Bargaining in Good Faith

• Author: John D. McCamus
• Pages: 139-162

139

CHAP TER 5

BARGAINING IN

GOOD FAITH

A. INTR ODUCTION

In a leading Canadi an decision1 on the subject of f‌iduciary obligation,

La Forest J. observed: “The institution of bargaining in good fait h is

one that is worthy of legal protection in those circumstances where

that protection accords with the expectations of the parties.”2 This

chapter examines t he extent to which the common law of contract pro-

vides legal protection to the inst itution of bargaining in good faith. One

possible means of affording such protection would be to recognize and

enforce an obl igation to bargain in good fa ith in certai n circum stances.

As we shall see, the common law t hus far has been reluctant to adopt

this means for encouraging good-faith negotiation. The possibility of

recognizing such a duty has, however, been considered in a variety of

doctrinal contexts. Before turning to consider existing Can adian com-

mon law on this topic, it may be useful to speculate as to the type s of

conduct that might be thought to constitute bargaining i n bad faith.3

1Lac Minerals Ltd. v. Intern ational Corona Resources Ltd. (1989), 61 D.L.R. (4th) 14

(S.C.C .).

2Ibid. at 14.

3 See generally M. Fur mston et al., Contract Formation and Lette rs of Intent (Ch i-

chester: Wiley & S ons, 1998) c. 10; E.A. Farnsworth, “Precont ractual Liabilit y

and Prelim inary Agreement s: Fair Dealing and Faile d Negotiations” (1987) 87

Colum. L. Rev. 217 [Farnsworth]; J. Cassels, “Goo d Faith in Contract Bargai ning:

General Pr inciples and Recent Developments” (1993) 15 Advocates’ Q. 56.

THE LAW OF CONTR ACTS140

One possible candidate might be the withholding of information th at

would disabuse the other negotiati ng party of a mist ake concerning an

important fact. Alt hough the common law, as we shall see, imposes no

general duty of d isclosure on negotiati ng part ies,4 it might be argued

that a duty to bargain in good fa ith would impose such an obligation, at

least in certai n circumstances. Other types of breache s of such a duty

might include bargaining with no intention of reaching agreement or

otherwise m isleading the other par ty with respect to one’s intentions,

reneging on a promise given in the course of negotiations, refusal to

make reasonable efforts to re ach agreement, breaking off negotiations

in order to accept a more attractive proposal from a third party, and so

on. Whether any of these or other tactics might be considered to con-

stitute bad faith might well depend, i n the particular circum stances, on

whether the parties h ad agreed to negotiate or, indeed, had agreed to

negotiate in good fa ith.

Although it is perhaps not obvious that any or all of thes e negoti-

ating moves ought to constitute breaches of duties owed to the other

party, there can be no doubt that conduct of this ki nd can visit injur-

ies on the other party. In the f‌irst place, t he victim of such negotiating

strategies may be deprived of the possibility of entering an attractive

and prof‌itable contractual arra ngement. Alternatively, a victim of bad

faith bargaining may sustain s ubstantial out-of-pocket expense s in the

course of fruitless negotiations. Consider, for example, the facts of the

American case of Hoffman v. Red Owl Stores,5 a case of reneging on a

promise. The parties were negotiating a supermarket franchi se. The

prospective franchisor told the prospect ive franchisee that an eighteen-

thousand-dollar cash contribution would be suff‌icient. Extended nego-

tiations followed. Thus encouraged, the franchisee sold his business,

moved to another town, and bought a small grocer y store. Negotiations

then collapsed when the franchi sor insisted on a substanti ally higher

contribution. At common law, the promise to accept the lesser contri-

bution would be unenforceable because it was not given for good con-

sideration.6 The franchisor’s bargaining strategy nonetheless i nf‌licted

serious losses upon the prospect ive franchisee.

The possible existence of a duty to negotiate or bargain in good

faith imposed either by agreement of the par ties or as a matter of com-

mon law has been considered in a var iety of contexts.

4 See Chapter 10.

5 133 N.W.2d 267 (Wis. 1965).

6 A different result is a vailable in American l aw on this point. The plaint iff suc-

ceeded in Hoffman v. Red Owl Stores on the basi s of promissory estoppel doc-

trine. For dis cussion of promissory e stoppel, see Chapter 8.