The New Neighbour Principle: Reasonable Expectations, Relationality, and Good Faith in Pre-Contractual Negotiations

THE NEW NEIGHBOUR PRINCIPLE: REASONABLE EXPECTATIONS, RELATIONALITY, AND GOOD FAITH IN PRE-CONTRACTUAL NEGOTIATIONS

Nicholas Reynolds*

Good faith law poses many fundamental questions: what is good 2017 CanLIIDocs 395 faith? If it is based on the parties’ expectations, then whose expectations count? Must those expectations be reasonable, and if so, what constitutes “reasonable”? Notwithstanding the measure of clarity that Bhasin v. Hrynew arguably brought, a specific conceptualization of good faith remains elusive — and the way forward remains unclear. This article proposes a way forward by arguing for an extension of the organizing principle of good faith to negotiations, making it more aptly characterized as an organizing principle of contracting. Canadian law recognizes reasonable expectations as an underlying thread of good faith, notwithstanding the vagueness of “reasonable expectations”. Thus, to the extent reasonable expectations in tort give rise to reasonable reliance in the form of a contract — which itself produces the reasonable expectations that underpin good faith — the organizing principle should therefore be recognized as applying to tort. The question then turns to what constitutes reasonable expectations in tort, given that private law still largely operates under a paradigm where negotiation is a zero-sum, adversarial game. Given the long-term, relational nature of much (though not all) commerce in the 21st century, it is apparent that the common law has not caught up to the empirical expectations of modern commercial parties. Recognition of such expectations is therefore attractive, even in the face of several common policy concerns. Lastly, this article re-conceptualizes the organizing principle as an analogue to the neighbour principle in tort law, from which courts may formulate a similarly principled, formally rigorous test to delineate new good faith duties.

* LL.M. student, University of Toronto. Many thanks to Professor Margaret Jane Radin for her encouragement and guidance through several drafts of middling quality, and to the participants of her Academic Scholarship Seminar at the University of Toronto Faculty of Law for their thorough feedback on those same drafts.

94 2017] The New Neighbour Principle 95

I. INTRODUCTION Good faith is a concept deeply rooted in the common law and contracts in particular, serving as a fundamental regulator of private parties’ behaviour between and amongst each other. It was fitting, then, that the Supreme Court of Canada recently affirmed this fact in Bhasin v. Hrynew1 by recognizing good faith contractual performance as an organizing principle that underpins the more specific pre-existing legal doctrines of good faith in contracts, as well as the duty of honesty in contractual performance that

flows from it. But it is perhaps equally curious that in the wake of 2017 CanLIIDocs 395 such a fundamental decision, the law on good faith remains unsettled and uncertain, providing no principled approach on how to develop good faith in the future. In the wake of the Bhasin decision, courts have been faced with many arguments for new good faith duties, yet have taken Cromwell J.’s “incremental approach” to simply mean a staunchly conservative attitude in the face of novel arguments.2 This is due in large part to the fact that, although Bhasin brought some measure of clarity and coherence, it nonetheless left unanswered some of the fundamental questions that have historically plagued good faith: what is good faith? If it is based on the expectations of the parties, then whose expectations count? Must those expectations be reasonable, and if so, what constitutes “reasonable”? It is largely due to these uncertainties that conceptualizing good faith remains elusive, and consequently the way forward for good faith law remains unclear. This article therefore proposes a more coherent approach to good faith by advocating that good faith should be recognized within tort in respect of certain tort doctrines, to the extent that they are applicable to contractual negotiations. In short, the organizing principle of good faith extends to negotiations, and is therefore more aptly characterized as an organizing principle of contracting that encompasses both contract and part of tort.

1. 2014 SCC 71 (S.C.C.). 2. See, e.g., Bank of Montreal v. Javed, 2016 ONCA 49 (Ont. C.A.), leave to appeal refused Shah v. Bank of Montreal, 2016 CarswellOnt 9666, 2016 CarswellOnt 9667 (S.C.C.), where the court refused to extend the doctrine of unconscionability to the performance of contracts; and see e.g., Moulton Contracting Ltd. v. British Columbia, 2015 BCCA 89 (B.C. C.A.), at para. 68, leave to appeal refused 2015 CarswellBC 3021, 2015 CarswellBC 3022 (S.C.C.), where the court refused to modify the test for implied terms. While there is plenty to be said with respect to the arguments in these cases on their merits alone, the salient point is that, to date, the application of Bhasin has been highly deferential and conservative with respect to the “incremental approach”. 96 Canadian Business LawJournal [Vol. 60

Canadian common law does not recognize pre-contractual negotiations as falling within the ambit of good faith. Though Bhasin signaled a fundamental shift in how the Canadian common law of contracts understands good faith with respect to contractual performance, it did not address this very important facet of contracting — the nature of which places negotiation in a para- doxical space as non-contractual while simultaneously integral to contracts. The issue remains, per Martel Building Ltd. v. Canada,a question for another time.3 Notwithstanding the Supreme Court of Canada’s reluctance to address the issue directly, though, it

appears that the landscape of Canadian common law might now 2017 CanLIIDocs 395 be more open to this move on the same grounds that Cromwell J. justified the court’s decision in Bhasin: namely, the desire for doctrinal coherence and certainty, as well as consistency with reasonable expectations.4 Ultimately, the goal of this article is to re-conceptualize the organizing principle of good faith broadly as an analogue to the neighbour principle in tort law, from which courts may formulate a similarly principled test to delineate new good faith duties and thereby illuminate the way forward. An extension of the organizing principle of good faith beyond contractual performance and into contracting (i.e.,including negotiations) could (and should) be accomplished under the Canadian jurisprudential framework by arguing for the place of reasonable expectations in tort. Although analysis of the jurisprudence and academic literature reveals that the concept of reasonable expectations escapes a specific narrow definition and instead incorporates several possible definitions, it becomes clear that the concept of reasonable expectations is an underlying thread that has tied together good faith throughout its history in Canadian law. Reasonable expectations of the parties are consulted by courts 3. Martel Building Ltd. v. R., [2000] 2 S.C.R. 860, 2000 SCC 60 (S.C.C.), at para. 73. In Martel, Martel Building Ltd. owned a building and leased space to the Department of Public Works. Near the end of the lease’s term, the parties entered into negotiations to renew the lease. The Department of Public Works led Martel to believe that it would be amenable to renewing the lease on a certain set of terms, but upon Martel making an offer on those terms, the Department of Public Works rejected the offer and called for tenders. It ultimately accepted the tender of an unrelated third party. Martel argued that there was a duty of care in negotiations. The Supreme Court of Canada found that there was a prima facie duty of care, but that it should be denied based on policy considerations that such a duty would be antithetical to the nature and purpose of negotiations. In its reasons, the Supreme Court of Canada expressly noted that such a duty of care resembles a duty to bargain in good faith, but since a breach of that specific duty was not alleged, it was therefore “a question for another time”. 4. Bhasin, supra, footnote 1, at para. 41. 2017] The New Neighbour Principle 97 after a contract is formed, when conflict arises during performance — this is where doctrines of good faith manifest. Reasonable expectations of the parties are also consulted by courts in adjudi- cating disputes arising during negotiations, before a contract is formed — yet the label of good faith has never attached. For disputes arising from negotiations, courts explicitly apply tort doctrines such as civil fraud/deceit. Implicitly, through the use of reasonable expectations, these tort doctrines addressing harmful behaviour in pre-contractual negotiations are also addressing bad faith in the same way as the good faith doctrines relating to

contractual performance. 2017 CanLIIDocs 395 In recognizing this, the analysis then turns to identifying the reasonable expectations that exist in tort as a means for recognizing good faith. To the extent that reasonable expectations in tort give rise to reasonable reliance in the form of a contract, which itself produces these same reasonable expectations that underpin contractual good faith, the principle of good faith should therefore be recognized as covering reasonable expectations in tort. In other words, if reasonable expectations exist along a continuum from the pre-contractual to the contract itself, then recognizing good faith in tort (i.e., in respect of pre-contractual negotiations) would ensure greater conceptual coherence and clarity along this continuum. The question then turns to what constitutes reasonable expectations in tort, given that in a general sense, private law still largely operates in the classical paradigm of freedom of contract, where negotiation is understood as a zero-sum game and questions of morally dubious conduct are often resolved by recourse to the apparent economic utility that they generate. In effect, the adversarial model, even in negotiation, reigns supreme. This view of contracting and commerce, however, is no longer appropriate for the modern age. If it is true that commercial parties expect a basic level of honesty and good faith in contractual dealings, then it is also reasonable to say they may expect some measure of good faith in pre-contractual dealings. In short, the common law must recognize the reasonable expectations of commercial parties in the 21st century. This article concludes by remarking on the potential future of good faith in light of this proposed change, identifying the similarities between this proposed principle of good faith in contracting and the neighbour principle. On this ground, it is argued that the principle of good faith could generate a test for 98 Canadian Business LawJournal [Vol. 60 new good faith duties much the same way that the neighbour principle generated the Anns test for duties of care.5 While the shape of new good faith duties to come are unpredictable, such a test could be beneficial as a means of guiding the development of good faith law, much as the duty of care test provided some formal rigour to the process of dealing with new potential duties as they arise.

