Ontario Court Considers Content of Implied Duty of Good Faith in Business Negotiations

In a recent motion seeking an interlocutory injunction to restrain the sale of a business, Justice Wilton-Siegel considered the content of an implied duty of good faith. In SCM Insurance Services Inc. v. Medisys Corporate Health LP, 2014 ONSC 2632, Justice Wilton-Siegel found that, in the circumstances, a party was given the right of first negotiation and was therefore owed a duty to negotiate in good faith. The Court held that this duty related only to the right of first negotiation and did not impose a new, unbargained-for right to match other potential purchasers.

Background

In 2011, Medisys sold its independent medical examinations (IME) business to SCM and agreed to be bound by a restrictive (non-competition) covenant. In 2012, Medisys sought to acquire a business that included a small IME division. Medisys and SCM entered into an agreement (the “Agreement”) that contemplated that Medisys would attempt to acquire the integrated business and then give SCM an opportunity to acquire the IME portion. Justice Wilton-Siegel found that Medisys gave SCM a right of first negotiation.

That is in fact what happened. Medisys and SCM negotiated, but were unable to agree on the terms of a sale of the IME business. SCM terminated the negotiations and insisted that Medisys dispose of the IME business, in order to comply with the restrictive covenant. Medisys ultimately agreed to sell the IME business to a third party. On learning that the purchaser was a competitor, SCM then moved for an interlocutory injunction restraining the sale. Osler, Hoskin & Harcourt LLP represented Medisys on the motion.

Decision

SCM argued that: (i) the Agreement included an implied duty of good faith; and (ii) that this duty of good faith gave SCM the right to match the third party’s offer.

Justice Wilton-Siegel found that Medisys owed SCM an obligation to negotiate in good faith. In this context, this meant a duty to act reasonably in negotiating a possible sale. However, Justice Wilton-Siegel found that Medisys did not breach this obligation and that the purchase price offered by Medisys was not unreasonable. Moreover, Justice Wilton-Siegel found that this obligation related only to the right of first negotiation. It could not impose a new, unbargained-for right – e.g., to match sale terms or to impede a sale to a competitor.

Justice Wilton-Siegel held that there was no serious issue to be tried and denied the injunction.

Conclusion

This case is a good reminder that, in certain circumstances, courts may be prepared to imply duties of good faith into commercial arrangements, even where the parties are at arm’s length.

Topics:  Acquisitions, Canada, Contract Negotiations, Good Faith, Interlocutory Injunctions, Purchase Agreement

Published In: Civil Remedies Updates, General Business Updates, Health Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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