P (the respondent, Martel) owned a building and leased space to D (the appellant, Department of Public Works). The lease was about to expire so both parties entered into negotiations for renewal. D led P to believe that it would be willing to renewing lease on certain terms. P extended an offer on those terms, but D rejected it and called for tenders, accepting a tender from a third party.
Does a duty of care exist with respect to negotiations?
** Does the tort of negligence extend to damages for pure economic loss arising out of the conduct of pre-contractual negotiations?
In the context of economic loss, a duty of care does not extend to contractual negotiations. There are significant policy concerns:
** Indeterminate liability
** Social and economic costs
** Tort law would act as an after-the-fact insurance (may result in excuses for lack of due diligence and risk mitigation in negotiations)
** Would impose significant regulatory function on the court (when contract law already provides this)
** Floodgate effect - needless litigation should be discouraged
In general, claims for negligence require the plaintiff to establish a duty, a breach, damage and causation. But in cases of pure economic loss, there is a higher level of scrutiny. Only in limited circumstances may damages for economic loss, absent physical or proprietary harm, be recovered
Four reasons for limiting the recognition of purely economic loss:
** 1. Economic interests are less compelling of protection than bodily or proprietary interests
** 2. Unbridled recognition would raise spectre of indeterminate liability
** 3. Economic losses often arise in a commercial context: inherent part of business risk, better guarded on the party on whom they fall
** 4. Allowing such cases would seem to encourage inappropriate lawsuits
Negligence in negotiation does not fit the limiting categories; it is a novel claim. Therefore, the court applies the Anns/Kamloops Test:
** Proximity: negotiations are not enough, but a pre-existing relationship and the communications that occurred were sufficient
** Policy considerations: There are compelling reasons for not holding one party liable for an other party's loss during negotiations
*** Indeterminate liability is important (but not relevant to this negotiation)
*** Quantum of damages is limited in this case by the nature of the transaction being negotiated
*** Object of negotiation is to achieve most advantageous financial bargain against the other party
** 1. Transfer of wealth does not make society worse off, one party loses, another gains
** 2. Creation of a duty could deter socially and economically useful conduct
** 3. Imposing a duty would make tort law an after-the-fact insurance against failure to act with due diligence and to hedge risk of failed negotiations
** 4. Extending a duty to negotiations would impose significant regulatory function upon the court, unnecessarily when law of contract already provide
** 5. Needless litigation should be discouraged, many negotiations fail may end up in court
Decision in favour of Canada (Department of Public Works).