Oz Optics Limited v. Timbercon, Inc. [Indexed as: Oz Optics Ltd. v. Timbercon, Inc.]

107 O.R. (3d) 509

2011 ONCA 714

Court of Appeal for Ontario,

Simmons, R.P. Armstrong and LaForme JJ.A.

November 15, 2011

Torts -- Negligent misrepresentation -- Plaintiff and defendant working together to develop automated attenuator for use in construction of jet fighter planes -- Defendant representing to plaintiff that plaintiff was to be sole supplier of automated attenuator -- Defendant approaching plaintiff's competitor as potential supplier without informing plaintiff -- Defendant submitting plaintiff's and competitor's bids to ultimate purchaser of automated attenuator after rigging bids to make competitor's bid more attractive -- Trial judge erring in finding that defendant was not liable for negligent misrepresentation.

The defendant approached the plaintiff to design and manufacture a fibre-optic product known as a manual attenuator, which the defendant intended to supply to Lockheed Martin for use in the construction of jet fighter planes. The plaintiff manufactured and delivered ten manual attenuators and the defendant paid for them. The defendant then faxed an order to the plaintiff for more manual attenuators. The purchase order referred to a "consignment agreement". The plaintiff did not sign the purchase order or the consignment agreement, but did not advise the defendant that it was not accepting the order on a consignment basis. The defendant refused to pay for any of the manual attenuators that were not sold to Lockheed Martin. The parties were also involved in the design and production of an automated attenuator. From the outset, the defendant represented to the plaintiff that it would be the sole supplier of the automated attenuator and that there would be no competition. The defendant contacted D Inc., a competitor of the plaintiff, with a view to involving D Inc. as a potential supplier of the automated attenuators. The defendant ultimately sent the plaintiff's bid and D Inc.'s bid to Lockheed Martin and rigged the bids so that the D Inc. bid was clearly preferential. D Inc. was granted the order. The plaintiff sued the defendant for the outstanding balance for the manual attenuators and for damages for negligent misrepresentation and breach of the duty of good faith. The trial judge dismissed the action, finding that the manual attenuators were delivered on consignment, that the elements of negligent misrepresentation were not made out and that the defendant was not liable for a breach of the duty of good faith. She held that there is no duty to bargain in good faith and that the defendant had no obligation to treat the plaintiff fairly in the tendering of the bids because there was no contract governing their relationship. The plaintiff appealed.

Held, the appeal should be allowed in part.

In the circumstances, it was open to the trial judge to find that the order for the manual attenuators was a consignment order.

The trial judge erred in finding that the elements of the tort of negligent misrepresentation were not made out. She correctly concluded that there was a special relationship between the parties that gave rise to a duty of care as the relationship was more akin to that of joint venturers than that of customer/supplier. The defendant acted negligently, if not nearly fraudulently, in continuing to represent to the plaintiff that it would be the sole automated [page510] attenuator supplier after involving D Inc. as a potential supplier. In relying on the representation, the plaintiff acted reasonably and to its detriment. It would have acted differently had it known that there was a competing bid. A new trial was required on the issue of damages.

The common law has not recognized a free-standing duty of good faith based in tort. It was unnecessary to reach a conclusion on that issue given that recovery could be grounded in negligent misrepresentation.

APPEAL by the plaintiff from the judgment of Parfett J., [2010] O.J. No. 1963, 2010 ONSC 310, 73 B.L.R. (4th) 120 dismissing an action.