II. REASONABLE EXPECTATIONS: THE ORGANIZING PRINCIPLE OF GOOD FAITH SHOULD EXTEND TO

PRE-CONTRACTUAL NEGOTIATIONS 2017 CanLIIDocs 395 1. The Legal Role(s) of Reasonable Expectations The Supreme Court of Canada decision in Bhasin recognized an overarching organizing principle of good faith in contractual performance,6 which may manifest itself through existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance.7 Cromwell J. summarized the court’s rationale for these developments as follows: First, the current Canadian law is uncertain. Second, the current approach to good faith performance lacks coherence. Third, the current law is out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law Canada — Quebec and the United States . . . While these developments which I propose will not completely address these problems, they will bring a measure of coherence and predictability to the law and bring the law closer to what reasonable commercial parties would expect it to be.8 [emphasis added] Apart from attempting to bring coherence to the disparate existing doctrines of good faith that were previously “incoherent” and “piecemeal”,9 Cromwell J. continued the jurisprudential trend 5. The Anns test, of course, was developed in U.K. law —— a two-stage test established for determining whether there exists a novel duty of care in negligence: Anns v. Merton London Borough Council (1977), [1978] A.C. 728, [1977] 2 All E.R. 492, [1977] UKHL 4 (U.K. H.L.). Though it has since been rejected in the United Kingdom, it has been adopted and modified in Canadian law: see, generally, Nielsen v. Kamloops (City), [1984] 2 S.C.R. 2 (S.C.C.); and Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79 (S.C.C.). 6. Bhasin, supra, footnote 1, at para. 62. 7. Bhasin, supra, footnote 1, at para. 66. 8. Bhasin, supra, footnote 1, at para. 41. 9. Bhasin, supra, footnote 1, at para. 32, citing Ontario, Law Reform Commission, Report on Amendment of the Law of Contract (Ontario: Ministry of the Attorney General, 1987), at p. 169. 2017] The New Neighbour Principle 99 of focussing on the “reasonable expectations” of the parties as a means of establishing good faith.10 By recognizing the overarching, organizing principle that underpins the doctrines of good faith,11 Bhasin acknowledged a common thread running through those doctrines that govern contractual performance. Integral to that thread are reasonable expectations. Going further, however, it must be noted that the existing contractual, tort, and equitable doctrines that address pre- contractual behaviour demonstrate a consistent attention to monitoring the parties’ behaviour, so as to ensure that they

interact and negotiate with each other without engaging in conduct 2017 CanLIIDocs 395 that defies reasonable expectations.12 Each, to varying extents, is directly concerned with evaluating the quality of the parties’ behaviour in the negotiation phase, to the extent that they apply to pre-contractual negotiations; this is not to say that these doctrines are themselves focused on negotiation per se. It is in this specific capacity that we may deduce the underlying thread of good faith that runs through them by way of “reasonable expectations”. The problem, though, is that “reasonable expectations” has always been, and continues to be, notoriously difficult to conceptualize both in the jurisprudence and in academic literature.13 As will be

10. As others have noted, the court’s attempt in Bhasin at giving coherence to the area of good faith in contract law may have been somewhat superficial, grouping together a hodge-podge of terms without adequately linking them in a substantive sense: see, for example, John D McCamus, “The New General ‘Principle’ of Good Faith Performance and the New ‘Rule’ of Honesty in Performance in Canadian Contract Law” (2015), 32:2 J. Contract L. 103. 11. Citing the legal philosophy of Ronald Dworkin, Cromwell J. inductively reasoned from those existing doctrines to prove the existence of the organizing principle. Bhasin, supra, footnote 1, at para. 64, citing Ronald M. Dworkin, “Is Law a System of Rules?” in Ronald M. Dworkin, ed., The Philosophy of Law (New York, Oxford University Press, 1977), p. 38 at p. 47. 12. Consider, for example, the doctrines of undue influence and duress (economic and otherwise), which provide redress against bargains obtained as a result of defective consent flowing from improper negotiations, as well as fraud and the tort of deceit, which cover tortious conduct committed during negotiations. So too has the Supreme Court noted that good faith generally underlies doctrines that explicitly deal with fairness in contracts, such as unconscionability: Bhasin, supra, footnote 1, at paras. 42-43. Interestingly, the relationship of procedural unconscionability (disadvantage suffered by a weaker party in negotiations) to substantive unconscionability (unfairness of the contractual terms) exemplifies a focus on contracting as a whole rather than simply the contract itself, and thus anticipates this article’s argument for a principle of good faith that covers negotiations in addition to contracts. 13. There exists ample literature debating the meaning and utility of “reasonable expectations” as a concept. Some have argued that the term is highly ambiguous, admitting different bases such as rational, normative, and moral expectations: 100 Canadian Business LawJournal [Vol. 60 shown below, defining reasonable expectations has always suffered from the tension between factual conceptions of reasonableness that are highly particular to a given interaction, and normative understandings of reasonableness that are plagued by vagueness. There appears to be no middle ground or solution that adequately resolves the tension between these two ends of the spectrum of reasonableness. Notwithstanding such uncertainty, the analysis below demon- strates that reasonable expectations play a legal role in both contract and tort, bridged by reasonable reliance, and it is on this

basis that good faith exists not only in contract but in tort as well. 2017 CanLIIDocs 395 To extend the organizing principle of good faith to the negotiation phase would therefore only constitute recognition that reasonable expectations, far from being the exclusive domain of contract, act as an underpinning concept of good faith in both contract and tort. Extending the principle of good faith simply amounts to recognition of what is already there. Much like contractual good faith was cured of its “incoherent” and “piecemeal” pre-Bhasin nature14 by recognizing the underlying thread running through good faith doctrines, so too should the existing doctrines that protect against improper negotiation be recognized for the same underlying thread and thereby be cured of the same disparate, piecemeal nature. Since the court offered a similar rationale in Bhasin, an argument on such grounds might very well find favour.15

Stephen A Smith, “‘The Reasonable Expectations of the Parties’: An Unhelpful Concept” (2009), 48 C.B.L.J. 366. Others have suggested, however, that the Canadian jurisprudence incorporates these different types of reasonable expectations into a single, unstable concept: Catherine Valcke, “Contractual Interpreta- tion at Common Law and Civil Law – An Exercise in Comparative Legal Rhetoric” in J. Neyers, ed., Exploring Contract Law (Oxford, Hart Publishing, 2008), p. 77 at p. 79. 14. Bhasin, supra, footnote 1, at para. 32, citing Ontario, Law Reform Commission, Report on Amendment of the Law of Contract (Ontario, Ministry of the Attorney General, 1987), at p. 169. 15. It is worth noting here that, as a member state of UNIDROIT, Canada is already politically committed to the harmonization of international private law (including contracts), which includes good faith in negotiation as a principle of contract law. See, generally, art 1.7 UNIDROIT, Principles of International Commercial Contracts (Rome, International Institute for the Unification of Private Law, 2010), online:

2. Good Faith and Liability on the Basis of Reasonable Expectations A central obstacle to tracing a thread of good faith throughout contract and into tort is the lack of agreement on the definition of good faith in contractual performance generally. However, the survey below of the academic literature and Canadian jurisprudence suggests that of the available definitions, reasonable expectations underpins each of them and is therefore a central element of good faith in Canadian common law.16 With respect to

the gap between contract and tort that good faith would have to 2017 CanLIIDocs 395 bridge for such an organizing principle to be recognized, such a concern may be over-stated. Notwithstanding that contract and tort fundamentally differ in the fact that their obligations are created by request and imposition respectively, the similarity they share in creating both positive and negative obligations suggests that this convergence has undermined a hard and fast distinction between the two areas.17 The analysis below concludes that reasonable expectations exist as a component of certain tortious doctrines and are manifested in the form of reasonable reliance; accordingly, those tort doctrines that address pre-contractual behaviour are apt to fit under the scope of an organizing principle of good faith. Reasonable expectations thereby act as an underlying thread linking good faith doctrines of contract with those tort doctrines that might fall under the ambit of the organizing principle of good faith.

