Pinning down a legal definition of good faith

Larry Lowenstein, Laura Fric, Robert Carson

Sept 22, 2014

Drew Hasselback, Financial Post, National Post

(Recap)

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There are some areas of law, such as labour and insurance, where “good faith” becomes part of every contract, even if those words are absent from a written deal. But even when “good faith” is not a specific term of a contract, it can become the focus of a lawsuit over how a deal was negotiated or implemented. One of the legal problems is whether the existence of “good faith” creates a basket of identifiable rights the parties can rely on.

A recent example of this is an Ontario case called SCM Insurance Services Inc. v. Medisys Corporate Health LP. These companies had a deal in which SCM was granted what the judge called a “right of first negotiation” should a particular Medisys division come up for sale. This happened. The two sides held negotiations but couldn’t reach a deal.

SCM then challenged whether Medisys had actually negotiated in “good faith.” When the talks failed, Medisys struck a deal with a third party. SCM argued that “good faith” meant it should have been given a right to match the offer from the third party buyer. The judge disagreed. The duty to negotiate in good faith was satisfied when Medisys gave SCM a reasonable opportunity to buy the business, the judge said, adding that it doesn’t include the creation of rights that weren’t specifically included in the deal.

But remember that case law looks backward at past events. The SCM case is how one judge applied the notion of “good faith” in one case. A future judge may find that acting in “good faith” triggers some specific acts or behaviours.

“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,” wrote Larry LowensteinLaura FricRobert Carson of Osler, Hoskin & Harcourt LLP in a note on the SCM case.

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To read the full article, click here.

To read more on the SCM case, click here.