constitutes a
breach of the duty to negotiate in good faith. Put differently, in reliance upon one
party’s representations that they wish to see negotiations concluded successfully,
the other party expends its time and resources in an attempt to reciprocate its
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It is also worth observing that equitable doctrines relating to
pre-contractual behaviour bear out the underlying thread of good
faith. Since equity and good faith were largely tied together in the
development of early medieval common law,39 it is no stretch to
claim that each has informed the other’s doctrinal development
over the centuries. Indeed, this fact is borne out in certain equitable
remedies that exist today. Consider, for example, the case of
contracts for the sale of land, where equity has developed a
doctrine that protects reliance of one party on the other party’s
actions during contractual negotiations. This, of course, is
proprietary estoppel, and its relevance here is perhaps best
illustrated as follows:
Proprietary estoppel exists to adjust the prevailing balance of property
between claimant and defendant when the claimant has formed the relevant
kind of expectation, and has acted detrimentally in reliance on it, and these
occurrences are ascribable to the defendant (via his encouragement of or
acquiescence in them), so that it would be unconscionable40 for him to
insist on the status quo.41 [emphasis added]
Such a definition recognizes protection of the wronged party’s
reasonable reliance as generated from the “relevant” expectation,
which itself is a result of the wrongdoer’s conduct (i.e.,
“encouragement or acquiescence”). Indeed, the fact that promissory estoppel can be used as an alternative to consideration for
intention to conclude negotiations successfully. Based upon this act of reliance,
the civil law thereby recognizes that the parties have an interest that must be
protected. Since the parties cannot be forced to conclude negotiations with a
contract, instead the wronged party is compensated for the loss arising from
reliance on the other party’s representations.
39. See, e.g., Reinhard Zimmermann and Simon Whittaker, eds., Good Faith in
European Contract Law (Cambridge, Cambridge University Press, 2000), at p. 96
for the proposition that early medieval jurists concluded that as a matter of faith
(e.g., bona fides), equity, and ius gentium (law of nations), agreements must be
kept.
40. There is an interesting point to be examined, perhaps in another forum, of the
relationship to be drawn between good faith and unconscionability. While the
latter applies to evaluating the terms of a contract in relation to the bargaining
phase, the use of “unconscionable” in the quote above appears to refer to a
broader evaluation of behaviour that offends the conscience. What exactly that
means is unclear, but this reference in equity appears far broader than the
unconscionability doctrine.
41. Simon Gardner, “The Remedial Discretion in Proprietary Estoppel” (1999), 115
Law Q. Rev. 438, at p. 508.
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Similarly Focus on Reasonable Expectations and Reliance
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enforcing a promise additionally provides strong support for the
claim that equity is fundamentally concerned with protecting the
parties’ reasonable expectations and the resultant reliance.42 In
sum, expectations and reliance play a significant role in one of
equity’s most important doctrines, and in so doing provide the
same underpinnings that this analysis presents as central to both
contract and certain tortious doctrines.
III. RECOGNIZING THE RELATIONALITY OF CERTAIN
ECONOMIC INTERACTIONS PROVIDES THE BASIS ON
WHICH REASONABLE EXPECTATIONS CAN APPLY TO TORT
What is thus lacking in common law is a treatment of
reasonable expectations in tort that mirrors its treatment in
contract law; namely, recognition of good faith. The question
therefore becomes why, at common law, one instance of reasonable expectations explicitly gives rise to good faith duties while the
other does not, notwithstanding the similarities. Applying this
overarching continuum of reliance and expectation to tort would
not produce a logical leap so much as it would conceptually unify
the relationship of reliance and expectation, thereby producing a
consistent and continuous relationship between tort and contract.
The theory behind an extension of good faith into tort therefore
does not face a significant logical hurdle; the main issue is whether
the common law is ready to recognize expectations as reasonable in
tort if reliance or other circumstances dictate.
Given that Cromwell J.’s approach of using other jurisdictions
in part to define reasonable expectations would suggest a
conservative approach to recognizing good faith in tort, a
normative argument on the grounds that Canadian common law
should recognize the social realities of 21st-century commerce is
therefore more appropriate.43 In short, the argument must be that
42. There is, of course, the fact that promissory estoppel can generally only be used
as a shield and not as a sword (Combe v. Combe, [1951] 2 K.B. 215 (C.A.)), but
this was meant more as a means of avoiding the displacement of the doctrine of
the consideration. This view is not unanimous, however, as the Australian High
Court recognized in Waltons Stores (Interstate) Ltd v. Maher, [1988] HCA 7 that
promissory estoppel could function as a sword (i.e., could be a cause of action).