16. Much of the academic literature bears this out. Even though most of such writing comes from American academia, it is worth noting that Cromwell J. relied on this literature in part in Bhasin, and perhaps more importantly, this American literature was the context in which Canadian law first began to move towards admitting good faith into contract law. The first moves towards accepting a broad role for good faith in contracts occurred via the Ontario Law Reform Commission, in two separate reports, both of which drew heavily on the American academic literature, which is discussed below. Those two reports were the Ontario Law Reform Commission, Report on Sale of Goods, vol. 1 (Toronto, Ministry of the Attorney General, 1979), ch. 7 and Ontario Law Reform Commission, Report on Amendment of the Law of Contract (Toronto, Ministry of the Attorney General, 1987), ch. 9. 17. The history of warranty provides an interesting case study for the permeability of categorical boundaries between contract and tort: See, for example, Russell Brown, Pure Economic Loss in Canadian Negligence Law (Markham, Ontario, LexisNexis, 2011), at pp. 217-218. Though we now understand warranty as a contractual doctrine, it was originally a “pure action [in tort]” for deceit. Warranty migrated in the mid-19th century into contract as a matter of procedural advantages in pleadings. 102 Canadian Business LawJournal [Vol. 60

(a) The Varied Conceptions of Reasonable Expectations The academic literature is consistent in its reliance on reasonable expectations as the basis for formulations of good faith, although it is unhelpful in defining what reasonable expectations actually are. Robert Summers, whose definition of good faith served as the basis for the Restatement (Second) of Contracts, adopted an objective standard of reasonable expectations in stating that good faith is “prescribed as a standard for the observance of all men in their dealings with one another”.18 This remarkably broad conception is expressed even more vaguely in the Restatement’s comments: 2017 CanLIIDocs 395 Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness. [Emphasis added]19 The Restatement, however, does not explain what is meant by “community”, “decency”, “fairness”, or “reasonableness”. If any- thing, Summers’ position might be taken to mean that “reasonable expectations” are defined according to the “community” in the broadest sense of the term, encompassing all of society. Allan Fars- worth expressed a very similar conception of good faith that relies on an “objective standard, based on decency, fairness, or reasonableness of the community”,20 but he too failed to provide a substantial definition for any of those terms. A third analysis put forward by Steven Burton attempted to frame good faith in economic terms, bad faith being “an attempt to recapture an opportunity that is foregone as a consequence of entering into the contract.”21 While Burton’s approach came closer to factual reasonableness (i.e., that specific to the parties in that specific interaction) than it did to normative reasonableness, it nonetheless suffered from the same vagueness as Summers and Farnsworth in its failure to pin down exactly how to determine

18. Robert S. Summers, “‘Good Faith’ in General Contract Law and the Sales Provisions of the Uniform Commercial Code” (1968), 54 Va. L. Rev. 195, at p. 203, citing First National Bank v. F.C. Trebein Co., 59 Ohio St. 316, 52 N.E. 834 (Ohio., 1898), at pp. 324-325 (Ohio St.). 19. Restatement (Second) of Contracts §205 (1981). 20. Allan Farnsworth, “Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code” (1963), 30 U. Chi. L. Rev. 666, at p. 672. 21. Steven J. Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faith” (1980), 94 Harv. L. Rev. 369, at p. 373. 2017] The New Neighbour Principle 103 reasonableness. Indeed, as Feinman observes, reasonable expectations are exactly that which link the Summers-Restatement definition and the Burton definition, notwithstanding their differing approaches to formulating a definition.22 In short, although there is a clear thread of reasonable expectations that runs through all three definitions, discussion of reasonable expectations is plagued with difficulties in identifying a precise definition for the term. Not only is there no consensus as to the relationship between normative and factual reasonableness, there is also no agreement as to the scope of its normative aspects. There

is thus no precise guidance to be found in the academic literature, 2017 CanLIIDocs 395 apart from the fact that reasonable expectations are central to shaping and evolving good faith. The Canadian jurisprudence on good faith, although equally consistent in its reliance on reasonable expectations as a central feature of good faith, is unfortunately just as vague and inconsistent in conceptualizing reasonable expectations. As Hall observes, there have been at least six circumstances in which good faith performance has arisen as a contractual duty.23 In four of those circumstances,24 reasonableness and reasonable expectations have been central to shaping these duties of good faith, yet have remained poorly defined (if at all) both on their own and in relation to good faith. One of the leading cases on the duty to

22. Jay M. Feinman, “Good Faith and Reasonable Expectations” (2014), 67 Ark. L. Rev. 525, at p. 529. 23. Geoff Hall, Canadian Contractual Interpretation Law,3rded.(Toronto, LexisNexis, 2016), at pp. 39-45. Those six circumstances are as follows: 1. Duty to exercise a discretionary power in good faith 2. Duty to act in good faith in complying with a condition precedent 3. Duty to act in good faith when invoking a rescission clause in an agreement of purchase and sale for real property 4. Duty of good faith in respect of a right of first refusal 5. Duty of good faith in the performance of franchise agreements 6. Duty of good faith in employment contracts at least in respect of termination by the employer. Interestingly, Hall also observes that there may possibly be a duty of good faith with respect to negotiation within the confines of an existing contract, but the case law is inconsistent on this point: see, for example, Empress Towers Ltd. v. Bank of Nova Scotia (1990), 50 B.C.L.R. (2d) 126, [1990] B.C.J. No. 2054 (B.C. C.A.), leave to appeal refused (1991), [1991] 1 S.C.R. vii (note), [1990] S.C.C.A. No. 472 (S.C.C.). 24. The other two, which are (1) performance of franchise agreements and (2) the termination of employment contracts by the employer, are duties imposed by law as a paternalistic measure to militate against power imbalances. See, for example, Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (Ont. C.A.), additional reasons 2006 CarswellOnt 2627 (Ont. C.A.); and Keays v. Honda Canada Inc., [2008] 2 S.C.R. 362, [2008] S.C.J. No. 40 (S.C.C.). 104 Canadian Business LawJournal [Vol. 60 exercise discretionary power in good faith, Greenberg v. Meffert, is illustrative of this confusion: In any given transaction, the category into which such a provision falls will depend upon the intention of the parties as disclosed by their contract. In the absence of explicit language or a clear indication from the tenor of the contract or the nature of the subject-matter, the tendency of the cases is to require discretion . . . to be reasonable.25 While the contract, if sufficiently clear and explicit, can import a highly subjective form to contractual discretion, the default rule is one of reasonableness. Quite confusingly, the Court of Appeal went on to state that “[a]part altogether from the question of 2017 CanLIIDocs 395 reasonableness, a discretion must be exercised honestly and in good faith”, but indicated that good faith was so fundamental that it “require[s] no elaboration”.26 Thus, although the court distinguished good faith from reasonableness, it was in fact reasonableness that drove the court’s analysis27 in the absence of any actual definition of “good faith”. The court, however, only went so far as to say that reasonableness entailed an objective standard; whose objective standard that was, is unclear. Similarly, other seminal cases such as Gateway Realty Ltd. v. Arton Holdings Ltd.28 and LeMesurier v. Andrus29 relied on “community standards of honesty, reasonableness, and fairness”30 to ground a duty of good faith performance,31 but much like the Restatement, failed to explain what exactly those terms meant and how they relate to good faith, which was always poorly defined.

