A duty to negotiate in good faith appears to run counter to the adversarial nature of bargaining. However, parties may have a duty to negotiate in good faith according to the recent decision in SCM Insurance Services Inc. v. Medisys Corporate Health LP, 2014 ONSC 2632, where the Ontario Superior Court held that the parties had intended to create “an enforceable obligation” to negotiate in good faith despite no express covenant to do so.
Summary of Facts
In 2011, Medisys sold its independent medical examinations (IME) business to the Plaintiffs and agreed to a five year non-compete and non-solicit covenant. Subsequently, Medisys sought to acquire Plexo’s integrated business which included an IME business. Medisys obtained a waiver of the restrictive covenant on the basis that the Plaintiffs would have the first opportunity to negotiate the purchase of Plexo’s IME business, failing which, Medisys was required to sell or close that business.
The Plaintiffs and Medisys were unable to agree to terms for the sale of Plexo’s IME business. Medisys subsequently agreed to sell Plexo’s IME business to AssessMed, the Plaintiffs’ competitor.
The Plaintiffs sought an interlocutory injunction restraining Medisys’ sale of the IME business to AssessMed, alleging that Medisys breached its duty of good faith to the Plaintiffs by failing to: (1) negotiate the sale of the IME business in good faith, and (2) provide the Plaintiffs with an opportunity to match AssessMed’s offer, which in the Plaintiffs’ view, was substantially equivalent to the price that the Plaintiffs had last offered to Medisys.
Despite no express covenant to negotiate in good faith, the Court implied such an obligation as “a necessary corollary” of the Plaintiffs’ waiver of the restrictive covenant. The Court characterized the scope of Medisys’ obligation as follows:
… In this context, “good faith” refers to refraining from acting in a manner which would have the result that the plaintiffs did not have a reasonable opportunity to acquire the Business. … to act reasonably in the performance of its obligation to provide the plaintiffs with the right of first negotiation. Specifically, it is a duty to act reasonably in negotiating a possible sale of the Business to the plaintiffs. Accordingly, while the terms of the 2012 Agreement did not obligate Medisys to agree to whatever price or other terms the plaintiffs considered reasonable, Medisys was required to refrain from adopting a negotiating position that “eviscerates or defeats the objectives of the agreement that they have entered into”. (para. 36)
The Court concluded that Medisys did not breach its obligation to negotiate in good faith after examining the following two factors:
- whether the terms proposed by Medisys were objectively within a range that could be reasonably supported on the basis of the evidence; and
- whether the position adopted by Medisys reflected an honest belief in the reasonableness of the price proposed as opposed to an intention to eviscerate or defeat the plaintiffs’ right to a first opportunity to negotiate a purchase of the Business. (para. 37)
With respect to (1), the Court determined that Medisys’ position in the negotiation was not unreasonable. With respect to (2), the Court found no evidence that Medisys did not honestly consider that its approach was credible.
Separately, the Court rejected the allegation that Medisys was required to provide the Plaintiffs with a right to match AssessMed’s offer. The Court reasoned as follows:
… A duty of good faith cannot require a party to grant an additional substantive right to a counterparty to a contract. To do so would go beyond the performance of the obligation which the parties agreed would be subject to a good faith obligation in respect of its performance. As the Court of Appeal affirmed in Transamerica, a duty of good faith does not create new, unbargained-for rights and obligations nor can it be used to alter the express terms of a contract reached by the parties to the contract.
- SCM appears to be consistent with the Ontario Court of Appeal’s dicta in Transamerica Life Canada Inc. v. ING Canada Inc., 2003 CanLII 9923 that “courts have implied a duty of good faith with a view to … ensure that parties do not act in a way that eviscerates or defeats the objectives of the agreement that they have entered into.” However, SCM is confined to its narrow facts — the Court concluded that Medisys “must have intended” to agree to bargain in good faith as valid consideration for the Plaintiffs’ waiver of the restrictive covenant, which allowed Medisys to acquire Plexo’s integrated business in the first place.
- An agreement to negotiate in good faith may be sufficiently certain to be an enforceable obligation, even when it is implicit (as in SCM). Courts will consider whether the parties intended that any breach of their commitment to negotiate in good faith was to have legal consequences. Molson Canada 2005 v. Miller Brewing Company, 2013 ONSC 2758 at para. 108.
- Do not agree to negotiate in good faith lightly. Before agreeing, parties should consider whether they are prepared to meet the standards espoused in SCM. That is, a party must take a principled position that, objectively viewed, is within a range of reasonableness. That party must also honestly believe that its position is reasonable.
- A duty of good faith will not alter the express terms of an agreement and cannot convey an additional substantive right that was not bargained for.
- Expect more on this subject as the Supreme Court may clarify whether or not an obligation to negotiate or perform an agreement in good faith exists. In late 2013, it granted leave from the Alberta Court of Appeal’s decision in Bhasin v. Hrynew, 2013 ABCA 98 where that Court refused to imply an obligation of good faith.