Indeed, the court strongly rejected the traditional view as logically deficient,
citing David Jackson, “Estoppel as a Sword” (1965), 81 Law Q. Rev. 84, and 223
at pp. 241-243.
43. There has been something of an academic debate about the extent to which
contract law (or at least academic considerations of that area of law) has already
evolved away from the classical contract paradigm. See footnote 46, infra; Patrick
S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press,
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the common law, as it currently is, reflects an outdated paradigm
of commercial relationships that categorizes them as transactional
events in which parties are perfect strangers who come together for
a discrete economic event, only to go their separate ways upon its
conclusion. In fact, the reality of 21st-century commerce is that
contracting, even during the negotiation phase, is a relational activity in which actors come together and form commercial relationships that give rise to certain reasonable expectations. Even in the
negotiation phase, these expectations may arise. In other words,
reasonable expectations at law ought to reflect reasonable
expectations as they actually are in modern commercial interactions — reasonable expectations factually exist in pre-contractual
negotiations, and accordingly ought to be recognized, under the
banner of good faith, in tort.
The recognition of some contracts as relational in nature
provides a strong foundation on which to build the proposition
that recognizing reasonable expectations in tort is viable and
consequently imports good faith. Effectively, it would extend the
logic applied by Cromwell J. in recognizing a duty to perform
contracts honestly. In this regard, Cromwell J.’s comment on
commercial expectations is therefore a useful starting point:
Commercial parties reasonably expect a basic level of honesty and good faith
in contractual dealings. While they remain at arm’s length and are not subject
to the duties of a fiduciary, a basic level of honest conduct is necessary to the
proper functioning of commerce. The growth of longer term, relational
contracts that depend on an element of trust and cooperation clearly calls
for a basic element of honesty in performance, but, even in transactional
exchanges, misleading or deceitful conduct will fly in the face of the
expectations of the parties.44 [emphasis added]
Notwithstanding the general jurisprudential attitude that contracting is individualistic and adversarial by its very nature,45 the theory
1979); Lawrence M. Friedman, Contract Law in America: A Social and Economic
Case Study (Madison, Wisconsin, University of Wisconsin Press, 1965); Morton
J. Horwitz, The Transformation of American Law, 1780-1860 (Cambridge,
Massachusetts, Harvard University Press, 1977); and Grant Gilmore, The Death
of Contract (Columbus, Ohio, Ohio State University Press, 1974).
44. Bhasin, supra, footnote 1, at para. 60, citing Angela Swan and Jakub Adamski,
Canadian Contract Law, 3rd ed. (Markham, Ontario, LexisNexis, 2012), at para.
1.24.
45. Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd. (1994), 19
Alta. L.R. (3d) 38 (Alta. C.A.), leave to appeal refused (1994), 21 Alta. L.R. (3d)
xxxvii (note) (S.C.C.). See also Martel, supra, footnote 3, at paras. 62-71; and
Walford v. Miles, [1992] 2 A.C. 128 (U.K. H.L.), at p. 129, per Ackner L.J.
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on contracting46 and empirical studies47 indicates that commercial
parties in the 21st century have a reasonable expectation that the
other negotiating party, while vigourously advocating for its own
interests, will avoid active dishonesty and duplicitous behaviour. If
it is true that commercial parties expect a basic level of honesty and
good faith in contractual dealings, then it is also reasonable to say
that they may expect some measure of good faith in precontractual dealings. The question, therefore, is simply whether
reasonable expectations at common law should catch up with the
reasonable expectations of commercial parties in modern society.