25. Greenberg v. Meffert (1985), 18 D.L.R. (4th) 548, [1985] O.J. No. 2539 (Ont. C.A.), at p. 554 (D.L.R.), leave to appeal refused (1985), 30 D.L.R. (4th) 768 (note), [1985] 2 S.C.R. ix (note) (S.C.C.). 26. Greenberg v. Meffert, supra, footnote 25, at p. 556. 27. See, generally, John McCamus, “Abuse of Discretion, Failure to Cooperate and Evasion of Duty: Unpacking the Common Law Duty of Good Faith Contractual Performance” (2004), 29 A.Q. 72, at p. 83 for a similar argument that reasonableness in this context implies a duty to exercise discretion honestly and in light of the purposes for which it was conferred. 28. (1991), 106 N.S.R. (2d) 180 (N.S. T.D.), affirmed (1992), 112 N.S.R. (2d) 180 (N.S. C.A.). 29. (1986), 25 D.L.R. (4th) 424, 54 O.R. (2d) 1, 12 O.A.C. 299 (Ont. C.A.), leave to appeal refused (1986), 63 O.R. (2d) x (note) (S.C.C.). 30. Gateway, supra, footnote 28, at pp. 191-92. 31. As McCamus importantly observes with respect to Gateway Realty, however, the result of the case rested on Arton’s express undertaking to use “best efforts”, meaning this finding of good faith was obiter and therefore not authority: McCamus, supra, footnote 27, at p. 79. Indeed, it is equally true that the body of Canadian case law on good faith pre-Bhasin did not require reference to good faith in order to resolve the issues: Ibid., at p. 90. 2017] The New Neighbour Principle 105

This same pattern was present across all the other manifestations of good faith in Canadian common law.32 Despite the lack of an explicit connection between reasonableness and good faith, reasonableness has always stood as an analytical placeholder for the development of good faith in Canadian common law. The problem (identical to the academic literature) remains that reasonable expectations and reasonableness are never precisely defined. In many instances, they are not defined at all — but they nonetheless have been central in shaping the Canadian common law of good faith. 2017 CanLIIDocs 395 (b) Whose Expectations Count? All the above, however, still leaves unanswered some of the most fundamental questions of this analysis: whose reasonable expectations count, and what makes an expectation reasonable? Indeed, there exists ample literature debating the meaning and utility of “reasonable expectations” on both of these points. However, the answer to this first question seems to lie in answering what “reasonable” means, exactly. Given the breadth and depth with which the term has been inserted into all facets of the law, it is impossible that this analysis could provide any definite resolution — after all, the “reasonable person” is arguably one of the most central figures of common law, yet that person has thus far escaped a clear definition. Nonetheless, it is worth examining the definition of reasonable expectations in order to establish where that confusion rests. Some have argued that the term is highly ambiguous, admitting different bases such as rational, normative, and moral expecta- tion33 — evidently, this hodgepodge of different considerations has done perhaps more to confuse than it has to clarify. That being said, the wide range of these types of considerations is helpful in mapping out a spectrum of reasonableness from which definitions 32. For greater detail regarding each manifestation of good faith, see the following: Dynamic Transport Ltd. v. O.K. Detailing Ltd. (1978), 85 D.L.R. (3d) 19, [1978] 2 S.C.R. 1072, 6 Alta. L.R. (2d) 156 (S.C.C.), at p. 28 (D.L.R.) (condition precedent); LeMesurier, supra, footnote 29, at p. 430, quoting from Freedman v. Mason (1958), 14 D.L.R. (2d) 529, [1958] S.C.R. 483 (S.C.C.), at p. 486 (S.C.R.) (rescission clause in purchase and sale of real property); GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Gen. Div. [Commercial List]), at p. 276, citing Landymore v. Hardy (1991), 21 R.P.R. (2d) 174, 110 N.S.R. (2d) 2 (N.S. T.D.) at pp. 16-17 (N.S.R.), additional reasons 1992 CarswellNS 90 (N.S. T.D.) (right of first refusal). 33. Stephen A Smith, “The Reasonable Expectations of the Parties: An Unhelpful Concept” (2009), 48 C.B.L.J. 366. 106 Canadian Business LawJournal [Vol. 60 of reasonable expectations are drawn. At one end is a pure, factual/empirical reasonableness that is largely descriptive: in a particular interaction, what would the parties expect given the circumstances, objectively ascertained? Here, the focus admits very little, if any, broader social considerations, preferring instead to ask what is an accurate reading of the factual situation.34 Moving to the other end of the spectrum, reasonableness begins to accommodate various normative considerations about what should be expected in a particular interaction, given the social and community standards that inform the broader context in which the

interaction is taking place. Here, the factual element of reason- 2017 CanLIIDocs 395 ableness begins to give way. But even knowing that reasonableness exists on this spectrum does little to explain how it is put into practice in actual jurisprudence, given that reasonableness is never truly explained (as indicated above). This is perhaps because, as Professor Valcke has suggested, Canadian jurisprudence incorporates these different types of reasonable expectations into a single, unstable concept: “[T]he parties’ reasonable intention” stands for the intention which it is (normatively) reasonable for the parties to have precisely because that is the intention which it is (factually) reasonable for each to attribute to the other. . . . It is this interplay of normative and factual within the notion of objective intention that arguably causes this notion to be inherently unstable . . .35 Given Professor Valcke’s claim that normative reasonability is found within the factual reasonableness attributable to the parties’ intentions, “reasonable expectations” appears to be whatever normative considerations a judge can find — or force into — a reading of the parties’ intentions.36 But this then presents the problem that reasonable expectations are what a judge believes them to be on a reading of the facts, which is highly subjective to the judge — prone to unpredictable and inconsistent readings. Accordingly, the answer to “what are reasonable expectations” and “whose expectations count” is, rather frustratingly, difficult to pin down. There is significant overlap between factual and normative reasonableness in common law jurisprudence, but the 34. Burton’s attempt at a formulation of reasonable expectations above probably comes closest to factual reasonability, although it too seems to admit normative elements. 35. Catherine Valcke, “Contractual Interpretation at Common Law and Civil Law – An Exercise in Comparative Legal Rhetoric” in J. Neyers, ed., Exploring Contract Law (Oxford, Hart Publishing, 2008), p. 77 at p. 79. 36. John Enman-Beech, Three Essays on the Penalty Doctrine (LLM Thesis, University of Toronto Faculty of Law, 2016) [unpublished], at p. 70. 2017] The New Neighbour Principle 107 degree of that overlap is inconsistent and contingent upon a particular judge’s reading of a particular set of facts. That, unfortunately, seems to be the best answer that the common law jurisprudence has to offer. To the extent that this analysis is in line with doctrine, then, it is therefore a necessary evil to use reasonable expectations, notwithstanding their conceptual vagueness, as the basis on which to argue that certain tort doctrines are linked to good faith.

3. Tort Doctrines are Linked to Reasonable

Expectations through Reasonable Reliance 2017 CanLIIDocs 395 The central question is how tort doctrines relating to pre- contractual behaviour may be understood to fall under the ambit of good faith, if good faith is underpinned by reasonable expectations. Most basically, the purpose of tort is not to fulfill unfulfilled expectations, but to restore a victim as far as possible to the circumstances that existed before the tort.37 There is thus an apparent gap between the reasonable expectations in good faith performance and the nature of liability in tort. However, the tort doctrines that are applicable to pre-contractual negotiations all share an important linking element: namely, reasonable reliance. Reasonable reliance is, of course, distinct from reasonable expectations, but their difference is not a categorical one insofar as the latter generates the former. With respect to reasonable reliance, consider that in the case of fraud or deceit, the tortfeasor makes representations on which they intend the plaintiff to rely and thereby engage in conduct that flows from those representations. Tort law, however, requires that that reliance be reasonable in order for the plaintiff to be able to claim relief. In short, the wronged party develops a reasonable expectation from the wrongdoer’s representations that certain events or circumstances will come about, or are true, and this in turn causes the wronged party to act in reliance on those expectations. Reasonable expectations may thus give rise to the reasonable reliance that tort law protects. At a basic level, then, it seems intuitively appealing that if reasonable expectations give rise to good faith in contract, then 37. See, generally, Athey v. Leonati, [1996] 3 S.C.R. 458 (S.C.C.), at para. 20. In instances of intentional torts (such as deceit or fraudulent misrepresentation), however, punitive damages are more easily obtainable as a matter of public policy to deter socially undesirable conduct: see, generally, Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085 (S.C.C.), at pp. 1098-1099. 108 Canadian Business LawJournal [Vol. 60 they should do the same in tort. Put simply: reasonable expectations generate good faith; reasonable reliance is reliance on reasonable expectations; torts, as noted above, often require reasonable reliance; torts (to the extent that they require reasonable reliance) are about reasonable expectations; therefore, certain torts involve considerations of good faith. Perhaps more persua- sive is the fact that the reasonable expectations that good faith protects are the very same that generated the contract in the first place: that is, the contract re-instantiates those same reasonable expectations that gave rise to reasonable reliance.

