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Saba Ahmad is a Litigator working on environmental, administrative and commercial matters in Toronto. Learn more at www.sabaahmad.com

Divided Case Law – Are Duties to Negotiate in Good Faith Unenforceable? #CDNLaw #litigation #onca

ImageProvisions requiring parties to negotiate in good faith are pervasive.  But Justice Pattillo of the Ontario Superior Court of Justice recently ruled that requirements to negotiate in good faith – or to use best efforts to reach an agreement – are unenforceable.

In Georgian Windpower v. Stelco Inc., the parties entered a Memorandum of Understanding (“MOU”) and an Agreement to Establish a Land Lease Easement Agreement (“AELLEA”) to explore using Stelco’s land to set up a wind farm.

Stelco terminated both the MOU and the AELLEA and argued the documents did not create an enforceable obligation for it to negotiate future agreements with the plaintiff, despite language to the contrary.

Starting at around paragraph 170 of the judgment, Pattillo, J. adopted Stelco’s interpretation:

“Such an agreement is uncertain and incapable of giving rise to an enforceable obligation.  It is also contrary to the rationale behind negotiation that each party seeks to reach the most favourable agreement for themselves.”

Patillo, J. distinguished other cases in which parties were held to have breached good faith or best efforts obligations.  In those cases, the contracting parties had existing obligations to one another and obligations of good faith or best efforts applied to activities required to carry out the agreement – such as seeking approvals.

On this basis, Pattillo, J. distinguished Bruce v. Region of Waterloo Swim Club (1990), 73 O.R. (2d) 709, in which the contracting party was required to use best efforts to obtain employment authorization from a third party.

Similarly, in the seminal decision Eastwalsh Homes v. Anatal Developments Ltd, 1993 CanLII 3431 (ON CA) (which was not addressed by Pattillo, J.), the Court of Appeal found the defendant had an obligation to use best efforts to register a plan of subdivision.

In both cases, the best efforts obligations applied to dealings with third parties and did not create obligations to negotiate with the primary contracting party.

However, in Buttcon Energy Inc. v. Ontario Lottery & Gaming Corporation, 2009 CanLII 47330 (ON SC), at para. 14 and FN1, the Honourable Justice Belobaba accepted (without deciding) the enforceability of parties’ obligations to negotiate in good faith with one another.   Patillo, J. did not address this decision (which was not before him), nor others like it, in which courts have found specific promises to use best efforts to negotiate future agreements to be enforceable.

Pattillo, J. adopted the rationale of the House of Lords in Walford v. Miles, [1992] 2 A.C. 128 (HL) on the unenforceability of specific promises to negotiate in good faith or using best efforts.

There is an attractive coherence to distinguishing obligations to negotiate with the primary contracting party from obligations to deal with third parties.  Likewise, it is easier to infer duties of good faith and fair dealing after parties have entered broader contractual relations.

However it is concerning that seemingly ubiquitous provisions to negotiate in good faith might have no meaning going forward.  Parties rely on such provisions by revealing proprietary information, investing time and money into projects, and securing or extending credit.  In the absence of the enforceability of these provisions, lawyers will have to find other provisions to provide assurances to their clients who might otherwise be deterred from proceeding with proposals.

Many thanks to Richard Ogden for his helpful feedback on this post.

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One comment on “Divided Case Law – Are Duties to Negotiate in Good Faith Unenforceable? #CDNLaw #litigation #onca

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    September 18, 2013

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This entry was posted on March 27, 2013 by in Uncategorized and tagged , , , , .

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