1. Fundamental Principles and the Types of
Contracts Covered by Good Faith
At a most fundamental level, the common law (to the extent the
classical contract paradigm still governs) largely misconceives the
nature of a great deal of contracting as a discrete economic event
rather than a relational activity. Despite the academic literature
providing ample support for this contention,48 doctrine has not yet
caught up (and there is little to suggest that it will, given its current
trajectory).49 Though the English common law once conceived of
good faith as “the governing principle . . . applicable to all
contracts and dealings”,50 it quickly gave way to classical contract
law reflecting the laissez-faire economics and political economy
46. See, for example, Roger Brownsword, “Static and Dynamic Market Individualism”, in Roger Halson, ed., Exploring the Boundaries of Contract (Aldershot,
Dartmouth, 1996), p. 48; Roger Brownsword, “Contract Law, Co-operation, and
Good Faith: The Movement from Static to Dynamic Market-Individualism”, in
Simon Deakin and Jonathan Michie, eds., Contracts, Cooperation, and Competition: Studies in Economics, Management, and Law (Oxford, Oxford University
Press, 1997) p. 255; M.A. Eisenberg, “The Emergence of Dynamic Contract
Law” (2001), 2:1 Theor. Inq. L. 1; and of course the now-famous contract theory
of Ian Macneil: Ian Macneil, “Contracts: adjustment of long-term economic
relations under classical, neoclassical, and relational contract law” (1977), 72 Nw
U.L. Rev. 854.
47. See footnote 58, infra.
48. See footnotes 43 and 46, supra.
49. Waitzer and Sarro provide an excellent summary of the current trajectory of the
law’s use of reasonable expectations in Canadian common law. Though
reasonable expectations are growing in use across several different areas of
law, there is no indication that in the commercial context, the judiciary has
expressed support for the notion that reasonable expectations exist in negotiations. See Edward J. Waitzer and Douglas Sarro, “Protecting Reasonable
Expectations: Mapping the Trajectory of the Law” (2016), 57 C.B.L.J. 285.
50. Carter v. Boehm (1766), 97 E.R. 1162 (Eng. K.B.), at p. 1164.
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theories of the 19th century.51 This approach treated contracts as
discrete events between economic actors who, once having
completed the contract, go their separate ways; and indeed, the
increase of sea-faring vessels trading across the globe meant these
paradigmatic discrete contracts were common. Although good
faith was already part of equity, good faith in the early 19th
century common law was initially confined to the commercial
doctrine of good faith purchase, which itself was devised as a
means of producing greater commercial efficiency by reducing the
need to investigate property rights of a sold good.52 In view of
these circumstances, English courts thereafter developed a contract
law that focused on the contract as a stand-alone unit, with little
regard for the circumstances that precede its formation. Though
common law courts have since that time adopted a more expansive
attitude towards good faith in general, the common law approach
to good faith remains largely faithful to the assumption that
contracts are discrete events rather than a manifestation of a
relationship.53
Because this view of contracts is no longer appropriate for the
modern age, Canadian common law jurisdictions would be better
served by recognizing the underlying relational nature of a
significant portion of economic interactions. This would in turn
provide a stronger basis on which courts may recognize the
reasonable expectations that underpin good faith in tort doctrines
that address pre-contractual negotiations, to the extent that they
protect negotiations. As a point of reference, it is useful to observe
that civilian codes, contrary to the common law, focus on the
relationship between the parties rather than treating the contract
as a dramatic event; the contract is simply the manifestation of a
relationship between the parties which exhibits some measure of
trust. In other words, judicial interpretation is more concerned
with morally evaluating the behaviour of the parties, and treating
51. Bobux Marketing Ltd v. Raynor Marketing Ltd. (2001), [2002] 1 N.Z.L.R. 506,
[2001] NZCA 348 (N.Z. C.A.), at para. 34. For an alternative view endorsing the
influence of civil law on 19th century contract law, see, generally, James Gordley,
The Philosophical Foundations of Modern Contract Doctrine (Oxford, Clarendon
Press, 1991); and A.W.B. Simpson, “Innovations in 19th Century Contract Law”
(1975), 91 L.Q. Rev. 247.
52. Grant Gilmore, “The Commercial Doctrine of Good Faith Purchase” (1954), 63
Yale L.J. 1057, at p. 1057.
53. Indeed, one might view Bhasin as indicative of this trend towards recognizing
relationality while still taking pains to remain firmly rooted within the dominant
paradigm. See, e.g., John Enman-Beech, “The Subjects of Bhasin: Good Faith
and Relational Theory” (2017), 13 J.L. & Equality (forthcoming).