Cases referred to Queen v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, 99 D.L.R. (4th) 626, 147 N.R. 169, J.E. 93-270, 60 O.A.C. 1, 45 C.C.E.L. 153, 14 C.C.L.T. (2d) 113, 93 CLLC Â14,019 at 12082, 37 A.C.W.S. (3d) 1304, D.T.E. 93T-198, apld Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 2000 SCC 60, 193 D.L.R. (4th) 1, 262 N.R. 285, J.E. 2000-2272, 3 C.C.L.T. (3d) 1, 5 C.L.R. (3d) 161, 36 R.P.R. (3d) 175, REJB 2000-21224, 101 A.C.W.S. (3d) 410, consd 978011 Ontario Ltd. v. Cornell Engineering Co. (2001), 2001 8522 (ON CA), 53 O.R. (3d) 783, [2001] O.J. No. 1446, 198 D.L.R. (4th) 615, 144 O.A.C. 262, 12 B.L.R. (3d) 240, 8 C.C.E.L. (3d) 169, 104 A.C.W.S. (3d) 676 (C.A.) [Leave to appeal to S.C.C. refused [2001] S.C.C.A. No. 315, 158 O.A.C. 195], distd Other cases referred to Coco Paving (1990) Inc. v. Ontario (Minister of Transportation), [2009] O.J. No. 2547, 2009 ONCA 503, 252 O.A.C. 47, 79 C.L.R. (3d) 166; Hollis v. Dow Corning Corp., 1995 55 (SCC), [1995] 4 S.C.R. 634, [1995] S.C.J. No. 104, 129 D.L.R. (4th) 609, 190 N.R. 241, [1996] 2 W.W.R. 77, J.E. 96-124, 67 B.C.A.C. 1, 14 B.C.L.R. (3d) 1, 26 B.L.R. (2d) 169, 27 C.C.L.T. (2d) 1, 59 A.C.W.S. (3d) 1025, EYB 1995-67074; Honda Canada Inc. v. Keays (2008), 92 O.R. (3d) 479, [2008] 2 S.C.R. 362, [2008] S.C.J. No. 40, 2008 SCC 39, [2008] CLLC Â230-025, EYB 2008-135085, J.E. 2008-1354, 166 A.C.W.S. (3d) 685, 66 C.C.E.L. (3d) 159, 376 N.R. 196, 294 D.L.R. (4th) 577, 239 O.A.C. 299, 63 C.H.R.R. D/247, D.T.E. 2008T-551; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Masterpiece Inc. v. Alavida Lifestyles Inc., [2011] 2 S.C.R. 387, [2011] S.C.J. No. 27, 2011 SCC 27, 416 N.R. 307, EYB 2011-191034, 332 D.L.R. (4th) 1, 92 C.P.R. (4th) 361, 2011EXP-1716, J.E. 2011-942; Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd., 1994 ABCA 94, [1994] A.J. No. 201, 19 Alta. L.R. (3d) 38, 149 A.R. 187, 13 B.L.R. (2d) 310, 46 A.C.W.S. (3d) 644 (C.A.) [Leave to appeal to S.C.C. refused [1994] S.C.C.A. No. 202, 21 Alta. L.R. (3d) xxxvii]; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17, 170 D.L.R. (4th) 577, 237 N.R. 334, [1999] 7 W.W.R. 681, J.E. 99-859, 69 Alta. L.R. (3d) 341, 232 A.R. 360, 49 B.L.R. (2d) 1, 44 C.L.R. (2d) 163, 3 M.P.L.R. (3d) 165, REJB 1999-11937, 87 A.C.W.S. (3d) 681; Ontario v. Ron Engineering & Construction (Eastern) Ltd., 1981 17 (SCC), [1981] 1 S.C.R. 111, [1981] S.C.J. No. 13, 119 D.L.R. (3d) 267, 35 N.R. 40, 13 B.L.R. 72; Peel Condominium Corp. No. 505 v. Cam-Valley Homes Ltd. (2001), 2001 24035 (ON CA), 53 O.R. (3d) 1, [2001] O.J. No. 714, 196 D.L.R. (4th) 621, 142 O.A.C. 251, 14 B.L.R. (3d) 169, 7 C.L.R. (3d) 184, 103 A.C.W.S. (3d) 636 (C.A.); Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., [2011] 2 S.C.R. 175, [2011] S.C.J. No. 23, 2011 SCC 23, 306 B.C.A.C. 1, 82 C.C.L.T. (3d) 1, 416 N.R. 1, EYB 2011-190358, [2011] 7 W.W.R. 1, 2011EXP-1577, J.E. 2011-871, 331 D.L.R. (4th) 1, 18 B.C.L.R. (5th) 1, 5 R.P.R. (5th) 1, 81 B.L.R. (4th) 1; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919, 226 D.L.R. (4th) 577, 172 O.A.C. 78, 38 B.L.R. (3d) 42, 123 A.C.W.S. (3d) 267 (C.A.); [page511] Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69, [2010] S.C.J. No. 4, 2010 SCC 4, 86 C.L.R. (3d) 163, 100 B.C.L.R. (4th) 201, EYB 2010-169491, 2010EXP-608, J.E. 2010-321, 397 N.R. 331, [2010] 3 W.W.R. 387, 315 D.L.R. (4th) 385, 281 B.C.A.C. 245, 65 B.L.R. (4th) 1; Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94, 152 D.L.R. (4th) 1, 219 N.R. 161, [1999] 4 W.W.R. 86, J.E. 97-2111, 123 Man. R. (2d) 1, 3 C.B.R. (4th) 1, 36 C.C.E.L. (2d) 1, 97 CLLC Â210-029, 74 A.C.W.S. (3d) 788, REJB 1997-02865 Authorities referred to Finn, P., "The Fiduciary Principle" in T.G. Youdan, ed., Equity, Fiduciaries and Trusts (Scarborough, Ont.: Carswell, 1989)

Stephen Victor, Q.C., and David Cutler, for appellant. Jonathan Stainsby, Mark E. Davis and Andrew McIntyre, for respondent.

The judgment of the court was delivered by

R.P. ARMSTRONG J.A.: --

Introduction

[1] Oz Optics Limited ("Oz") appeals from the judgment of Parfett J. dated February 10, 2010, in which she dismissed Oz's action against Timbercon, Inc. ("Timbercon"). The action concerned the parties' business relationship through which they had sought to design, manufacture and sell manual and automated attenuators for use in the construction of jet fighter planes. The appeal raises issues relating to the nature of the business relationship between Oz and Timbercon, negligent misrepresentation and the breach of the obligation to act in good faith.

[2] Specifically, Oz challenges the trial judge's conclusion that the 900 manual attenuators were provided on the basis of a consignment agreement and that, therefore, Timbercon is not liable for the cost of the unsold units. Oz also challenges the trial judge's conclusion that Timbercon was neither liable for negligent misrepresentation nor the breach of the duty to act in good faith with respect to the purchase of automatic attenuators.

[3] For the following reasons, I would allow the appeal, in part, on the basis that the trial judge erred in dismissing Oz's claim for negligent misrepresentation. I would dismiss the remaining grounds of appeal. [page512]

Factual Background

(i) The manual attenuators

[4] Oz and Timbercon are both engaged in the fibre-optic industry. In late 2002, Timbercon approached Oz to design and manufacture a fibre-optic product known as a manual attenuator, which Timbercon intended to supply to Lockheed Martin for use in the construction of jet fighter planes. Attenuators adjust the amount of light passing through a fibre-optic component.

