Good Faith in Contract Negotiations: Is There Such a Thing?

The Legal Framework

In modern commercial transactions, the negotiation process is often as significant as the final contract itself. Parties enter into talks expecting open communication, fair dealing, and a genuine effort to find common ground. Yet, the law has historically approached pre-contractual negotiations with a measure of caution. How far does the duty of good faith extend before you have a binding agreement? Recent legal developments, as well as longstanding doctrinal principles, provide guidance to businesses and individuals seeking to protect their interests and keep the negotiation fair.

Overview: The Concept of Good Faith in Contract Law

“Good faith” is now recognized as an organizing principle in Canadian contract law that influences how parties conduct themselves at every stage of a contractual relationship. While courts have long acknowledged that once a contract is formed, parties owe each other certain duties of honesty, fairness, and reasonableness in performance, the question of whether a “duty to negotiate in good faith” exists during pre-contractual discussions has remained more elusive.

Traditionally, freedom of contract and commercial certainty have weighed against imposing broad obligations at the negotiation phase. Parties have the right to look out for their own interests, walk away if the deal no longer appeals to them, and bargain aggressively to secure the best possible terms. However, that freedom isn’t absolute. Certain doctrines, such as misrepresentation, unilateral mistake, undue influence, estoppel and the duty of honesty recognized in Bhasin v. Hrynew, keep bargaining a process aimed at reaching a voluntary and equitable agreement, rather than an exercise in deception or bad faith tactics.

The Law on Good Faith in Negotiations

Canadian courts have articulated an “organizing principle of good faith” that now underpins much of contract law. This principle was famously acknowledged by the Supreme Court of Canada in Bhasin v. Hrynew (2014), which held that while the principle does not create a standalone legal duty to negotiate in good faith before a contract is formed, it can inform existing doctrines and relationships. This means that while no bright-line rule compels parties to be “nice” or “fair” during negotiations, the overarching principle of good faith can shape how courts interpret various pre-contractual behaviours.

For the most part, courts have resisted the idea of a general, enforceable duty of good faith in failed negotiations. The common law traditionally requires a concluded agreement before good faith duties fully crystallize. Nonetheless, certain contexts and doctrines may give rise to something similar to a duty of good faith at the negotiation stage:

1. Tendering Situations (Contract A/Contract B):

   In the unique world of competitive bidding, courts have recognized a duty of fairness and good faith in the tendering process. When a party issues a call for tenders, a preliminary contract (often called “Contract A”) is formed with each compliant bidder, obliging the issuer to treat all bids fairly. This scenario illustrates how an enforceable preliminary agreement can create a basis for good faith obligations even before the final contract (Contract B) is awarded. Here, fairness is essential to protect the integrity of the bidding process and prevent hidden preferences or favouritism.

2. Pre-Existing or Preliminary Agreements Requiring Further Negotiation:

   If parties have a binding preliminary agreement (e.g., a letter of intent or a renewal clause in an existing contract) that requires them to negotiate additional terms, courts may imply obligations of good faith. For instance, a commercial lease renewal clause might state that future rent must be agreed upon by both parties. In such cases, courts have sometimes held that the parties must at least keep an open mind and not present absurd, non-negotiable demands designed to block agreement. This doesn’t mean either side must capitulate, but it does mean they cannot undermine the spirit of ongoing contractual cooperation.

3. Estoppel and Related Doctrines:

   Estoppel can arise during negotiations if one party leads the other to reasonably believe certain terms are settled, causing the latter to rely on that belief to their detriment. Courts may prevent the first party from denying its earlier representations. While estoppel does not create an enforceable contract out of thin air, it can stop a party from unfairly walking back promises that induced significant reliance. This encourages honesty and consistency in negotiations, preventing parties from playing bait-and-switch tactics.

4. Statutory and Constitutional Contexts (e.g., Labour Law):

   Certain statutes impose explicit good faith negotiation requirements. The most prominent example is labour law, where employers and unions must bargain in good faith toward collective agreements. Here, good faith is a statutory obligation rather than a bare principle. Under the Canadian Charter of Rights and Freedoms, the Supreme Court has also recognized that freedom of association protects a “meaningful process of collective bargaining,” which includes an element of good faith consideration of employee proposals. While these situations arise in specialized contexts, they show that when the legislative or constitutional framework demands it, a duty of good faith negotiation is not only recognized but enforced.

Real-Life Examples: How Good Faith Can Affect You

1. The Tendering Process:
   

   Imagine your company submits a compliant bid in a tender. The issuer then accepts a non-compliant bid from a competitor without disclosing its hidden preference. Courts have found that such conduct can breach the implied duty of good faith in the tendering process. This means that if you carefully prepared a bid according to the stated rules and the issuer secretly favoured another bidder for undisclosed reasons, you may seek remedies. This encourages owners to maintain transparent and honest tendering practices.

