Good Faith Bargaining? Recent Decision Implies A Duty To Negotiate In Good Faith

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.

The Decision

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...