[5] Initially, Oz manufactured ten manual attenuators, which were delivered to Timbercon and paid for by Timbercon. By March 2003, Timbercon advised Oz that it expected a further order of 900 manual attenuators.

[6] On March 27, 2003, Eric Meslow, the president of Timbercon, met with Omur Sezerman, vice-president of Oz, at a trade show in Atlanta, Georgia. Each has a very different recollection of a discussion they had there about the manual attenuators. According to Mr. Sezerman, he was told that Timbercon required the attenuators to be provided over a 12- month period and that Timbercon would pay when it received payments from Lockheed Martin. According to Mr. Meslow, he was surprised to learn from Mr. Sezerman that Oz had already produced 900 attenuators. Mr. Sezerman asked him to take the attenuators off his hands as a favour. Mr. Meslow asserts that he responded that the sale of the manual attenuators should take place by way of a consignment order and that Mr. Sezerman agreed to proceed by consignment.

[7] On March 31, 2003, Timbercon faxed a purchase order to Oz for 500 manual attenuators. The purchase order contained the following notation:

This purchase order is issued for consignment agreement only. Please review attached pages (exhibit "A") for terms and conditions of the consignment agreement. A signed and returned copy of this purchase order indicates acceptance of these terms.

[8] Oz did not sign either the purchase order or the consignment agreement. In an e-mail dated March 31, 2003 from Oz to Timbercon, a representative of Oz stated, "thank you in advance for your understanding and co-operation for this matter". Oz shipped 500 manual attenuators to Timbercon. The invoice, which accompanied the delivery, indicated a payment due of US$73,125 "net 30 [days]" for the order of 500. Upon Oz's request, Timbercon increased the order to 900 units. During the spring of 2003, Oz shipped the additional 400 manual attenuators to Timbercon, bringing the total due to US$131,565. [page513]

[9] Timbercon paid approximately US$52,650.01 for the attenuators, leaving an unpaid balance of approximately US$78,974.99 remaining.

[10] Although the consignment agreement was never signed, Oz did not advise that it was not accepting the order on a consignment basis before shipping the attenuators.

[11] Oz claims that Timbercon owes the remaining US$78,974.99 for the purchase and sale of the manual attenuators. Timbercon's position is that Oz delivered the manual attenuators on consignment for a potential sale to Lockheed Martin. Since none of the manual attenuators, apart from the initial delivery, were sold to Lockheed Martin, nothing is required of Timbercon other than to return the unsold attenuators.

(ii) The automated attenuators

[12] The initial discussion between Oz and Timbercon only involved the design and production of manual attenuators. However, by January 2003, they began to consider the design of an automated attenuator, which came to be known as the FiberStar Project. In furtherance of this project, Oz and Timbercon entered into a non-disclosure agreement in order to protect their respective proprietary and confidential information.

[13] From the outset, Timbercon represented that Oz would be the sole supplier of the automated attenuator. In an e-mail of January 3, 2003, Timbercon advised Oz that "there is no competition".

[14] On July 16, 2003, Timbercon reported to Oz on the current status of the project:

Little background. [The situation is one of] . . . hurry up and wait, etc. etc. . . . We are in a situation where they are asking for items without wanting to completely commit. [Non-recurring engineering fee and purchase orders] have all be [sic] slow in coming; but at the same time the client wants our/your specific command list. So there is little doubt we are in . . . just paperwork at this point.

[15] Timbercon advised Oz that it anticipated an initial order of about 80 automated attenuators with a forecast of 600 to 1,000 over the next three to five years. A witness from Lockheed Martin testified at trial that less than 70 to 90 units were contemplated as being required by Lockheed Martin.

[16] Throughout the spring and early summer of 2003, Timbercon made a number of e-mail representations indicating that an order for the automated attenuators for Lockheed Martin was imminent.

[17] Lockheed Martin requested a meeting at Timbercon's facilities on August 14, 2003 in order to conduct a technical audit of the product. Timbercon asked Oz to send an engineer to [page514] Timbercon's Portland, Oregon facilities for the meeting to answer technical questions raised by Lockheed Martin. In preparation, a conference telephone call was arranged between Oz and Timbercon on August 4, 2003 to discuss the details of the Lockheed Martin visit.

[18] Oz was represented on the conference call by the following staff: Mr. Sezerman; Ersoy Uygur, the product manager; and Saidou Kane, the product engineer. Timbercon was represented by James Davies, the executive vice-president, and Jayson Lizardo, the sales engineer.

[19] There is a conflict in the evidence as to what was said during the conference call. Mr. Sezerman testified that it was a very cordial discussion. Mr. Davies testified that he was bullied by Mr. Sezerman, who is alleged to have made a number of insulting allegations against Timbercon. According to Mr. Davies, Mr. Sezerman demanded an upfront fee for his engineer's attendance at the meeting in Portland and Mr. Sezerman raised the issue of the outstanding payment for the manual attenuators.

[20] After the August 4, 2003 telephone call, Timbercon adopted a completely different stance toward Oz and the FiberStar Project. However, Oz was not advised of this change in position until several weeks later.

[21] The day after the telephone call, Timbercon contacted DiCon Fiberoptics, Inc. ("DiCon"), a competitor of Oz, with a view to involving DiCon as a potential supplier of the automated attenuators.

[22] Unaware of this turn of events, Oz continued to prepare for the meeting in Portland. These preparations included answering technical questions posed by Timbercon in advance of the meeting, preparing a block diagram of an automated attenuator and providing draft specifications.

