Free to Negotiate: The Limited Nature of Pre-Contractual Good Faith Obligations

University of Regina v HTC Purenergy Inc., 2019 SKQB 126 explores the limited nature of good faith obligations during the negotiation of commercial contracts.

This claim involves allegations that a licensing agreement of the University’s carbon capture technology with the defendant HTC was entirely non-exclusive. HTC and the other defendant, Doosan subsequently entered into a sub-license of the same technology. Prior to execution of the sub-license, the University was asked to verify and confirm various matters by way of a letter to Doosan (the “Confirmation Letter”).

Subsequently a dispute arose amongst the parties as to the exclusive or non-exclusive nature of the licensing and whether such provisions were void for uncertainty. Doosan relied on the confirmation letter as part of its defence. The University on the other hand claimed that Doosan should not be able to do so because it had a duty of good faith when negotiating the Confirmation Letter to raise certain matters with the University and avoid “strategically uncertain” language in the confirmation letter.

Doosan sought to strike this portion of the University’s Claim. The Court held that there was no existence of a duty of good faith in pre-contractual negotiations between these entities and accordingly struck this portion of the pleadings.

Nature of a duty to negotiate in good faith

 A great deal of attention has been paid in recent years to the contours of the duty of good faith contractual performance. However the nature of the duty in a pre-contractual setting remains less defined. In general terms it requires one contracting party to be mindful of the interests of the other contracting party to the point where it may need to subordinate its own interest. Whereas a contracting party is typically able to negotiate for the purposes of securing the most advantageous deal possible, a party that is subject to a good faith duty may not be able to do so in light of the interests of the other party.

In Martel Building Ltd. v Canada, 2000 SCC 60, the Supreme Court confirmed that there will typically be no duty of good faith in pre-contractual negotiations. The Court identified policy reasons for not extending the tort of negligence into the conduct of negotiations, including that it would deter socially and economically useful conduct and that a commercial partying having to be mindful of another’s interests is inconsistent with “the primary goal of any economically rational actor engaged in commercial negotiation … to achieve the most advantageous financial bargain” (see para 62).

Although the negotiating process is generally protected, where a special relationship exists, the courts have found that there may be a duty to negotiate in good faith. In situations where one party relies on another with trust and confidence and the relationship resembles one of an advisory relationship, the Court may find a duty of good faith negotiations exists. See for example, 978011 Ontario Ltd. v Cornell Engineering Co., 53 O.R. (3d) at para 34 783 (Ont CA).

The University’s Claim

The University argued there was an imbalance in the relationship between Doosan and the University and an “environment of good faith” existed which amounted to a special relationship that would require a pre-contractual duty of good faith. The University further argued that Doosan breached this duty by using “strategically uncertain language” in the Confirmation Letter.

The Court disagreed the pleadings could possibly bear out any special relationship. No past dealings or any kind of previous relationship was pleaded between the parties. No advisory relationship or relationship of trust was pleaded. No exclusive access to special information was pleaded. The University instead pleaded it was a world leader in the area of carbon capture technology.  The Court also struck this portion of the claim on the basis that the concept of “strategically uncertain language” was unknown to law.

This case confirms that commercial actors are not required to concern themselves with the best interests of other parties in a pre-contractual setting where no special relationship exists between the parties.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.