Businesses Behaving Badly - Expanding Contractual Duties Of Good Faith

Various courts have struggled with the concept of "good faith" between two contracting parties. The struggle arises from the competing principles of the individualistic and adversarial nature of contracting versus the natural inclination to punish people for taking undue advantage of another person. As indicated in a recent decision of the Ontario Court of Appeal in Oz Optics Limited v Timbercon, Inc,1 this struggle continues to challenge many courts. While this case does not resolve the issue, it appears to invite future courts to consider expanding the scope of contractual duties of good faith.

The underlying dispute in this case relates to "attenuators", which are a fiber-optic component used in jet fighter planes. Oz Optics Limited ("Oz"), a manufacturer of attenuators, entered into discussions with Timbercon, Inc. ("Timbercon") to have the attenuators incorporated into a product to be sold to Lockheed Martin. Although Timbercon told Oz that Oz was the sole bidder to supply the attenuators, Timbercon was also in discussions with another attenuator manufacturer. Ultimately, Timbercon presented both attenuator options to Lockheed Martin, but due in part to a substantial markup on the Oz product, Lockheed selected Oz's competitor for the project.

Oz then claimed against Timbercon, alleging that Timbercon had misrepresented the lack of other bidders, and had breached a duty of good faith towards Oz. The trial judge found in favour of Timbercon. The matter was appealed, and the Court of Appeal reversed the trial judge's decision on the misrepresentation, holding that Timbercon was liable to Oz for misleading it as to whether there was any competing bidder. In addition, Justice Armstrong of the Court of Appeal went on to discuss the concept of the duty of good faith in contractual dealings.

After noting that it "is difficult to ascertain in what circumstances [a duty of good faith] will be applied," Justice Armstrong made an attempt to identify where the law stands on the duty of good faith. In essence, the state of the law was described as follows:

There is currently no recognized "free standing duty of good faith based in tort." The duty of good faith arises only through contract. The law has not recognized "a general duty to bargain in good faith," although the Court of Appeal has previously left open the possibility that such a duty exists in "special circumstances."2 Those "special circumstances" which could give rise to pre-contractual...