[23] Oz's lead engineer, Mr. Kane, attended the meeting in Portland and answered Lockheed Martin's questions. While at the Portland meeting, Mr. Meslow confirmed to Mr. Kane that they were expecting a purchase order soon from Lockheed Martin. In addition, Mr. Lizardo advised that there was no other bidder or competitor involved in the project. The evidence regarding Mr. Lizardo's statement was uncontradicted at trial.

[24] On August 28, 2003, Mr. Davies of Timbercon sent an e- mail to An Thuan Triew of DiCon, which said:

We are very excited about this opportunity. You have instilled a high level of confidence in this project being successful now that we understand DiCon's delivery time and product capabilities. We are looking forward to working with your team and on future opportunities. [page515]

[25] Oz was still in the dark about Timbercon's new initiative to involve DiCon. It is significant that this e-mail was not included in Timbercon's affidavit of documents in the action. The e-mail only surfaced as a result of an order requiring DiCon to produce its documents.

[26] Following the August 4, 2003 telephone call, Oz made some changes to its proposal. The time for delivery was changed from 14-16 weeks to 22-24 weeks. The NRE (non-recurring engineering) expenses were increased. Oz added an expedited delivery fee of $110,000 for delivery within the 14-16 week time frame. Oz also requested that it receive certain deposits prior to commencing production.

[27] On September 8, 2003, Messrs. Meslow and Davies met with representatives of Lockheed Martin in Orlando, Florida. They informed Lockheed Martin that there was an alternative supplier for the FiberStar Project.

[28] On September 9, 2003, Mr. Sezerman met with Messrs. Meslow and Davies in Orlando at the National Fiber Optic Engineering Conference. They discussed Oz's quote for the FiberStar Project. Mr. Sezerman was not told that there was a second bidder for the project. The trial judge referred to Mr. Sezerman's evidence on this point, at para. 119:

Sezerman indicated that if he had been told that there was competition, and there was a risk they might lose the order, then he might have made changes to the quote to satisfy Timbercon's concerns. I accept this latter statement. Sezerman was clearly frustrated with the pace of negotiations and he was legitimately concerned about whether the units could be produced on time. He thought that he was the only supplier and could manipulate the process. Had he known otherwise, he would undoubtedly have acted differently.

[29] When Timbercon received the DiCon quotation, it informed DiCon that its price was higher than the competitor's price. At that point, as found by the trial judge, "[Oz's] prices were significantly lower than DiCon's". DiCon accordingly reduced its quote. With both quotes in hand, Timbercon then marked up the Oz unit price by 72 per cent and the DiCon unit price by only 42 per cent and submitted them to Lockheed Martin.

[30] The delivery dates quoted by Oz were less favourable than those quoted by DiCon. However, the evidence at trial suggested that if production had proceeded on the basis of the expedited dates offered by Oz, the timeline would have been acceptable to Lockheed Martin. Nevertheless, in this scenario, Lockheed Martin would have been charged an expedite fee.

[31] Joseph Costro of Lockheed Martin was called as a witness at trial. He testified that if Oz had been the only bidder, its bid [page516] would have been acceptable. Specifically, during examination-in-chief, he stated in response to questions from counsel for the appellant:

Q. If, if, if the OZ quote had been the only quote that had [been] submitted, would that have been accepted by Lockheed?

A. I, I believe so.

Q. And you had, you and your team had a greater understanding of the OZ solution at that time [when the competing bids were submitted]?

A. That's correct.

[32] On October 3, 2003, Lockheed Martin sent a letter of contract to Timbercon incorporating the purchase of the automated attenuators as quoted by DiCon. A purchase order followed on October 6, 2003.

[33] The following day, Oz learned for the first time that another supplier was involved and that DiCon had been granted the order to supply the automated attenuators for the FiberStar Project.

[34] Timbercon issued a press release in respect of the FiberStar Project on February 20, 2004. In the press release, DiCon was referred to as Timbercon's "key strategic technology partner" for the project and its "primary technology partner".

The Trial Judgment

[35] The trial judge considered the following issues: (1) Was the order for the 900 manual attenuators a consignment order only? (2) Did Timbercon misappropriate confidential and/or proprietary information belonging to Oz Optics? (3) Did Timbercon make fraudulent and/or negligent misrepresentations to Oz Optics concerning the opportunities for sale of both manual and automated attenuators? (4) Did Timbercon act in bad faith in the bidding process?

[36] The trial judge observed that the first issue relates solely to the manual attenuators. The remaining three issues relate to the automated attenuators. The trial judge's findings with regard to the use of confidential information (issue 2) were not challenged on appeal. Consequently, the trial judge's discussion of this issue is not included in these reasons. [page517]

(1) The manual attenuators

[37] The issue concerning the manual attenuators was whether the deal was merely a consignment order or an outright sale to Timbercon. The trial judge concluded that it was a consignment order and therefore the only obligations Timbercon had were to (1) pay Oz for those units that were sold to Lockheed Martin and (2) return the unsold attenuators to Oz.

[38] Oz shipped 900 manual attenuators to Timbercon without advising the latter that Oz did not accept the consignment order. The nature of the order was left unresolved as between the parties. The trial judge discussed the impasse, at para. 21 of her reasons:

The primary reason why the consignment order issue was never resolved was because both companies had bigger fish to fry -- the automated attenuator solution. The issue of the manual attenuators did not appear on the radar in any concrete form until the teleconference call of August 4, 2003. During that call, Sezerman advised James Davies . . . that the manual attenuators had not yet been paid for, that Oz Optics was owed $132,000 by Timbercon and that he wanted immediate payment. Davies responded by advising him that the attenuators were on consignment only, very few had been purchased at that point, and that Timbercon would be more than happy to return the manual attenuators to Oz Optics. Sezerman refused.

