Does this apply to precontract negotiations?
As result of a relatively recent decision of the Supreme Court of Canada, and several follow-up cases, it is clear that parties to a contract have a duty to carry out their responsibilities under the contract in good faith and to act in good faith when exercising any discretion they may have under the contract.
However, it is fairly clear that the duty to act in good faith does not apply to the conduct of the parties to a contract during negotiations. In a recent decision of the British Columbia Court of Appeal, the court said that bad faith on the part of any party to the contract during the course of negotiation could be addressed by an action for damages for negligent or fraudulent misrepresentation, “a contracting party being wrongfully misled by statements made leading to the formation of the contract”.
Interestingly enough, the foregoing decision referred to provisions frequently contained in a contract regarding a requirement for parties to negotiate any particular issue or other term of the contract including a renewal, “in good faith”. In these circumstances the duty to negotiate in good faith arises not from general common law principles but from a term of the contract requiring the parties to act in good faith.
This raises an interesting consideration whether to include either a representation or warranty or some form of acknowledgement to confirm that the parties have acted in good faith in the course of negotiation of the contract. It is highly unlikely that asking for such an acknowledgement would be acceptable to the other side, but then that raises the obvious question: “Are you telling me that you don’t want to be obligated to act in good faith?”
This concept is similar to the one I have addressed in my blog article titled “Avoiding the Gotcha as a Seller.” Essentially asking for a provision such as this amounts to asking the other party if they are being transparent and whether they have information which we don’t that could ultimately result in any provisions of the contract being detrimental to us.
When I first wrote about the “Gotcha” that I had experienced in several prior M&A deals, the prevailing approach was for the purchaser to refuse to provide a warranty that they had no knowledge of a possible breach of any representation or warranty by the seller. In the past year I have seen commentary indicating that an acknowledgement of that kind from the purchaser was being requested on a more frequent basis. Perhaps, because of recent case law in Canada, some counsel may raise a request for an acknowledgement that the parties have negotiated in “good faith”.
The bottom line is this: if one party is willing to negotiate entirely transparently and in good faith, there is no reason why they shouldn’t ask the other party to do the same. This will make for an interesting exchange between counsel with an opportunity for one of them to ask the other: “why is your client afraid to acknowledge that it is negotiating in good faith?”