A contract, it may be said, is a quintessential act of reasonable 2017 CanLIIDocs 395 reliance; in reliance on the reasonable expectation that party A’s representations (explicit or implicit) accurately indicate party A will be able to meet the obligations it has undertaken, party B binds itself via contract. From this act of reasonable reliance thus flows the crystallization of those same reasonable expectations in contract form, insofar as those pre-contractual representations ultimately make up the terms of the contract. Thus, if reasonable expectations in economic relations generate good faith duties where the act of reliance produces a contract, then at a basic level, it is intuitively appealing to recognize that reasonable expectations should have a similar effect where the act of reliance produces a loss (i.e., in tort). It is perhaps no coincidence that the remedy for misrepresentation in contract law is very similar to that in tort: where the contract was entered into in reliance on representations from the defendant, the plaintiff is remedied by restoring the parties to their positions prior to contract formation (i.e., rescission of the contract). If reasonable expectations therefore exist along a continuum from pre-contract to within contract itself, with each being protected to some extent by doctrinal remedies, then recognizing good faith in tort (namely, pre-contractual negotiations) would ensure greater conceptual coherence and continuity along that theoretical continuum.38 38. Similarly (although distinctly), civil law recognizes that sufficiently advanced and sophisticated negotiations give rise to a reasonable expectation that the negotiating parties will co-operate with each other to achieve the intended objective (i.e., form a contract): See, e.g., art. 1375 CCQ; and Pegasus Partners Inc. v. Groupe Laurem Inc., 2007 QCCS 476 (C.S. Que.), at para. 31, citing Pierre- Gabriel Jobin, Nathalie Ve´ zina, Les Obligations, 6th ed. (Cowansville, Yvon Blais, 2005), at p. 148. Failing to meet that expectation thereby constitutes a breach of the duty to negotiate in good faith. Put differently, in reliance upon one party’s representations that they wish to see negotiations concluded successfully, the other party expends its time and resources in an attempt to reciprocate its 2017] The New Neighbour Principle 109

4. Equitable Doctrines Relating to Pre-Contractual Behaviour Similarly Focus on Reasonable Expectations and Reliance It is also worth observing that equitable doctrines relating to pre-contractual behaviour bear out the underlying thread of good faith. Since equity and good faith were largely tied together in the development of early medieval common law,39 it is no stretch to claim that each has informed the other’s doctrinal development over the centuries. Indeed, this fact is borne out in certain equitable remedies that exist today. Consider, for example, the case of

contracts for the sale of land, where equity has developed a 2017 CanLIIDocs 395 doctrine that protects reliance of one party on the other party’s actions during contractual negotiations. This, of course, is proprietary estoppel, and its relevance here is perhaps best illustrated as follows: Proprietary estoppel exists to adjust the prevailing balance of property between claimant and defendant when the claimant has formed the relevant kind of expectation, and has acted detrimentally in reliance on it, and these occurrences are ascribable to the defendant (via his encouragement of or acquiescence in them), so that it would be unconscionable40 for him to insist on the status quo.41 [emphasis added] Such a definition recognizes protection of the wronged party’s reasonable reliance as generated from the “relevant” expectation, which itself is a result of the wrongdoer’s conduct (i.e., “encouragement or acquiescence”). Indeed, the fact that promissory estoppel can be used as an alternative to consideration for

intention to conclude negotiations successfully. Based upon this act of reliance, the civil law thereby recognizes that the parties have an interest that must be protected. Since the parties cannot be forced to conclude negotiations with a contract, instead the wronged party is compensated for the loss arising from reliance on the other party’s representations. 39. See, e.g., Reinhard Zimmermann and Simon Whittaker, eds., Good Faith in European Contract Law (Cambridge, Cambridge University Press, 2000), at p. 96 for the proposition that early medieval jurists concluded that as a matter of faith (e.g., bona fides), equity, and ius gentium (law of nations), agreements must be kept. 40. There is an interesting point to be examined, perhaps in another forum, of the relationship to be drawn between good faith and unconscionability. While the latter applies to evaluating the terms of a contract in relation to the bargaining phase, the use of “unconscionable” in the quote above appears to refer to a broader evaluation of behaviour that offends the conscience. What exactly that means is unclear, but this reference in equity appears far broader than the unconscionability doctrine. 41. Simon Gardner, “The Remedial Discretion in Proprietary Estoppel” (1999), 115 Law Q. Rev. 438, at p. 508. 110 Canadian Business LawJournal [Vol. 60 enforcing a promise additionally provides strong support for the claim that equity is fundamentally concerned with protecting the parties’ reasonable expectations and the resultant reliance.42 In sum, expectations and reliance play a significant role in one of equity’s most important doctrines, and in so doing provide the same underpinnings that this analysis presents as central to both contract and certain tortious doctrines.

III. RECOGNIZING THE RELATIONALITY OF CERTAIN ECONOMIC INTERACTIONS PROVIDES THE BASIS ON

WHICH REASONABLE EXPECTATIONS CAN APPLY TO TORT 2017 CanLIIDocs 395 What is thus lacking in common law is a treatment of reasonable expectations in tort that mirrors its treatment in contract law; namely, recognition of good faith. The question therefore becomes why, at common law, one instance of reasonable expectations explicitly gives rise to good faith duties while the other does not, notwithstanding the similarities. Applying this overarching continuum of reliance and expectation to tort would not produce a logical leap so much as it would conceptually unify the relationship of reliance and expectation, thereby producing a consistent and continuous relationship between tort and contract. The theory behind an extension of good faith into tort therefore does not face a significant logical hurdle; the main issue is whether the common law is ready to recognize expectations as reasonable in tort if reliance or other circumstances dictate. Given that Cromwell J.’s approach of using other jurisdictions in part to define reasonable expectations would suggest a conservative approach to recognizing good faith in tort, a normative argument on the grounds that Canadian common law should recognize the social realities of 21st-century commerce is therefore more appropriate.43 In short, the argument must be that 42. There is, of course, the fact that promissory estoppel can generally only be used as a shield and not as a sword (Combe v. Combe, [1951] 2 K.B. 215 (C.A.)), but this was meant more as a means of avoiding the displacement of the doctrine of the consideration. This view is not unanimous, however, as the Australian High Court recognized in Waltons Stores (Interstate) Ltd v. Maher, [1988] HCA 7 that promissory estoppel could function as a sword (i.e., could be a cause of action). Indeed, the court strongly rejected the traditional view as logically deficient, citing David Jackson, “Estoppel as a Sword” (1965), 81 Law Q. Rev. 84, and 223 at pp. 241-243. 43. There has been something of an academic debate about the extent to which contract law (or at least academic considerations of that area of law) has already evolved away from the classical contract paradigm. See footnote 46, infra; Patrick S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 2017] The New Neighbour Principle 111 the common law, as it currently is, reflects an outdated paradigm of commercial relationships that categorizes them as transactional events in which parties are perfect strangers who come together for a discrete economic event, only to go their separate ways upon its conclusion. In fact, the reality of 21st-century commerce is that contracting, even during the negotiation phase, is a relational activity in which actors come together and form commercial relationships that give rise to certain reasonable expectations. Even in the negotiation phase, these expectations may arise. In other words, reasonable expectations at law ought to reflect reasonable

expectations as they actually are in modern commercial interac- 2017 CanLIIDocs 395 tions — reasonable expectations factually exist in pre-contractual negotiations, and accordingly ought to be recognized, under the banner of good faith, in tort. The recognition of some contracts as relational in nature provides a strong foundation on which to build the proposition that recognizing reasonable expectations in tort is viable and consequently imports good faith. Effectively, it would extend the logic applied by Cromwell J. in recognizing a duty to perform contracts honestly. In this regard, Cromwell J.’s comment on commercial expectations is therefore a useful starting point: Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly calls for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties.44 [emphasis added] Notwithstanding the general jurisprudential attitude that contracting is individualistic and adversarial by its very nature,45 the theory