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the contract as relational.54 As a result, civilian courts are more
likely to declare parties legally bound at an earlier stage in the
negotiation process, since the relationship extends beyond the
bounds of the contract.55
At common law, it is equally true that a substantial amount of
commerce in the modern age is not a one-off event in which each
party cuts off commerce with the other upon concluding the
contract. Rather, one contract may simply provide the basis for a
commercial relationship that produces others contracts between
the parties.56 Indeed, this has been borne out in empirical studies
of business activity for decades, which have observed that many
business persons, though not all,57 find law to be superfluous to
commercial dealing except in certain specific instances.58 More
important to business relationships were reputation, trust,
flexibility, and co-operation, with only informal sanctions in cases
of dispute.59 That being the case, the civilian law ethos of
54. Barry Nicholas, “The United Kingdom and the Vienna Sales Convention:
Another Case of Splendid Isolation?” (Rome, Centro di Studi e Richerche di
Diritto Comparato e Straniero, 1993), online: <http://www.cisg.law.pace.edu/
cisg/biblio/nicholas3.html4.
55. R.B. Lake, “Letters of Intent: A Comparative Examination Under English, U.S.,
French, and West German Law” (1984), 18 Geo. Wash. J. Int’l L & Econ. 331, at
p. 342.
56. This may help explain in part why there already exists, for example, a duty of
good faith bargaining in labour law: Kathleen O’Byrne, “Good Faith in
Contractual Performance: Recent Developments” (1995), 74 Can. Bar Rev. 70, at
p. 71.
57. Lisa Berstein’s study of the American cotton industry’s arbitration system reveals
a “relatively formalistic adjudication approach” to dispute resolution. Contractual interpretation in that system made little use of contextual factors, preferring
strict construction instead because it is the accepted industry standard. Thus,
despite a highly relational setting amongst the cotton industry, their arbitration
system nevertheless privileges a legalistic approach more characteristic of
freedom of contract and the classical contract paradigm that it reflects: Lisa
Bernstein, “Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions” (2001), 99 Mich. L. Rev. 1724.
Many thanks to John Enman-Beech for bringing this to my attention.
58. Such instances are high-risk or high-value deals with a new contracting partner,
for example. See, generally, Catherine Mitchell, “Commercial Contract Law and
the ‘Real Deal’, in Gonzalo Villalta Puig and Christian Twigg-Flesner, eds.,
Boundaries of Commercial and Trade Law (Munich, sellier European law
publishers, 2011), p. 21 at pp. 22-27, citing Stewart Macaulay, ”Non-Contractual
Relations in Business: A Preliminary Study“ (1963), 28 Am. Soc. Rev. pp. 55-67;
Hugh Beale and Tony Dugdale, ”Contracts Between Businessmen: Planning and
the Use of Contractual Remedies“ (1975), 2 Brit. J. Law & Soc’y 45, pp. 45-60;
and Catherine Mitchell, ”Contracts and Contract Law: Challenging the
Distinction Between the ‘Real’ and ‘Paper’ Deal“ (2009), O.L.J.S. 675.
59. Mitchell, “Commercial Contract Law”, ibid., at pp. 22-27. Perhaps just as
importantly, the S.C.C. recognized in Bhasin that relational contracts are very
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commerce is reflected at least at an empirical level, if not in the
common law. A move in the Canadian common law to recognize
the relational nature of many contracts, and indeed of economic
interactions, would thus better align with the commercial realities
of the 21st century.
2. The Absence of Negotiation in Standard Form Contracts
It is important to recognize, however, that not all contracts and
not all economic interactions fall neatly within this ambit. One
particular category of contracts that warrants greater scrutiny are
contracts of adhesion60 in the consumer context, and standard
form contracts more generally. From a contractual perspective, it
is likely uncontentious to say that the contract may evidence
relational qualities even after formation. When a student purchases
a computer, for example, there is little expectation that that
student will have a traditional business relationship with the seller;
but it is equally true that the seller will likely provide years of
technical support and maintain contact with the buyer in order to
offer new products, updates, etc. So too is this true of cell-phone
contracts, where contact between buyer and seller persists for the
typically multiyear duration of the contract. Far from being the
paradigmatic perfect strangers who, upon conclusion of their
contract, go their separate ways, even parties to these contracts
exhibit a high degree of relationality.
Problematically for this analysis, however, is that the negotiation phase in consumer contracts like those described above is
most often truncated or non-existent, meaning the pre-contractual
interactions are not sufficiently robust to generate any relational
qualities at that stage. Accordingly, no reasonable expectations
would arise, and good faith would be inapplicable in a tortious
capacity in respect of the negotiation of such contracts. But this is
not to say that consumers would be left without redress, since there
already exists protection in the form of consumer protection
legislation.61 In view of the significant portion of commerce that is
much part of the judicial (and, of course, commercial) landscape: Bhasin, supra,
footnote 1, at para. 60.