2. Negotiating Lease Renewals:

   Suppose a commercial lease includes a clause requiring you and your landlord to agree on the renewal rent at the end of the current term. If the landlord takes an absurd stance, demanding a tripled rent far beyond market norms and refusing any discussion in the hope that you will give up, courts may find a violation of the duty to negotiate in good faith. While the court won’t dictate the rent, it can refuse to let the landlord’s unreasonable posture defeat the renewal process. As a tenant, you then get a fair shot at renewal discussions.

3. Estoppel in Pre-Contractual Dealings:

   Consider you’re close to finalizing a supply agreement. The supplier assures you that a certain discount is agreed upon, prompting you to invest in specialized equipment. If the supplier later denies ever agreeing to the discount, a court may use estoppel to prevent that denial, provided your reliance was reasonable and significant. This protects you from manipulative negotiation tactics and encourages all parties to communicate honestly about which terms are settled and which remain open.

4. Labour Relations and Collective Bargaining:

   In unionized workplaces, employers must follow statutory duties to bargain in good faith. If an employer engages in “surface bargaining,” pretending to negotiate while never intending to compromise, the Labour Relations Board or courts can impose serious remedies. This might include restoring clauses that the employer tried to remove unilaterally. For unions and employees, the duty means the employer cannot simply stonewall or undermine the bargaining process.

Distinguishing Between Statutory and Constitutional Good Faith Duties

In labour law, two layers of duty coexist: one is the statutory duty to bargain in good faith found in labour codes, and another is the constitutional duty of good faith bargaining derived from the freedom of association under s. 2(d) of the Charter. The statutory duty is typically procedural; it requires the parties to come to the table, discuss proposals openly and avoid deceptive or obstructive behaviour. It does not guarantee a particular outcome, nor does it let courts pry deeply into the substantive reasonableness of every bargaining position, unless it is so extreme as to amount to surface bargaining.

By contrast, the constitutional duty of good faith bargaining recognized under s. 2(d) of the Charter can, in some cases, invite more scrutiny of the substance of the positions taken by a government employer. Where the government possesses unilateral legislative power to impose terms and affect labour relations dramatically, courts may require that government not only follow a consultation process, but also make that process meaningful. If the government claims it cannot compromise for reasons proven invalid by past court decisions, or if it uses its legislative power to predetermine outcomes while only “pretending” to consult, courts can find a constitutional violation.

On this constitutional view, good faith negotiation is not a hollow ritual. It acknowledges that in certain contexts, such as where government employers wield extraordinary power, the process must be open in fact to input and compromise if employees’ fundamental freedoms are to be respected.

Practical Tips to Protect Your Interests in Negotiations

1. Document Everything:

   Keep detailed records of proposals, counterproposals, emails, and meeting notes. This documentation can be critical if you need to later show a court that you acted consistently and honestly, while the other party engaged in evasive or bad faith tactics.

2. Communicate Clearly and Honestly:

   Avoid making statements you cannot stand by. Don’t suggest that certain terms are “done deals” if they are still under discussion. Consistent, transparent communication helps maintain credibility and reduces the risk of estoppel or misrepresentation claims.

3. Be Aware of Contextual Factors:

   If you are involved in a tendering process or operating under a preliminary agreement that calls for further negotiation, be mindful of heightened scrutiny by courts. Similarly, if you are bargaining under a statutory or constitutional framework (e.g., labour relations), understand that the duty to negotiate in good faith may have both procedural and substantive elements.

4. Consider Using Mediators or Third-Party Experts:

   Bringing in a neutral mediator or advisor can help both parties understand each other’s positions and can reduce misunderstandings that could later be characterized as bad faith conduct. A mediator’s involvement often improves the overall transparency of negotiations.

5. Seek Legal Advice Early:

   A lawyer can help you identify the pitfalls, structure the negotiation documents to minimize risk and decide how to respond if the other side’s conduct becomes questionable. Legal counsel can also help you interpret the complex doctrines related to good faith and advise on whether statutory or constitutional obligations apply in your scenario.

Don’t Let Uncertainty Undermine Your Negotiations

Understanding the law of good faith in contract negotiations can help you avoid costly disputes and keep your bargaining process productive and principled. By recognizing that no absolute duty of good faith exists at common law for all negotiations, but that certain contexts and doctrines may import such obligations, you can enter discussions with open eyes.

Engage in negotiations prepared to justify your positions, respond fairly to the other party’s proposals, and avoid tactics that could be viewed as dishonest or obstructive. If you are in a complex negotiation and unsure whether the other party is acting in good faith, or worry about inadvertently breaching an implied duty, timely legal advice is worth having.

Grigoras Law and contract negotiations

Grigoras Law advises on contract negotiations and acts in the disputes that follow them, including claims founded on estoppel, on the tendering cases and on agreements that call for further negotiation. For a matter of your own, the intake form is the way to reach the firm.