Legal Blog

Good Faith Negotiating

The applicability of the concept of good faith, and its corollary of bad faith, has been evolving over the past 10 years. We were involved in the latest case out of the Ontario Superior Court of Justice, a case that was chock full of interesting issues.

Tender 

Our client, the general, had tendered a project and the sub, Architectural Concepts Inc. (“ACI”), had quoted the millwork portion of the project. The general was successful and carried part of sub’s quote and part of the quote from another sub supplying doors only. For whatever reason, the general did not get back to the sub for about 6 months. By that time, of course, it was too late simply to accept the sub’s quote because the sub had never agreed to hold its quote open that long. In any case, the general could not accept just part of the quote; it would have had to accept all or nothing.

Accordingly, the general contacted the sub and asked if it was still interested in performing the work. The sub said that it was, the general provided the plans and specs, and the sub again quoted the work, but without the doors. The amount of the quote was similar to the original quote. The general called the sub on January 2, 2003. They agreed on the major terms of the contract, added a couple hundred dollars worth of additional services and rounded the quote to the nearest hundred dollars.

The general immediately sent the sub its standard form subcontract and the fun began. First, the sub stated that it did not want to deal with the general at all; it had subsequently conducted a credit search, misinterpreted the report, and determined that the general was not a good risk with whom to do business. The general was rather taken aback by this position because each year it performed approximately $180 million dollars worth of work, entered into hundreds of subcontracts, and had never had a subcontractor or an owner raise the issue.

Rather than fight with the sub, the general did something almost unheard of; it agreed to pay the entire subcontract amount up front to the sub’s solicitors, who would then pay the sub in accordance with the architect’s certificates as work progressed. The sub agreed to this.

The sub’s lawyers sent comments to the general on the terms of the general’s standard subcontract. The general agreed to most of the requested changes, but could not accept changes to the subcontract that, for example, said that the sub had to comply with safety requirements. The sub’s lawyers then sent a letter stating that no agreement could be reached and abruptly cut off discussions. The general contracted with another sub to do the work for an additional $52,000 and sued for the difference.

Contract 

What contract did the sub breach? We were not able to say that the sub had breached the standard form subcontract because the sub had never previously dealt with that standard form, had not seen the terms of that subcontract, and therefore could not be said to have agreed to them when it quoted the project. However, this is true in almost every tender situation and the construction tendering system would dissolve into chaos if a sub could capriciously withdraw its bid because it felt like it. Everyone in the industry expects that a general and a sub will work towards negotiating a suitable subcontract and negotiate in good faith to get one.

The only contract entered into was on January 2, 2003. It was a contract in which the price and work were defined, but it was subject to the negotiation of additional terms. The sub took the position that this was no contract at all. We took the position that there was an implied term in the contract to negotiate the final construction contract in good faith and that the sub refused to so and therefore breached that contract.

The judge agreed. The correspondence between the parties and, indeed, the testimony of the sub’s main representative showed that the only real, stated concern of the sub was the credit issue and this concern had been satisfied when the general agreed to pay the sub in advance. The remaining changes that the sub’s lawyers had requested and the refusal to discuss the general’s reluctance to comply with them were red herrings. The sub breached its duty to negotiate the final construction contract in good faith.

Who’s Liable 

When we were about to issue the statement of claim, we performed a corporate search on the sub, ACI. We found that it once existed, but had changed its name. It was obvious, however, that the corporation once known as ACI had nothing to do with the ACI that quoted the project: wrong city, wrong address, wrong directors, and wrong officers.

We wrote to the sub’s lawyers and asked them to clear up the confusion. They informed us that the real sub was a numbered company that had registered the name and style of Architectural Concepts. The lawyers did not know this until they checked. Their letters had always referred to their client as ACI.

We knew that the corporation whose former name was ACI was not liable for the breach of contract because it knew nothing of the whole matter. We could have claimed that the numbered company’s principal, with whom the general had dealt, was personally liable or that the numbered company was liable, but not both. Since the numbered company had ceased carrying on business and had probably been stripped of its assets by its principal, we levelled our guns at him. He contracted in January 2003 on behalf of a corporation, ACI, that did not exist. As such, he was liable under breach of his warranty that he had the authority to contract as agent on behalf of ACI. He was also liable under the Business Corporations Act on the assumption that he was contracting on behalf of a corporation to be incorporated, when that corporation was never actually incorporated and never adopted the contract.

The judge agreed and held that the principal was personally liable for all of the general’s damages.

Moral 

There are two morals to the story:

1.   Generals and subs must deal with each other in good faith as they travel along the road to achieve their goal of a final construction contract.

2.   Corporations must use their correct name in their dealings with others. Otherwise, the principal of a corporation may find that limited liability is not so limited.