1979); Lawrence M. Friedman, Contract Law in America: A Social and Economic Case Study (Madison, Wisconsin, University of Wisconsin Press, 1965); Morton J. Horwitz, The Transformation of American Law, 1780-1860 (Cambridge, Massachusetts, Harvard University Press, 1977); and Grant Gilmore, The Death of Contract (Columbus, Ohio, Ohio State University Press, 1974). 44. Bhasin, supra, footnote 1, at para. 60, citing Angela Swan and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham, Ontario, LexisNexis, 2012), at para. 1.24. 45. Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd. (1994), 19 Alta. L.R. (3d) 38 (Alta. C.A.), leave to appeal refused (1994), 21 Alta. L.R. (3d) xxxvii (note) (S.C.C.). See also Martel, supra, footnote 3, at paras. 62-71; and Walford v. Miles, [1992] 2 A.C. 128 (U.K. H.L.), at p. 129, per Ackner L.J. 112 Canadian Business LawJournal [Vol. 60 on contracting46 and empirical studies47 indicates that commercial parties in the 21st century have a reasonable expectation that the other negotiating party, while vigourously advocating for its own interests, will avoid active dishonesty and duplicitous behaviour. If it is true that commercial parties expect a basic level of honesty and good faith in contractual dealings, then it is also reasonable to say that they may expect some measure of good faith in pre- contractual dealings. The question, therefore, is simply whether reasonable expectations at common law should catch up with the reasonable expectations of commercial parties in modern society. 2017 CanLIIDocs 395 1. Fundamental Principles and the Types of Contracts Covered by Good Faith At a most fundamental level, the common law (to the extent the classical contract paradigm still governs) largely misconceives the nature of a great deal of contracting as a discrete economic event rather than a relational activity. Despite the academic literature providing ample support for this contention,48 doctrine has not yet caught up (and there is little to suggest that it will, given its current trajectory).49 Though the English common law once conceived of good faith as “the governing principle . . . applicable to all contracts and dealings”,50 it quickly gave way to classical contract law reflecting the laissez-faire economics and political economy

46. See, for example, Roger Brownsword, “Static and Dynamic Market Individu- alism”, in Roger Halson, ed., Exploring the Boundaries of Contract (Aldershot, Dartmouth, 1996), p. 48; Roger Brownsword, “Contract Law, Co-operation, and Good Faith: The Movement from Static to Dynamic Market-Individualism”, in Simon Deakin and Jonathan Michie, eds., Contracts, Cooperation, and Competi- tion: Studies in Economics, Management, and Law (Oxford, Oxford University Press, 1997) p. 255; M.A. Eisenberg, “The Emergence of Dynamic Contract Law” (2001), 2:1 Theor. Inq. L. 1; and of course the now-famous contract theory of Ian Macneil: Ian Macneil, “Contracts: adjustment of long-term economic relations under classical, neoclassical, and relational contract law” (1977), 72 Nw U.L. Rev. 854. 47. See footnote 58, infra. 48. See footnotes 43 and 46, supra. 49. Waitzer and Sarro provide an excellent summary of the current trajectory of the law’s use of reasonable expectations in Canadian common law. Though reasonable expectations are growing in use across several different areas of law, there is no indication that in the commercial context, the judiciary has expressed support for the notion that reasonable expectations exist in negotiations. See Edward J. Waitzer and Douglas Sarro, “Protecting Reasonable Expectations: Mapping the Trajectory of the Law” (2016), 57 C.B.L.J. 285. 50. Carter v. Boehm (1766), 97 E.R. 1162 (Eng. K.B.), at p. 1164. 2017] The New Neighbour Principle 113 theories of the 19th century.51 This approach treated contracts as discrete events between economic actors who, once having completed the contract, go their separate ways; and indeed, the increase of sea-faring vessels trading across the globe meant these paradigmatic discrete contracts were common. Although good faith was already part of equity, good faith in the early 19th century common law was initially confined to the commercial doctrine of good faith purchase, which itself was devised as a means of producing greater commercial efficiency by reducing the need to investigate property rights of a sold good.52 In view of

these circumstances, English courts thereafter developed a contract 2017 CanLIIDocs 395 law that focused on the contract as a stand-alone unit, with little regard for the circumstances that precede its formation. Though common law courts have since that time adopted a more expansive attitude towards good faith in general, the common law approach to good faith remains largely faithful to the assumption that contracts are discrete events rather than a manifestation of a relationship.53 Because this view of contracts is no longer appropriate for the modern age, Canadian common law jurisdictions would be better served by recognizing the underlying relational nature of a significant portion of economic interactions. This would in turn provide a stronger basis on which courts may recognize the reasonable expectations that underpin good faith in tort doctrines that address pre-contractual negotiations, to the extent that they protect negotiations. As a point of reference, it is useful to observe that civilian codes, contrary to the common law, focus on the relationship between the parties rather than treating the contract as a dramatic event; the contract is simply the manifestation of a relationship between the parties which exhibits some measure of trust. In other words, judicial interpretation is more concerned with morally evaluating the behaviour of the parties, and treating

51. Bobux Marketing Ltd v. Raynor Marketing Ltd. (2001), [2002] 1 N.Z.L.R. 506, [2001] NZCA 348 (N.Z. C.A.), at para. 34. For an alternative view endorsing the influence of civil law on 19th century contract law, see, generally, James Gordley, The Philosophical Foundations of Modern Contract Doctrine (Oxford, Clarendon Press, 1991); and A.W.B. Simpson, “Innovations in 19th Century Contract Law” (1975), 91 L.Q. Rev. 247. 52. Grant Gilmore, “The Commercial Doctrine of Good Faith Purchase” (1954), 63 Yale L.J. 1057, at p. 1057. 53. Indeed, one might view Bhasin as indicative of this trend towards recognizing relationality while still taking pains to remain firmly rooted within the dominant paradigm. See, e.g., John Enman-Beech, “The Subjects of Bhasin: Good Faith and Relational Theory” (2017), 13 J.L. & Equality (forthcoming). 114 Canadian Business LawJournal [Vol. 60 the contract as relational.54 As a result, civilian courts are more likely to declare parties legally bound at an earlier stage in the negotiation process, since the relationship extends beyond the bounds of the contract.55 At common law, it is equally true that a substantial amount of commerce in the modern age is not a one-off event in which each party cuts off commerce with the other upon concluding the contract. Rather, one contract may simply provide the basis for a commercial relationship that produces others contracts between the parties.56 Indeed, this has been borne out in empirical studies

of business activity for decades, which have observed that many 2017 CanLIIDocs 395 business persons, though not all,57 find law to be superfluous to commercial dealing except in certain specific instances.58 More important to business relationships were reputation, trust, flexibility, and co-operation, with only informal sanctions in cases of dispute.59 That being the case, the civilian law ethos of 54. Barry Nicholas, “The United Kingdom and the Vienna Sales Convention: Another Case of Splendid Isolation?” (Rome, Centro di Studi e Richerche di Diritto Comparato e Straniero, 1993), online:

2. The Absence of Negotiation in Standard Form Contracts It is important to recognize, however, that not all contracts and not all economic interactions fall neatly within this ambit. One

particular category of contracts that warrants greater scrutiny are 2017 CanLIIDocs 395 contracts of adhesion60 in the consumer context, and standard form contracts more generally. From a contractual perspective, it is likely uncontentious to say that the contract may evidence relational qualities even after formation. When a student purchases a computer, for example, there is little expectation that that student will have a traditional business relationship with the seller; but it is equally true that the seller will likely provide years of technical support and maintain contact with the buyer in order to offer new products, updates, etc. So too is this true of cell-phone contracts, where contact between buyer and seller persists for the typically multiyear duration of the contract. Far from being the paradigmatic perfect strangers who, upon conclusion of their contract, go their separate ways, even parties to these contracts exhibit a high degree of relationality. Problematically for this analysis, however, is that the negotiation phase in consumer contracts like those described above is most often truncated or non-existent, meaning the pre-contractual interactions are not sufficiently robust to generate any relational qualities at that stage. Accordingly, no reasonable expectations would arise, and good faith would be inapplicable in a tortious capacity in respect of the negotiation of such contracts. But this is not to say that consumers would be left without redress, since there already exists protection in the form of consumer protection legislation.61 In view of the significant portion of commerce that is

much part of the judicial (and, of course, commercial) landscape: Bhasin, supra, footnote 1, at para. 60. 60. Ironically enough, the concept of a contract of adhesion originated not in the common law, but in French civil law: Steven v. Fidelity & Casualty Co., 58 Cal.2d 862 (Cal., 1962) at p. 882, citing Raymond Saleilles, De la De´claration de volonte´: contribution a` l’e´tude de l’acte juridique dans le code civil allemande (art. 116 a` 114) (Paris, Pichon, 1901). 61. See, e.g., Canada Consumer Product Safety Act, S.C. 2010, c. 21; or Competition 116 Canadian Business LawJournal [Vol. 60 comprised of such contracts and interactions, the conceptualizing of good faith in terms of tort would therefore not affect all negotiations, but simply a subset of them; it therefore would not introduce wholesale changes to Canadian contract and tort law, but rather reflect a measured approach that accords with the realities of 21st-century commerce.

