Understanding the Legal Landscape
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 valuable guidance to businesses and individuals seeking to protect their interests and ensure a fair negotiating environment.
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—help ensure that bargaining remains 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:
- 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.
- 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.
- 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.
- 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 not just a principle, but a statutory obligation. Moreover, under the Canadian Charter of Rights and Freedoms, the Supreme Court has 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
- 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.
- 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 refuses any discussion, hoping you’ll just 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, this ensures you get a fair shot at renewal discussions.
- 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.
- 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 ensures 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, focusing on ensuring parties come to the table, openly discuss proposals, 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’s 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 ensure that process is 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.
This constitutional perspective ensures that good faith negotiation is not a hollow ritual. It acknowledges that in certain contexts—like when government employers wield extraordinary power—the process must be more genuinely open to input and compromise to respect employees’ fundamental freedoms.
Practical Tips to Protect Your Interests in Negotiations
- 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.
- 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.
- 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.
- Consider Using Mediators or Third-Party Experts:
Bringing in a neutral mediator or advisor can help ensure 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.
- Seek Legal Advice Early:
Consult an experienced lawyer who can help you identify potential pitfalls, structure negotiation documents to minimize risks, and respond strategically 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 legal landscape around good faith in contract negotiations can help you avoid costly disputes and ensure that your bargaining process is both 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 find yourself facing complex negotiations and unsure whether the other party is acting in good faith, or if you worry about inadvertently breaching any implied duties, getting timely legal guidance is crucial.
Call to Action: Contact Grigoras Law Today
Don’t let confusion about the duty to negotiate in good faith put you at a disadvantage. At Grigoras Law, we have extensive experience advising clients on all aspects of contract negotiations, from basic commercial transactions to complex tendering processes and collective bargaining scenarios. We’ll help ensure your rights are respected and guide you through strategies that enhance your credibility and protect your interests.
Our team understands the interplay between freedom of contract, the organizing principle of good faith, and specific statutory or constitutional duties. Whether you’re concerned about estoppel, tendering obligations, pre-existing agreements that require further negotiation, or unique statutory frameworks like labour relations, we can provide clear, practical advice tailored to your situation.
Take the First Step Toward a Fair and Secure Agreement: Contact Grigoras Law today to discuss your circumstances and learn how our expertise can help you navigate negotiations confidently and successfully. Let us assist you in pursuing a fair, enforceable agreement that protects your business and professional interests, ensuring that the final deal reflects honest, respectful, and meaningful dialogue at every stage.