[39] In concluding that the arrangement in respect of the manual attenuators was a consignment order, the trial judge relied on the following findings of fact: (a) Oz was aware from the outset that Timbercon took the position that this was a consignment order; (b) Oz delivered the manual attenuators to Timbercon although it did not sign the consignment agreement and it did not express any objection to a consignment order. The first indication of a dispute appeared during the August 4, 2003 conference call, long after the goods had been delivered; and (c) the trial judge did not accept Mr. Sezerman's evidence concerning the meeting of March 27, 2003 where he and Mr. Meslow discussed the deal.

(2) Negligent misrepresentation

[40] Oz alleged that Timbercon made a number of representations concerning the FiberStar Project and Oz's involvement in the project, which turned out to be false. In general, Oz alleged that Timbercon misrepresented that it would receive large orders from Lockheed Martin for the supply of automated [page518] attenuators that were to be designed and manufactured by Oz, as the sole supplier.

[41] The trial judge concluded that Timbercon was not liable for negligent misrepresentation.

[42] She began her analysis of the issue by reference to the oft-cited case of Queen v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, at p. 110 S.C.R., which established that the following elements are required to make out a case for negligent misrepresentation: (1) there must be a duty of care based on a "special relationship" between the representor and the representee; (2) the representation in question must be untrue, inaccurate or misleading; (3) the representor must have acted negligently in making said misrepresentations; (4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and (5) the reliance must have been detrimental to the representee in the sense that damages resulted.

[43] In addressing the issue whether there was a special relationship between the parties, Oz submitted at trial that the description used by Timbercon in its press release, which described the position of DiCon as a "key strategic technology partner", should apply to Oz. Timbercon submitted that its relationship with Oz was simply that of customer and supplier. The trial judge rejected Timbercon's submission, at para. 86 of her reasons:

I disagree. Although the relationship was not one of joint venturers given the absence of any contract between the parties, it was certainly more than a customer/supplier relationship. The parties' relationship did share some of the characteristics of a joint venture -- both parties contributed knowledge and effort in the pursuit of a common venture, and it was a single undertaking in which both parties had a mutual expectation of profit. Accordingly, she concluded that there was a special relationship between Timbercon and Oz that gave rise to a duty of care.

[44] The trial judge then turned to the issue whether the representations referred to above were untrue, inaccurate or misleading. She concluded, at para. 99 of her reasons:

In the present case, Timbercon's assertions that a contract was 1) possible, 2) was in the works, 3) was imminent, and only needed the final details [page519] worked out, and 4) might involve large quantities, were in fact mostly accurate. The contract -- albeit only for a small quantity of units -- was awarded to Timbercon in October 2003. Unfortunately for Oz Optics, Lockheed-Martin chose the quote involving DiCon as the supplier for the units. Therefore, the Plaintiff has failed to show that the representations made by the Defendant were "untrue, inaccurate or misleading." I note that the trial judge made no reference to the representation made by Timbercon that Oz was to be the sole supplier for the FiberStar Project. However, she did refer to this representation in her analysis concerning the alleged breach of duty of good faith.

[45] The trial judge's conclusion that Timbercon's representations were mostly accurate effectively determined that the claim for negligent misrepresentation would fail. However, she went on to conclude that the representations were not made negligently and that Oz did not rely on the representations to its detriment because it had accepted the risk that Timbercon would not be awarded the FiberStar contract.

(3) Breach of duty of good faith

[46] The trial judge found that Timbercon was not liable for a breach of the duty of good faith. In considering this issue, the trial judge found that Timbercon represented to Oz that Oz was the sole supplier for the FiberStar Project and that this representation was false. She also found that DiCon was told that there was a competitor without telling Oz that it would be facing a competing bid. To this effect, at para. 110 of her reasons, she said:

The only conclusion that can be drawn from this evidence is that Timbercon told DiCon that it was dealing with a competitor -- a courtesy that they did not extend to Oz Optics -- thereby providing DiCon with an unfair advantage in the bidding process. As Sezerman pointed out in his testimony, knowing that a competitor is also working to get a contract has a significant influence on the price quoted.

[47] The trial judge also concluded that Timbercon rigged the bids that were sent to Lockheed Martin so that the DiCon bid was clearly preferential. The trial judge concluded, at para. 124 of her reasons:

The only conclusion that can be drawn from Timbercon's actions in manipulating their profit margins in preparing the two quotes that were sent to Lockheed-Martin is that they intended to make the DiCon quote more attractive and ensure that Lockheed-Martin chose that quote over Oz Optics' quote. I do not accept Timbercon's argument that they did not intend to make the DiCon's quote more attractive, since they would then make less profit. The only possible reason for lowering their profit margin on the DiCon quote in comparison to the Oz Optics quote would be to compensate for DiCon's higher prices, thereby making the DiCon quote more attractive [page520] to Lockheed-Martin. I find that Timbercon did deliberately rig the two bids in a manner that was unfair to Oz Optics. (Emphasis added)

[48] Turning to the legal question of whether there was an actionable breach of a duty of good faith on the part of Timbercon, the trial judge concluded that there was none. She cited Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 2000 SCC 60 for the proposition that there is no duty to bargain in good faith. She further concluded that there was no obligation on the part of Timbercon to treat Oz fairly in the tendering of the bids, because there was no contract governing their relationship and, in fact, "Timbercon did not embark on a tendering process with respect to either Oz Optics or DiCon". The tendering process was between Timbercon and Lockheed Martin.