IV. POLICY CONCERNS Naturally, one of the first arguments that would be raised against the recognition of good faith in pre-contractual negotiations is that it would cripple commercial efficiency due to the 2017 CanLIIDocs 395 constraints it would place on economic actors. The reasoning goes that such a duty is anathema to the very nature of negotiations as adversarial, and any suggestion that a party would have to forego any of their self-interest in order to protect that of their negotiating partner is untenable. This position is best illustrated by reference to the seminal English case of Walford v. Miles,62 where Lord Ackner described any attempt to ascribe a duty of faith in negotiation (in that particular case, one imposed by the parties’ consent) as repugnant to the adversarial nature of negotiations, and sure to compromise each party’s ability to act in its own self-interest.63 This view was strongly endorsed in Martel,64 where the S.C.C. stated, amongst other things, that negotiation is a zero-sum game involving a transference rather than a loss of wealth.65 Despite the fact that Martel dealt with a proposed duty of negligence in negotiation, the court made a point of observing the similarity that such duty in negligence would have to one of good faith.66 Martel is therefore worth quoting at length, to demonstrate the policy concerns that the court believed run counter to recognizing the reasonable expectations of parties in tort (particularly in negotiations): Act, R.S.C. 1985, c. C-34. Consumer protection, while an important topic on this point and ripe for discussion, is outside the purview of this analysis. 62. Walford, supra, footnote 45. 63. Ackner L.J. gives the specific example of being unable to withdraw from further negotiations in order to exert pressure upon the other negotiating party. Walford, supra, footnote 45, at p. 29. 64. Although outside of the scope of this paper, the court in Martel additionally identified other concerns about recognizing such a duty, such as the fear that it would create “after-the-fact insurance against failures to act with due diligence” (para. 68), it would assign to courts a “significant regulatory function” (para. 70), and would encourage a multiplicity of lawsuits (para. 71). 65. Martel, supra, footnote 3, at para. 62. 66. Martel, supra, footnote 3, at para. 73. 2017] The New Neighbour Principle 117

The primary goal of any economically rational actor engaged in commercial negotiation is to achieve the most advantageous financial bargain. As noted above, in the context of bilateral negotiation, such gains are realized at the expense of the other negotiating party ...... Second, to extend a duty of care to pre-contractual commercial negotiations could deter socially and economically useful conduct ...... In many if not most commercial negotiations, an advantageous bargaining position is derived from the industrious generation of information not possessed by the opposite party as opposed to its market position as here. 2017 CanLIIDocs 395 Helpful information is often a by-product of one party expending resources on due diligence, research or other information gathering activities. It is apparent that successful negotiating is the product of that kind of industry...... It would defeat the essence of negotiation and hobble the marketplace to extend a duty of care to the conduct of negotiations, and to label a party’s failure to disclose its bottom line, its motives or its final position as negli- gent ...... Third, to impose a duty in the circumstances of this appeal could interject tort law as after-the-fact insurance against failures to act with due diligence or to hedge the risk of failed negotiations through the pursuit of alternative strategies or opportunities...... Fourth, to extend the tort of negligence into the conduct of commercial negotiations would introduce the courts to a significant regulatory function, scrutinizing the minutiae of pre-contractual conduct...... A concluding but not conclusive fifth consideration is the extent to which needless litigation should be discouraged.67

With respect, this view is misguided. It conceives of negotiation through the outdated 19th-century lens of contracts that fails to account for the relational nature of much commerce, and in so doing, fails to recognize that morally dubious bargaining, while potentially a wealth generator in the short-term, arguably impedes long-term wealth generation by hindering the development of trust and co-operation amongst business entities. In short, the essence of

67. Martel, supra, footnote 3, at paras. 62-71. 118 Canadian Business LawJournal [Vol. 60 negotiation is not for one side to defeat the other, but instead for both parties to gain. To digress slightly, even the practical arguments for recognition may be compelling: negotiations that require significant expendi- ture of resources may warrant protection, lest the negotiating system become unduly compromised by undesirable behaviour and consequently dis-incentivize serious negotiations. The result, under this line of reasoning, is either a reticence to enter into contracts due to lack of information, or else contracts entered into under sub-optimal informational conditions (subsequently increasing the

risk of breaches). The flip side would suggest that protecting 2017 CanLIIDocs 395 resource-intensive negotiations would promote greater due diligence and informational symmetry, increasing gains from trade and decreasing the likelihood of breach.68 Indeed, even Martel’s proposed duty of care in negligence might warrant reconsideration in light of this re-evaluation of policy concerns, but that is a question outside the scope of this analysis. If we take it as true that the legal elements of business relationships are of lesser importance than reputation, trust, flexibility, and co-operation,69 then it seems quite intuitive to conclude that recognizing good faith in negotiations, which would at the very least institutionalize some measure of trust between the parties, would be a favourable economic development. Indeed, it makes little sense to say that negotiations, if conceived of as a solely adversarial and combative exercise in which neither party yields an inch unless absolutely necessary, can form the basis for the contractual relationship that Cromwell J. stated demands a measure of honesty and good faith most generally.70 If there exists no foundation of good faith between the parties upon which the contract can be made, then it seems counterintuitive at best to say that good faith behaviour will naturally flow once the contract has been formed. With the recognition of a duty of good faith in negotiation, this will ensure a basic level of acceptable conduct that remains consistent throughout the entire course of the relationship. Put simply, commercial parties have a reasonable expectation that

68. Not all commentators agree, however. Stephen A. Smith has taken the view that a rule requiring trustworthy behaviour would actually diminish trust in fact because one would never know whether their counter-party had acted well because they were trustworthy, or because they feared sanction. Stephen A Smith, “Performance, Punishment and the Nature of Contractual Obligation” (1997), 60 Mod. L. Rev. 361. 69. Mitchell, supra, footnote 58, at p. 27. 70. Bhasin, supra, footnote 1, at paras. 60-61. 2017] The New Neighbour Principle 119 the other contracting party, while vigourously advocating for their own interests, will avoid active dishonesty and duplicitous behaviour. More importantly for the purposes of this analysis, the court’s practical concerns in Martel are entirely moot in view of the fact that conceptualizing good faith as existing in tort doctrines that address pre-contractual behaviour has no practical effect of reconfiguring the law. In effect, such a move simply recognizes that the tortious doctrines that are already available as remedies for improper negotiations are doctrines of good faith. Doing so

would not introduce any greater regulatory function for courts, 2017 CanLIIDocs 395 nor would it encourage a proliferation of litigation. Indeed, the oft- overriding concern of indeterminate liability would not need to be considered. Admittedly, such concerns might be quite relevant if a new, tortious good faith duty in negotiations were under consideration, but that is a question unto itself and therefore one for another time.71 What is proposed here is simply a re- categorization and re-conceptualization of the relevant tort doctrines outlined above, to the extent that they relate to negotiations, and insofar as they involve intentionally unreason- able behaviour.72 Thus, the totality of the court’s policy concerns in Martel appears manageable in view of the nature of this reconceptualization of good faith and tort, along with recognizing a more faithful view of modern commerce. For reasons of principle and policy, there is therefore a strong rationale for recognizing that reasonable expectations in tort should be understood to protect the relational nature of a certain subset of negotiations, which would discourage dishonest and unethical behaviour. Accepting the premise that reasonable expectations underpin good faith, it is consequently appropriate

