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Negotiation Negligence

Posted on April 1, 2001 | Posted in Lawyers' Issues

The ingenuity of lawyers should never be underestimated. Just when you think that you know everything that can reasonably be known about a subject, some bright lawyer, thinking outside of the box, dreams up a different angle and we are off to the Supreme Court. Such was the case in Martel Building Ltd. v. Canada, a 2000 decision of the Supreme Court of Canada.

The Scene

An owner had leased a building in Ottawa to the federal government. The lease was coming due and the parties entered into a form of negotiation for the renewal. They could not come to an agreement and the feds opened up the matter to tender. The owner submitted a tender, along with other prospective landlords, and was the low bidder. However, after the feds included fit-up costs to all of the tenders, the owner was considerably higher than the second low bidder, whose tender the feds accepted.

The owner alleged that the feds should be liable for its economic losses because:

1.   The feds owed the owner a duty not to harm it in the pre-contractual negotiations and were negligent in the manner in which they conducted the negotiations. Note that there were no allegations of negligent misrepresentation;

2.   The feds assessed the tenders unfairly and, although the standard tender clause was inserted, were therefore liable for both breach of contract A and for negligence; and

3.   The feds drafted the tender documents negligently and ought to have considered the prior negotiations and circumstances with the owner when they drafted the tender documents.

     Contract A is construction law lingo for the contract that is reached when a tender is submitted in response to a call for tenders. The terms of the contract are, in essence, to fairly review the tenders and, if the owner accepts the tender, to enter into the construction contract (i.e. contract B).

The owner was unsuccessful at trial but was successful in the Federal Court of Appeal.

Economic Loss

Tort law has evolved to compensate parties for injury to person and property. However, the courts have been much less likely to apply tort law for pure economic loss.

For example, if I contract with you to sell a widget, I am liable if the widget does not work and, because the machine in which you place it breaks down, it costs you money to replace the widget and fix the machine. I am liable in contract for your pure economic loss. Conversely, if I manufacture a widget that an independent retailer sells to you and your machine breaks down, the retailer is liable to you in contract for your repair costs but I am not liable to you in tort for that economic loss. I do not have a duty of care to you for your economic loss. However, if the defective widget causes the machine to explode and you are hurt or your factory is blown up, I am liable to you in tort. Your losses are no longer purely economic; they are losses arising out of personal injury or property damage.

As with every rule, there are some exceptions to the rule against pure economic loss in tort – but not many. The exception used most often is negligent misrepresentation. In the construction field, the applicable exception relates to faulty construction causing a safety hazard (e.g. Winnipeg Condominium Corporation v. Bird Construction).

Not This Time

The Court had to decide whether the exceptions to the pure economic loss rule should be extended to pre-contractual negotiations in which a contract never arose.

The Court refused to do so for a number of policy reasons:

1.   The very object of negotiations is a zero sum game (i.e. what I gain, you lose). The primary object in a negotiation is to ensure that you obtain the most advantageous terms for yourself; it is not to ensure that you inflict no economic harm on your negotiating counterpart.

2.   To impose a duty of care as requested would deter socially useful conduct. “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 negligent.”

3.   It would be the equivalent of providing the disappointed party with after-the-fact insurance for failed negotiations.

4.   It would require the courts to scrutinise the minutiae of pre-contractual conduct and would turn the courts into regulators.

5.   It would encourage needless litigation.

Tender Evaluation

The Court agreed that there was an implied duty in contract to evaluate the tenders fairly and consistently. However, it found that the feds did this in all material respects and in the one respect in which they failed to do it, the dollar amount would not have affected the decision to award the tender as it was awarded.

Since the Court concluded that there was no contractual breach of the evaluation of the tenders, there was no tort because the same factors in determining liability applied.

Tender Drafting

The Court held that there was no duty of care in tort in this case to properly draft a call for tenders. Again, policy considerations prevailed:

1.   The integrity of the tender process would be compromised if the person calling for tenders had to draft the tender documents to take into account its past relationship with one of the tenderers. Once the feds decided to tender, they were not required to account for any past relationship with the owner; negotiation gave way to competition.

2.   A party calling for tenders has the discretion to set out its own specifications and requirements. As long as there is no negligent misrepresentation in the tender documents, there is no duty of care in drafting the documents.

Not Covered

The Court took great pains to point out that this decision dealt only with the allegations of negligence. It did not deal with the concept of bargaining in good faith because that concept was not argued before it. The Court stated: “a duty to bargain in good faith has not been recognized to date in Canadian law. These reasons are restricted to whether or not the tort of negligence should be extended to include negotiation. Whether or not negotiations are to be governed by a duty of good faith is a question for another time.”

The Beat Goes On

We neglected to inform you that in July 2000 the owner’s appeal was dismissed and the lawyer’s cross appeal was allowed in Vaz-Oxlade v. Volkenstein (see April 1999 newsletter). The Court of Appeal noted that its decision in Wong v. 407525 Ontario Ltd. (see December 1999 newsletter) was dispositive that there is no duty on a lawyer to negotiate a price abatement after being presented with a signed offer to purchase.

Larry Plener, a Mississauga sole practitioner, brought our attention to Baker v. Turville, a case in which he represented the lawyer and which dealt with the same issue as Vaz, with a variation, and involved the same realtor. The Court of Appeal again re-affirmed Wong, this time with vehemence in its award of solicitor-client costs.


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