[49] In reaching her conclusion that there was no actionable breach of a duty of good faith, it is apparent that the trial judge was not impressed by Mr. Sezerman, whom she described as excitable, bellicose and loud, and whom she found to be the author of Oz's misfortune. According to the trial judge, this misfortune had its genesis in the August 4, 2003 telephone call. At para. 146 of her reasons, the trial judge said:

Finally, although the evidence indicates that Timbercon did act unfairly in its dealings with Oz Optics with respect to the bidding process, absent a contractual relationship, a fiduciary relationship, or some other exceptional circumstance, there is no legal duty to act in good faith. It also must be noted that Oz Optics brought much of its fate down on itself. Sezerman's behaviour at the August 4th meeting may have been considered quite normal by his employees, but it was considered over the top by Timbercon, and in the end that was all that mattered.

The Appeal

[50] Counsel for Oz submits that the trial judge made three errors: (1) The trial judge erred in concluding that the order for the manual attenuators was a consignment order. (2) The trial judge failed to find that Timbercon committed the tort of negligent misrepresentation. (3) Although the trial judge found Timbercon acted unfairly in rigging the bids in favour of DiCon, she erred in failing to find that Timbercon breached its obligation to act in good faith. [page521]

[51] In his factum, counsel for the appellant raises three other grounds of appeal related to procedural and evidentiary rulings made by the trial judge. Counsel did not pursue these grounds in oral argument. In any event, I do not find it necessary to address these grounds in order to decide the appeal.

(1) Was the order for the manual attenuators a consignment order?

[52] I see no basis upon which to interfere with the trial judge's conclusion on this ground. The trial judge reviewed and analyzed all of the relevant evidence on the factual issue whether the order was a consignment order. In order to interfere with her factual finding in this regard, I must find a palpable and overriding error: Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at para. 10. I can detect no such error. It was open to the trial judge to conclude, on the evidence that she accepted on this issue, that the order was a consignment order. In particular, it was open to her, inter alia, to (1) reject the testimony of Mr. Sezerman on this point; (2) rely on the fact that Oz was aware from the beginning of Timbercon's position that the order constituted a consignment agreement; and (3) rely on the fact that the written orders from Timbercon described the arrangement as a consignment agreement and that Oz proceeded to deliver the products as per the orders without express objection to the relevant terms.

[53] I would not give effect to this ground of appeal.

(2) Negligent misrepresentation

[54] In my view, the trial judge erred in her analysis of the negligent misrepresentation claim. She correctly concluded that there was a "special relationship" between Timbercon and Oz thereby satisfying the first requirement of the test set out in Cognos. I part company with the trial judge, however, on the remainder of her analysis in respect of the Cognos criteria. In particular, the trial judge erred in failing to consider that the central misrepresentation by Timbercon was that Oz remained the sole potential supplier for the production of the attenuators. In my view, it is immaterial that the other representations referred to by the trial judge were "mostly accurate". From the initiation of the project until its conclusion, Timbercon represented to Oz that the latter was the sole supplier. Oz accepted this representation and proceeded on that basis. Once Timbercon began discussing a potential proposal with DiCon, the representation that Oz was the sole automated attenuator supplier for its bid was no longer accurate. [page522]

[55] After the telephone call of August 3, 2003, which the trial judge referred to as a "watershed moment", the nature of Oz and Timbercon's relationship changed; however, Timbercon maintained the representation that Oz would be the sole supplier. Indeed, at the Portland meeting of August 14, 2003, Mr. Lizardo of Timbercon assured Mr. Kane of Oz that there was no other bidder or competitor involved on the project. The trial judge made no reference to this evidence even though counsel for Oz requested that she draw an adverse inference from the failure of Timbercon to call Mr. Lizardo as a witness. As indicated above, the evidence of Mr. Lizardo's statement was uncontradicted at trial.

[56] Turning to the remaining three elements of the test in Cognos, Timbercon acted negligently, if not nearly fraudulently, in continuing to make the representation that Oz remained the sole supplier under consideration.

[57] Moreover, it is my view that Oz, in relying on the representation, acted reasonably and to its detriment. That Oz was disadvantaged by virtue of not being informed of the competing bid is recognized by the trial judge in her analysis of the good faith obligation, at paras. 119 and 136 of her reasons:

Sezerman indicated that if he had been told that there was competition, and there was a risk they might lose the order, then he might have made changes to the quote to satisfy Timbercon's concerns. I accept this latter statement. Sezerman was clearly frustrated with the pace of negotiations and he was legitimately concerned about whether the units could be produced on time. He thought that he was the only supplier and could manipulate the process. Had he known otherwise, he would undoubtedly have acted differently. . . . . .

Sezerman indicated that if there is no competitor involved in a project, the company can charge a higher price and have a higher profit margin. Oz Optics will generally ask if they are bidding against other suppliers, so that they know how competitive their quote has to be. There was no dispute that this approach is a common custom or usage in this type of bidding situation. Therefore, Oz Optics was disadvantaged by the fact that they did not receive the information that after August 4, 2003 a competitor was involved in the bidding process. (Emphasis added)

[58] This reliance was reasonable in light of the ongoing relationship between the parties, and the ongoing representation throughout their relationship assuring Oz of its status as the sole supplier.