60. Ironically enough, the concept of a contract of adhesion originated not in the
common law, but in French civil law: Steven v. Fidelity & Casualty Co., 58 Cal.2d
862 (Cal., 1962) at p. 882, citing Raymond Saleilles, De la De´claration de volonte´:
contribution à l’e´tude de l’acte juridique dans le code civil allemande (art. 116 a`
114) (Paris, Pichon, 1901).
61. See, e.g., Canada Consumer Product Safety Act, S.C. 2010, c. 21; or Competition
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comprised of such contracts and interactions, the conceptualizing
of good faith in terms of tort would therefore not affect all
negotiations, but simply a subset of them; it therefore would not
introduce wholesale changes to Canadian contract and tort law,
but rather reflect a measured approach that accords with the
realities of 21st-century commerce.
IV. POLICY CONCERNS
Naturally, one of the first arguments that would be raised
against the recognition of good faith in pre-contractual negotiations is that it would cripple commercial efficiency due to the
constraints it would place on economic actors. The reasoning goes
that such a duty is anathema to the very nature of negotiations as
adversarial, and any suggestion that a party would have to forego
any of their self-interest in order to protect that of their negotiating
partner is untenable. This position is best illustrated by reference to
the seminal English case of Walford v. Miles,62 where Lord Ackner
described any attempt to ascribe a duty of faith in negotiation (in
that particular case, one imposed by the parties’ consent) as
repugnant to the adversarial nature of negotiations, and sure to
compromise each party’s ability to act in its own self-interest.63
This view was strongly endorsed in Martel,64 where the S.C.C.
stated, amongst other things, that negotiation is a zero-sum game
involving a transference rather than a loss of wealth.65 Despite the
fact that Martel dealt with a proposed duty of negligence in
negotiation, the court made a point of observing the similarity that
such duty in negligence would have to one of good faith.66 Martel
is therefore worth quoting at length, to demonstrate the policy
concerns that the court believed run counter to recognizing the
reasonable expectations of parties in tort (particularly in negotiations):
62.
63.
64.
65.
66.
Act, R.S.C. 1985, c. C-34. Consumer protection, while an important topic on this
point and ripe for discussion, is outside the purview of this analysis.
Walford, supra, footnote 45.
Ackner L.J. gives the specific example of being unable to withdraw from further
negotiations in order to exert pressure upon the other negotiating party. Walford,
supra, footnote 45, at p. 29.
Although outside of the scope of this paper, the court in Martel additionally
identified other concerns about recognizing such a duty, such as the fear that it
would create “after-the-fact insurance against failures to act with due diligence”
(para. 68), it would assign to courts a “significant regulatory function” (para. 70),
and would encourage a multiplicity of lawsuits (para. 71).
Martel, supra, footnote 3, at para. 62.
Martel, supra, footnote 3, at para. 73.
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The primary goal of any economically rational actor engaged in commercial
negotiation is to achieve the most advantageous financial bargain. As noted
above, in the context of bilateral negotiation, such gains are realized at the
expense of the other negotiating party . . .
.....
Second, to extend a duty of care to pre-contractual commercial negotiations
could deter socially and economically useful conduct . . .
.....
In many if not most commercial negotiations, an advantageous bargaining
position is derived from the industrious generation of information not
possessed by the opposite party as opposed to its market position as here.
Helpful information is often a by-product of one party expending resources
on due diligence, research or other information gathering activities. It is
apparent that successful negotiating is the product of that kind of industry.
.....
It would defeat the essence of negotiation and hobble the marketplace to
extend a duty of care to the conduct of negotiations, and to label a party’s
failure to disclose its bottom line, its motives or its final position as negligent . . .
.....
Third, to impose a duty in the circumstances of this appeal could interject tort
law as after-the-fact insurance against failures to act with due diligence or to
hedge the risk of failed negotiations through the pursuit of alternative
strategies or opportunities. . . .
.....
Fourth, to extend the tort of negligence into the conduct of commercial
negotiations would introduce the courts to a significant regulatory function,
scrutinizing the minutiae of pre-contractual conduct. . . .
.....