71. The Ontario Court of Appeal recently denied the existence of a pre-contractual duty of good faith in negotiations, in Oz Optics Ltd. v. Timbercon Inc., 2011 ONCA 714 (Ont. C.A.), additional reasons 2012 CarswellOnt 13318 (Ont. C.A.). What is noteworthy, however, is that the court was not completely opposed to the idea in appropriate circumstances should they arise. The court stated that the common law has not recognized a free-standing duty of good faith based in tort and that, to date, the S.C.C. has not extended the doctrine of good faith beyond the context of an existing contractual relationship: supra, at para. 62. The ONCA stated that the policy considerations previously raised by the S.C.C. in Martel dismissing the existence of a duty of care in negligence between parties to contractual negotiations were instructive in assessing whether a duty to negotiate in good faith should be recognized: supra, at para. 65. In other words, the ONCA’s reluctance stemmed largely from judicial deference. 72. See footnote 12, supra. 120 Canadian Business LawJournal [Vol. 60 to say the principle of good faith, if it is understood as within tort as well, must then discourage the behaviour described above and in those doctrines of tort that address expectation and reliance during negotiations, to the extent that those doctrines are applied to negotiation. As such, it is appropriate and indeed incremental to take that underlying, if presently fragmented, thread of good faith in tort and recognize it as an extension of the organizing principle of good faith that currently underpins only contractual performance.73 In short, the organizing principle should not simply be one of good faith in contractual performance, but of good faith in

contracting, at all stages from negotiation through to completion 2017 CanLIIDocs 395 or termination.

V. CONCLUSION: A WAY FORWARD Given that the reconceptualization of good faith is ostensibly moot at a practical level, a natural response would be to question what end it is meant to serve, or to question what effect it might actually have on the future of good faith. This reconceptualization of the overarching principle of good faith recalls the same overarching quality applicable to governing the conduct of private actors in general that was apparent in Lord Atkins’ invocation of the neighbour principle in McAlister (Donoghue) v. Stevenson:74 [T]here must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances. The liability for negligence . . . is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay. But acts or omissions . . . cannot . . . give a right to every person injured by them to demand relief. In this way rules of law arise which limit the range of complainants and the extent of their remedy. The rule that you are to love your neighbour becomes in law, you must not injure your neighbour . . . You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be — persons who are so closely

73. It is noteworthy in this regard to observe that the European Civil Court, in ruling on civilian claims of a failure to negotiate in good faith, have observed that the nature of such a claim is that of tort, delict, or quasi-delict within the meaning of Article 5(3) of the Brussels Convention: see, e.g., Fonderie Officine Meccaniche Tacconi SpA v. Heinrich Wagner Sinto Maschinenfabrik GmbH (HWS) (September 17, 2002), ECJ Case C-334/00, at paras. 19-27, citing Kalfelis, Case 189/87, [1988] ECR 5565; Reichert and Kockler, Case C-261/90, [1992] ECR I- 2149; and Handte, Case C-26/91, [1992] ECR I-3967. 74. [1932] A.C. 562, [1932] UKHL 100 (U.K. H.L.). 2017] The New Neighbour Principle 121

and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. Much like the neighbour principle, this article has attempted to conceptualize the principle of good faith as establishing the extent to which relations between private commercial actors may be generally regulated. Much like the neighbour principle, the scope of the principle of good faith is determined by what is reasonable in the circumstances — however vague that may be. Accordingly, it is useful to look to the neighbour principle as a precedent for guiding the evolution of good faith: much as the neighbour 2017 CanLIIDocs 395 principle eventually produced the Anns test75 (or its Canadian variation, modified by Cooper v. Hobart)76 as a guide for moving tort law forward, so too may it be possible that this conceptualization can produce a similarly useful guide to developing the law on good faith, across contract and tort.77 Instead of Canadian courts being left to grapple with the indeterminacy that each new judgment on good faith brings to addressing novel good faith arguments, a test that considers both principle and policy will provide some measure of guidance on how the law can and should be developed in future. The Canadian law on good faith is still unsettled, uncertain, and without a clear way forward. But recognizing the overarching principle of good faith of contracting as extending to negotiations provides greater conceptual coherence and certainty, which may in turn provide clarity and guidance on how to navigate new issues of good faith as they arise. Much as the neighbour principle in 75. Anns v. Merton London Borough Council (1977), [1978] A.C. 728, [1977] 2 All E.R. 492, [1977] 2 W.L.R. 1024, [1977] UKHL 4 (U.K. H.L.). The Anns test has since been rejected in the United Kingdom: see, generally, Caparo Industries plc v. Dickman, [1990] UKHL 2; and Murphy v. Brentwood District Council (1990), [1991] 1 A.C. 398, [1990] 2 All E.R. 908 (U.K. H.L.). 76. [2001] 3 S.C.R. 537, 2001 SCC 79 (S.C.C.). Indeed, it is interesting to note that in Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165 (S.C.C.) at para. 24, the court’s discussion of tort duties of care recalls language very similar to that used in Bhasin: The label “proximity”, as it was used by Lord Wilberforce in Anns, supra, was clearly intended to connote that the circumstances of the relationship inhering between the plaintiff and the defendant are of such a nature that the defendant may be said to be under an obligation to be mindful of the plaintiff’s legitimate interests in conducting his or her affairs. [emphasis added] 77. To be sure, this is not to suggest that a duty of good faith test would have the same substance and content as the Anns test for a duty of care. Rather, it is a claim that, similar to how the Anns test and its successors have guided the development of tort law, so too would a good faith test be able to guide the development of good faith law. 122 Canadian Business LawJournal [Vol. 60

McAlister (Donoghue) v. Stevenson set the stage for the creation of the duty of care test, so too does re-conceptualizing the overarching principle of good faith hold the potential to assist the law in developing in the same fashion and illuminating the way forward. This is not to say that even with such a test, the law will face no challenges in assessing where and when new duties should arise. As noted, the Canadian common law has been very reluctant to acknowledge the relational nature of commerce, lest it push against the classical paradigm. That being said, there is no shortage of scenarios in which new duties may be appealing: it may

occur that in the negotiations, party A may take information or 2017 CanLIIDocs 395 knowledge from party B that required significant time and resources to produce, only for party A to then use that information or knowledge to negotiate with party C; it may also occur that parties enter into negotiations with no intention of trying to reach a contract;78 parties may refuse to make reasonable efforts to reach an agreement, in which case mandating reasonable efforts is the solution.79 At least intuitively, these are the types of situations in which good faith may seem attractive but unavailable. This article has attempted to provide a framework for under- standing the doctrine and theory as it once was, as it currently is, as it should be, and as it could be. In this regard, there is little doubt that recognition of the theories above will raise a number of issues in its wake; although these scenarios may be ripe for good faith 78. One particular example is illustrative: in Westcom TV Group Ltd. v. Canwest Global Broadcasting Inc. (1996), [1997] 1 W.W.R. 761 (B.C. S.C. [In Chambers]), the parties were television networks negotiating the sale of programming. The parties had nearly concluded negotiations on a 10-year agreement, but it was never finalized. At trial, Westcom alleged that CanWest had only intended to conduct these fruitless negotiations in order to demonstrate to a regulator that it could not negotiate a successful arrangement for selling its programming to a broadcaster in Westcom’s area. In other words, CanWest had allegedly deceived Westcom as to its true intentions. Westcom’s argument did not succeed at trial, largely because the judge made a factual determination that the circumstances of the negotiations did not give rise to an expectation of good faith in negotiations: para. 16. The judge additionally observed that Westcom did not suffer any detriment in reliance on CanWest’s representations either: para. 12. It is important here to distinguish misrepresentations as to a party’s intentions from misrepresentations about the subject of the contract. Lowry J., in Westcom at paras. 18-19, took care to express this distinction, so as to clearly delineate the boundaries of acceptable negotiating behaviour. Lowry J.’s judgment evinces a reluctance to use the term “misrepresentation” at all to describe concealment of a party’s intentions (e.g., willingness to walk away from negotiations), lest it be confused with the type of misrepresentation that is tortious. 79. John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2012), at p. 158. This would effectively create a tortious counterpart to the same good faith duty in contract law. 2017] The New Neighbour Principle 123 duties to some, they may be equally unappealing to others. Though such debates are likely unavoidable, they will ideally be argued in a context where the terms of engagement are set and the legal framework is clear for all to see. It has been this article’s aim to provide those tools. 2017 CanLIIDocs 395