[59] Finally, reliance on this representation was detrimental to Oz's bid. Oz's belief that it was the sole possible supplier caused it to stand firmly behind the terms of its proposal -- [page523] including the proposed timeline -- when it "would undoubtedly have acted differently" if aware of the existence of a competing bid. As the trial judge found, at para. 122, the only significant difference between the two quotes was, ultimately, the delivery timeline.

[60] I am satisfied that Oz has established the case for negligent misrepresentation, and the appeal on this ground should be allowed.

(3) Breach of duty of good faith

[61] The obligation to act in good faith has been the subject of considerable discussion both by the judiciary and the legal academy. As things currently stand, it is difficult to ascertain in what circumstances it will be applied.

[62] The common law has not recognized a free-standing duty of good faith based in tort.

[63] Likewise, the law has not recognized a general duty to bargain in good faith in contract. However, in specific circumstances, a duty to enforce or perform a contract in good faith has been recognized. Notably, some courts have criticized the recognition of any duty of good faith in contract, holding that such a duty runs counter to the individualistic and adversarial nature of contracting: see, e.g., Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd., 1994 ABCA 94, [1994] A.J. No. 201, 19 Alta. L.R. (3d) 38 (C.A.), leave to appeal to S.C.C. refused [1994] S.C.C.A. No. 202, 21 Alta. L.R. (3d) xxxvii.

[64] The Supreme Court of Canada has recognized that an obligation of good faith exists in the context of termination of employment contracts: see Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94, at paras. 91-95, 98; Honda Canada Inc. v. Keays (2008), 92 O.R. (3d) 479, [2008] 2 S.C.R. 362, [2008] S.C.J. No. 40, 2008 SCC 39, at paras. 58-59. Members of this court have recognized the existence of a duty of good faith in various circumscribed situations including between a franchisor and franchisee: Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.), at paras. 5, 66; and from a condominium developer to the condominium corporation: Peel Condominium Corp. No. 505 v. Cam-Valley Homes Ltd. (2001), 2001 24035 (ON CA), 53 O.R. (3d) 1, [2001] O.J. No. 714 (C.A.), at paras. 50, 56, 97-100 (Weiler J.A., concurring in the result).

[65] The existence of a pre-contractual duty of good faith is less certain. According to the Supreme Court of Canada in Martel, at para. 73, "a duty to bargain in good faith has not been recognized to date in Canadian law". In Martel, the cause of action [page524] at issue concerned negligence by a party during contract negotiations; the court rejected the recognition of duty of care in that context. Significantly, the duty of good faith was not raised as an issue on appeal, and thus, the court emphasized, the analysis in that case did not directly address the question of whether such a duty exists: at para. 73. However, the policy considerations raised by the court in dismissing the existence of a duty of care in negligence between parties to contractual negotiations are, nonetheless, instructive on the question of whether a duty to bargain in good faith should be recognized. Among the various policy considerations the court relied upon in this regard, it observed that other causes of action already provide appropriate remedies. Among these, the court noted, that the doctrines of undue influence, economic duress and unconscionability "provide redress against bargains obtained as a result of improper negotiation". In addition, negligent misrepresentation, fraud and the tort of deceit cover much of the wrongful conduct committed during negotiations where an agreement is ultimately not concluded: at para. 70.

[66] This court left open the possibility of a duty of good faith in bargaining in 978011 Ontario Ltd. v. Cornell Engineering Co. (2001), 2001 8522 (ON CA), 53 O.R. (3d) 783, [2001] O.J. No. 1446 (C.A.), at para. 32, leave to appeal to S.C.C. refused [2001] S.C.C.A. No. 315, 158 O.A.C. 195, where the court said, "[a]bsent a special relationship, the common law in Canada has yet to recognize that in the negotiation of a contract, there is a duty to have regard to the person's interests, mainly, to act in good faith". In considering what constitutes a special relationship, the court adopted an approach originally articulated by P. Finn in "The Fiduciary Principle" in T. Youdan, ed., Equity, Fiduciaries and Trusts (Scarborough, Ont.: Carswell, 1989), 1 at pp. 17-18, 20. The court stated, at para. 34:

The circumstances where the law requires more than self- interested dealing on the part of a party share certain characteristics. Firstly, one party relies on the other for information necessary to make an informed choice and, secondly, the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party. See Finn . . . at pp. 17-18 and Waddams, [The Law of Contracts, 3d ed. (Toronto: Canada Law Book, 1993)] at para. 438. If one party to a contract relies on the other for information, that reliance must be justified in the circumstances. Finn . . . suggests at p. 20 that the following five factors are indicative of situations where reliance is justified: (1) A past course of dealing between the parties in which reliance for advice, etc., has been an accepted feature; (2) The explicit assumption by one party of advisory responsibilities; (3) The relative positions of the parties particularly in their access to information and in their understanding of the possible demands of the dealing; [page525] (4) The manner in which the parties were brought together, and the expectation that could create in the relying party; and (5) [W]hether "trust and confidence" knowingly [has] been reposed by one party in the other.

[67] Cornell Engineering can be distinguished from the case at bar. Cornell Engineering dealt with a situation where a contract had eventually formed, however, one of the parties sought relief from the contract based on bad faith in the negotiation of its terms. Arguably, if recovery had been granted in that case, the remedy would have been grounded in contract. However, in the case at bar, no agreement was ever reached. As this court recognized in Coco Paving (1990) Inc. v. Ontario (Minister of Transportation), [2009] O.J. No. 2547, 2009 ONCA 503, 252 O.A.C. 47, at para. 4, if a duty of good faith in bargaining does exist, it is a remedy grounded in contract; that is, it is not a free-standing obligation, which exists independent of a concluded contract.