A concluding but not conclusive fifth consideration is the extent to which
needless litigation should be discouraged.67
With respect, this view is misguided. It conceives of negotiation
through the outdated 19th-century lens of contracts that fails to
account for the relational nature of much commerce, and in so
doing, fails to recognize that morally dubious bargaining, while
potentially a wealth generator in the short-term, arguably impedes
long-term wealth generation by hindering the development of trust
and co-operation amongst business entities. In short, the essence of
67. Martel, supra, footnote 3, at paras. 62-71.
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negotiation is not for one side to defeat the other, but instead for
both parties to gain.
To digress slightly, even the practical arguments for recognition
may be compelling: negotiations that require significant expenditure of resources may warrant protection, lest the negotiating
system become unduly compromised by undesirable behaviour and
consequently dis-incentivize serious negotiations. The result, under
this line of reasoning, is either a reticence to enter into contracts
due to lack of information, or else contracts entered into under
sub-optimal informational conditions (subsequently increasing the
risk of breaches). The flip side would suggest that protecting
resource-intensive negotiations would promote greater due diligence and informational symmetry, increasing gains from trade
and decreasing the likelihood of breach.68 Indeed, even Martel’s
proposed duty of care in negligence might warrant reconsideration
in light of this re-evaluation of policy concerns, but that is a
question outside the scope of this analysis.
If we take it as true that the legal elements of business
relationships are of lesser importance than reputation, trust,
flexibility, and co-operation,69 then it seems quite intuitive to
conclude that recognizing good faith in negotiations, which would
at the very least institutionalize some measure of trust between the
parties, would be a favourable economic development. Indeed, it
makes little sense to say that negotiations, if conceived of as a
solely adversarial and combative exercise in which neither party
yields an inch unless absolutely necessary, can form the basis for
the contractual relationship that Cromwell J. stated demands a
measure of honesty and good faith most generally.70 If there exists
no foundation of good faith between the parties upon which the
contract can be made, then it seems counterintuitive at best to say
that good faith behaviour will naturally flow once the contract has
been formed. With the recognition of a duty of good faith in
negotiation, this will ensure a basic level of acceptable conduct that
remains consistent throughout the entire course of the relationship.
Put simply, commercial parties have a reasonable expectation that
68. Not all commentators agree, however. Stephen A. Smith has taken the view that
a rule requiring trustworthy behaviour would actually diminish trust in fact
because one would never know whether their counter-party had acted well
because they were trustworthy, or because they feared sanction. Stephen A
Smith, “Performance, Punishment and the Nature of Contractual Obligation”
(1997), 60 Mod. L. Rev. 361.
69. Mitchell, supra, footnote 58, at p. 27.
70. Bhasin, supra, footnote 1, at paras. 60-61.
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the other contracting party, while vigourously advocating for their
own interests, will avoid active dishonesty and duplicitous
behaviour.
More importantly for the purposes of this analysis, the court’s
practical concerns in Martel are entirely moot in view of the fact
that conceptualizing good faith as existing in tort doctrines that
address pre-contractual behaviour has no practical effect of
reconfiguring the law. In effect, such a move simply recognizes
that the tortious doctrines that are already available as remedies
for improper negotiations are doctrines of good faith. Doing so
would not introduce any greater regulatory function for courts,
nor would it encourage a proliferation of litigation. Indeed, the oftoverriding concern of indeterminate liability would not need to be
considered. Admittedly, such concerns might be quite relevant if a
new, tortious good faith duty in negotiations were under
consideration, but that is a question unto itself and therefore one
for another time.71 What is proposed here is simply a recategorization and re-conceptualization of the relevant tort
doctrines outlined above, to the extent that they relate to
negotiations, and insofar as they involve intentionally unreasonable behaviour.72 Thus, the totality of the court’s policy concerns
in Martel appears manageable in view of the nature of this
reconceptualization of good faith and tort, along with recognizing
a more faithful view of modern commerce.
For reasons of principle and policy, there is therefore a strong
rationale for recognizing that reasonable expectations in tort
should be understood to protect the relational nature of a certain
subset of negotiations, which would discourage dishonest and
unethical behaviour. Accepting the premise that reasonable
expectations underpin good faith, it is consequently appropriate
71. The Ontario Court of Appeal recently denied the existence of a pre-contractual
duty of good faith in negotiations, in Oz Optics Ltd. v. Timbercon Inc., 2011
ONCA 714 (Ont. C.A.), additional reasons 2012 CarswellOnt 13318 (Ont. C.A.).
What is noteworthy, however, is that the court was not completely opposed to the
idea in appropriate circumstances should they arise. The court stated that the
common law has not recognized a free-standing duty of good faith based in tort
and that, to date, the S.C.C. has not extended the doctrine of good faith beyond
the context of an existing contractual relationship: supra, at para. 62. The ONCA
stated that the policy considerations previously raised by the S.C.C. in Martel
dismissing the existence of a duty of care in negligence between parties to
contractual negotiations were instructive in assessing whether a duty to negotiate
in good faith should be recognized: supra, at para. 65. In other words, the
ONCA’s reluctance stemmed largely from judicial deference.
72. See footnote 12, supra.
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to say the principle of good faith, if it is understood as within tort
as well, must then discourage the behaviour described above and in
those doctrines of tort that address expectation and reliance during
negotiations, to the extent that those doctrines are applied to
negotiation. As such, it is appropriate and indeed incremental to
take that underlying, if presently fragmented, thread of good faith
in tort and recognize it as an extension of the organizing principle
of good faith that currently underpins only contractual performance.73 In short, the organizing principle should not simply be
one of good faith in contractual performance, but of good faith in
contracting, at all stages from negotiation through to completion
or termination.
V. CONCLUSION: A WAY FORWARD
Given that the reconceptualization of good faith is ostensibly
moot at a practical level, a natural response would be to question
what end it is meant to serve, or to question what effect it might
actually have on the future of good faith. This reconceptualization
of the overarching principle of good faith recalls the same
overarching quality applicable to governing the conduct of private
actors in general that was apparent in Lord Atkins’ invocation of
the neighbour principle in McAlister (Donoghue) v. Stevenson:74
[T]here must be, and is, some general conception of relations giving rise to a
duty of care, of which the particular cases found in the books are but
instances. The liability for negligence . . . is no doubt based upon a general
public sentiment of moral wrongdoing for which the offender must pay. But
acts or omissions . . . cannot . . . give a right to every person injured by them
to demand relief. In this way rules of law arise which limit the range of
complainants and the extent of their remedy. The rule that you are to love
your neighbour becomes in law, you must not injure your neighbour . . . You
must take reasonable care to avoid acts or omissions which you can
reasonably foresee would be likely to injure your neighbour. Who, then, in
law, is my neighbour? The answer seems to be — persons who are so closely
73. It is noteworthy in this regard to observe that the European Civil Court, in ruling
on civilian claims of a failure to negotiate in good faith, have observed that the
nature of such a claim is that of tort, delict, or quasi-delict within the meaning of
Article 5(3) of the Brussels Convention: see, e.g., Fonderie Officine Meccaniche
Tacconi SpA v. Heinrich Wagner Sinto Maschinenfabrik GmbH (HWS)
(September 17, 2002), ECJ Case C-334/00, at paras. 19-27, citing Kalfelis, Case
189/87, [1988] ECR 5565; Reichert and Kockler, Case C-261/90, [1992] ECR I2149; and Handte, Case C-26/91, [1992] ECR I-3967.
74. [1932] A.C. 562, [1932] UKHL 100 (U.K. H.L.).
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Much like the neighbour principle, this article has attempted to
conceptualize the principle of good faith as establishing the extent
to which relations between private commercial actors may be
generally regulated. Much like the neighbour principle, the scope
of the principle of good faith is determined by what is reasonable
in the circumstances — however vague that may be. Accordingly, it
is useful to look to the neighbour principle as a precedent for
guiding the evolution of good faith: much as the neighbour
principle eventually produced the Anns test75 (or its Canadian
variation, modified by Cooper v. Hobart)76 as a guide for moving
tort law forward, so too may it be possible that this conceptualization can produce a similarly useful guide to developing the law on
good faith, across contract and tort.77 Instead of Canadian courts
being left to grapple with the indeterminacy that each new
judgment on good faith brings to addressing novel good faith
arguments, a test that considers both principle and policy will
provide some measure of guidance on how the law can and should
be developed in future.
The Canadian law on good faith is still unsettled, uncertain, and
without a clear way forward. But recognizing the overarching
principle of good faith of contracting as extending to negotiations
provides greater conceptual coherence and certainty, which may in
turn provide clarity and guidance on how to navigate new issues of
good faith as they arise. Much as the neighbour principle in
75. Anns v. Merton London Borough Council (1977), [1978] A.C. 728, [1977] 2 All E.R.
492, [1977] 2 W.L.R. 1024, [1977] UKHL 4 (U.K. H.L.). The Anns test has since
been rejected in the United Kingdom: see, generally, Caparo Industries plc v.