[68] Courts have also recognized that a duty of good faith and fair dealing arises during the commercial tendering process: see Ontario v. Ron Engineering & Construction (Eastern) Ltd., 1981 17 (SCC), [1981] 1 S.C.R. 111, [1981] S.C.J. No. 13, at pp. 113-14, 119 S.C.R.; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17, at para. 41.

[69] In the commercial tendering process, the obligation arises in the context of a model of imputed Contract A/Contract B between the parties: Ron Engineering, at pp. 119, 121-22 S.C.R.; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69, [2010] S.C.J. No. 4, 2010 SCC 4, at para. 17. Contract A is formed upon the submission of a tender and requires fair dealing with respect to the consideration of all bids. Contract B is the actual agreement entered into between the successful bidder and the party seeking the bids.

[70] The situation that exists in the case at bar does not fit within the paradigm of the traditional commercial tendering process. There was no formal bidding process as is typically found in such situations. Oz was totally unaware that there was any bid submitted to Lockheed Martin other than its own. From the circumstances, it cannot be said that the intention of Timbercon and Oz was to enter into contractual relations with each other upon the submission of Oz's quote: M.J.B. Enterprises Ltd., at para. 23. The ordinary elements of contractual tendering relations were not present: there was no period of irrevocability of the quote, there was no requirement of bid security, there was no request for tender providing the specific terms of the request and procedure for assessment or other factors common to the tendering process: see Tercon Construction, at paras. 18-21. [page526]

[71] I concede that it is tempting to extend the good faith doctrine to the present circumstances given the following factors: (i) the representation by the respondent that Oz would be the sole supplier and the failure to advise otherwise; (ii) the respondent's involvement of DiCon; (iii) the respondent provided advice to DiCon that its bid was not competitive, while not providing similar information to Oz; and (iv) the respondent rigged the two bids in favour of DiCon. It may be arguable -- in light of that fact Timbercon chose to seek an alternative quote from DiCon -- that Timbercon unilaterally imposed a commercial relationship akin to the tendering process. In fact, if the duty of good faith applies to a formal tendering process, which all the parties enter into voluntarily, there is perhaps an even stronger argument to be made that a duty should be recognized in an analogous situation where the bidder is unknowingly considered as one bid among many. In such a circumstance, the bidder is placed in an even more vulnerable situation. However, in light of the reluctance of the courts, in particular the Supreme Court of Canada, to extend the doctrine of good faith beyond the context of a contractual relationship (whether formal or implied), I would be hesitant to invoke the doctrine here given that recovery can be grounded in negligent misrepresentation. This approach is suggested by the Supreme Court in Martel. Therefore, I do not find it necessary to consider this issue further.

Damages

[72] As indicated, I am satisfied that the appellant has made out a case for negligent misrepresentation. I now turn to the quantification of damages. Unfortunately, the trial judge did not make any assessment of the damages, which raises the question of whether this court should order a new trial in respect of damages or make its own assessment. Given the amounts in issue and the costs already involved in this litigation, it would be preferable for this court to deal with the damages if at all possible.

[73] The evidence in respect of the claim for damages at trial came mainly from the testimony of Mr. Sezerman. Documentary evidence was filed setting out the heads of damages; however, it simply reflected the testimony of Mr. Sezerman, without further proof of the numbers provided. If this court were to make the [page527] assessment of damages, we would do so without the advantage of seeing and hearing the testimony first-hand. The Supreme Court of Canada has cautioned appellate courts against taking such action when the evidence is mainly testimonial -- as opposed to documentary -- and where credibility may be in issue: see Hollis v. Dow Corning Corp., 1995 55 (SCC), [1995] 4 S.C.R. 634, [1995] S.C.J. No. 104, at p. 662 S.C.R.; Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., [2011] 2 S.C.R. 175, [2011] S.C.J. No. 23, 2011 SCC 23, at para. 174; and Masterpiece Inc. v. Alavida Lifestyles Inc., [2011] 2 S.C.R. 387, [2011] S.C.J. No. 27, 2011 SCC 27, at para. 103.

[74] In the circumstances of this case, I do not believe that we are in a position to make an assessment of quantum. I would refer the matter back to the Superior Court for a new trial limited to the assessment of damages.

Conclusion

[75] I would allow the appeal in respect of negligent misrepresentation and order a new trial limited to damages before a different judge. I suggest that a different judge hear the damages trial, because the trial judge has already made an adverse finding of credibility against Mr. Sezerman in respect of part of his evidence in her reasons on liability. The requirement that justice must appear to be done suggests that another judge should deal with the new trial on damages. I would dismiss the appeal regarding the manual attenuators and take this fact into account on the costs of the appeal.

[76] Since the majority of the trial concerned the various issues of liability in respect of the FiberStar Project, I would allow the appellant its costs of the trial; however, I would adjust those costs to account for the fact that Oz did not succeed in respect of the issue related to the manual attenuators.

[77] If the parties cannot agree on the trial costs, they may make written submissions, double-spaced and limited to ten pages. The appellant's submission should be made within 15 days of the release of these reasons. The respondent's submission should be made within 30 days of the release of these reasons.

Costs of the Appeal

[78] I would grant the appellant its costs of the appeal on a partial indemnity scale fixed in the amount of $40,000, including disbursements and applicable taxes.

Appeal allowed in part.