Dickman, [1990] UKHL 2; and Murphy v. Brentwood District Council (1990),
[1991] 1 A.C. 398, [1990] 2 All E.R. 908 (U.K. H.L.).
76. [2001] 3 S.C.R. 537, 2001 SCC 79 (S.C.C.). Indeed, it is interesting to note that in
Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165 (S.C.C.) at
para. 24, the court’s discussion of tort duties of care recalls language very similar
to that used in Bhasin:
The label “proximity”, as it was used by Lord Wilberforce in Anns, supra, was
clearly intended to connote that the circumstances of the relationship inhering
between the plaintiff and the defendant are of such a nature that the defendant
may be said to be under an obligation to be mindful of the plaintiff’s legitimate
interests in conducting his or her affairs. [emphasis added]
77. To be sure, this is not to suggest that a duty of good faith test would have the
same substance and content as the Anns test for a duty of care. Rather, it is a
claim that, similar to how the Anns test and its successors have guided the
development of tort law, so too would a good faith test be able to guide the
development of good faith law.
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and directly affected by my act that I ought reasonably to have them in
contemplation as being so affected when I am directing my mind to the acts
or omissions which are called in question.
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McAlister (Donoghue) v. Stevenson set the stage for the creation of
the duty of care test, so too does re-conceptualizing the overarching principle of good faith hold the potential to assist the law
in developing in the same fashion and illuminating the way
forward. This is not to say that even with such a test, the law will
face no challenges in assessing where and when new duties should
arise. As noted, the Canadian common law has been very reluctant
to acknowledge the relational nature of commerce, lest it push
against the classical paradigm. That being said, there is no
shortage of scenarios in which new duties may be appealing: it may
occur that in the negotiations, party A may take information or
knowledge from party B that required significant time and
resources to produce, only for party A to then use that information
or knowledge to negotiate with party C; it may also occur that
parties enter into negotiations with no intention of trying to reach
a contract;78 parties may refuse to make reasonable efforts to reach
an agreement, in which case mandating reasonable efforts is the
solution.79 At least intuitively, these are the types of situations in
which good faith may seem attractive but unavailable.
This article has attempted to provide a framework for understanding the doctrine and theory as it once was, as it currently is, as
it should be, and as it could be. In this regard, there is little doubt
that recognition of the theories above will raise a number of issues
in its wake; although these scenarios may be ripe for good faith
78. One particular example is illustrative: in Westcom TV Group Ltd. v. Canwest
Global Broadcasting Inc. (1996), [1997] 1 W.W.R. 761 (B.C. S.C. [In Chambers]),
the parties were television networks negotiating the sale of programming. The
parties had nearly concluded negotiations on a 10-year agreement, but it was
never finalized. At trial, Westcom alleged that CanWest had only intended to
conduct these fruitless negotiations in order to demonstrate to a regulator that it
could not negotiate a successful arrangement for selling its programming to a
broadcaster in Westcom’s area. In other words, CanWest had allegedly deceived
Westcom as to its true intentions. Westcom’s argument did not succeed at trial,
largely because the judge made a factual determination that the circumstances of
the negotiations did not give rise to an expectation of good faith in negotiations:
para. 16. The judge additionally observed that Westcom did not suffer any
detriment in reliance on CanWest’s representations either: para. 12.
It is important here to distinguish misrepresentations as to a party’s intentions
from misrepresentations about the subject of the contract. Lowry J., in Westcom
at paras. 18-19, took care to express this distinction, so as to clearly delineate the
boundaries of acceptable negotiating behaviour. Lowry J.’s judgment evinces a
reluctance to use the term “misrepresentation” at all to describe concealment of a
party’s intentions (e.g., willingness to walk away from negotiations), lest it be
confused with the type of misrepresentation that is tortious.
79. John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2012), at p. 158.
This would effectively create a tortious counterpart to the same good faith duty in
contract law.
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duties to some, they may be equally unappealing to others. Though
such debates are likely unavoidable, they will ideally be argued in a
context where the terms of engagement are set and the legal
framework is clear for all to see. It has been this article’s aim to
provide those tools.
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