Contractual Commitments to Negotiate in Good Faith – A Serious Issue to be Tried?

By Vanessa Voakes – Stikeman Elliott LLP

Absent a special relationship between parties to a negotiation, a tortious duty to bargain in good faith has generally gone unrecognized in Canadian law.  However, in Molson Canada 2005 v. Miller Brewing Company, 2013 ONSC 2758, Justice Wilton-Siegel of the Ontario Superior Court of Justice considered the question of whether a contractual commitment to negotiate in good faith is enforceable.

In that case, Molson Canada 2005 (“Molson”) brought an application for an injunction, pending trial, to enjoin Miller Brewing Company (“Miller”) from terminating a licence agreement between them for the distribution and sale of Miller-brand beers in Canada by Molson, and to set aside the notice of termination delivered by Miller. One of the main issues considered was whether Miller had terminated its relationship with Molson in accordance with the “good faith negotiation” clause in their agreement. Although His Honour only assessed the question from the perspective of whether there was a serious issue to be tried such that an injunction should be granted, he rejected the argument that contractual provisions to negotiate in good faith are always unenforceable and his reasons for judgment provide interesting discussion and commentary on the issue.

Background

Justice Wilton-Siegel’s Endorsement sets out an extensive discussion on the facts and background of the relationship between the parties.  For the purposes of this discussion, the following facts are relevant:

  • Pursuant to a licence agreement dating back to 1982 (as amended from time to time) Molson has been the exclusive Canadian licensed distributor of Miller’s key trademarks and brands, including one of its “flagship brands” Miller Genuine Draft (“MGD”) which has to be imported from the United States because it is produced in clear bottles (under the Industry Standard Bottle Agreement (“ISBA”) among Canadian brewers, beer produced in Canada is to be bottled in brown bottles).
  • In 2005 Molson merged with Coors (one of Miller’s primary competitors) and the parties amended their licence agreement; among other amendments, Miller’s rights of termination were amended to provide that its right to terminate without cause could not be exercised until September 2017 and that it could provide at least six months’ notice and terminate the agreement if Molson’s sales volume fell below certain limits.
  • Molson met its sales volume targets in 2007-2009 but failed to do so in 2010-2012 and so the parties began discussions to adjust the licence agreement in the summer of 2010.  These negotiations resulted in a Letter of Intent and a second amendment to the licence agreement (“Amendment No. 2.”) which gave effect to the principles set out in the Letter of Intent.
  • In the Letter of Intent Miller waived its right to terminate the agreement in the event that Molson did not achieve the sales volume targets in 2010 and 2011 and agreed there would be no volume targets for 2012-2015 for certain brands.  The Letter of Intent also provided that if certain changes were not made to ISBA by January 2013 (a change to allow for production of beer in clear bottles in Canada), the amendment would terminate and the parties would go back to their current licensing agreement.
  • Amendment No. 2 provided that if the ISBA was not amended prior to January 2013 the original licence agreement would continue without regard to the modifications in the amending agreement so long as the parties agreed to re-negotiate minimum volume targets and other issues.  Importantly, section 2.1(b) of Amendment No. 2 provided that such negotiations were to be conducted “in good faith”.
  • In December, 2012 Miller found out that changes to ISBA would not be made and advised Molson of its intention to terminate the agreement.  Molson’s position was that Miller didn’t have the right to terminate and the parties entered into discussions.
  • In January, 2013 Miller delivered a notice of termination to Molson advising of its intention to terminate the agreement as of July 22, 2013 on the basis that changes to ISBA had not been made, terminating Amendment No. 2, and on the basis that Molson had failed to meet minimum volume targets in 2011 and 2012.
  • Upon receiving Miller’s notice of termination, Molson commenced the action that is the subject of this interlocutory decision, seeking declarations that the licence agreement remained in effect and that Miller’s purported termination constituted a breach of contract and a breach of its duty of good faith.
  • The trial is set for December, 2013 and in the interim, Molson sought interlocutory injunctive relief enjoining the purported termination.

The Test for an Injunction

The three-part test for an injunction espoused by the Supreme Court of Canada in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311 (SCC) requires (i) a preliminary assessment of the merits to ensure there is a serious question to be tried (which is a low threshold); (ii) a consideration of whether the application would suffer irreparable harm if the application were refused; and (iii) an assessment of which of the parties would suffer the greater harm from the granting or refusal of the remedy pending a decision on the merits (i.e., the balance of convenience).

In determining the first issue of whether there was a serious issue to be tried, Justice Wilton-Siegel considered the allegations that Miller’s waiver of its right of termination continued to have legal effect notwithstanding the termination of Amendment No. 2 and that Miller was not entitled to exercise its right of termination pending satisfaction of a condition precedent pertaining to the conduct of good faith negotiations as contemplated by section 2.1(b) of Amendment No. 2.  His Honour concluded that there was a serious issue to be tried on both allegations, however only the discussion pertaining to the purported obligation to negotiate in good faith is considered here.

Are Contractual Commitments to Negotiate in Good Faith Enforceable?

Ultimately, in this case, there was no conclusion on the question of whether contractual commitments to negotiate in good faith are enforceable because the question was considered in the context of whether it gave rise to a serious issue to be tried for the purposes of an injunction.  On the facts of this case, Justice Wilton-Siegel was satisfied that Molson had met that low threshold.  Despite not actually deciding the issue, His Honour’s analysis and discussion on the issue is interesting, in particular his analysis of recent US jurisprudence in which the courts found that an agreement to negotiate a contract in good faith may be enforced if all of the material terms of the contract have been agreed to in principle by the parties (Siga Technologies Inc. v. Parmathene, Inc., 2013 WL 2303303 Del. Sup. Ct.). Justice Wilton-Siegel stated:

…any covenant to negotiate in good faith, as any other contractual obligation, must be interpreted in accordance with the intention of the parties in the context in which the agreement was negotiated and executed.  The issue is not whether a court should imply an obligation to negotiate in good faith as a matter of commercial morality but rather whether the parties themselves understood from the circumstances in which an express commitment to negotiate in good faith was given, and intended in those circumstances, that any breach of the specific commitment was to have some legal consequence.  In this regard, in my opinion, Siga and the case law cited therein reflect a much more nuanced and modern understanding of commercial realities than the arbitrary and formulaic approach evidenced in the case law which would exclude the possibility of an enforceable obligation to negotiate in good faith under all circumstances. (para 108)

One of Miller’s positions on the issue was that the negotiations contemplated by section 2.1(b) of Amendment No. 2 were not a condition precedent to its right to exercise its option to terminate and alternatively, that all contractual provisions to negotiate in good faith are unenforceable. Justice Wilton-Siegel noted that Molson refrained from arguing that the obligation of good faith negotiation in the licence agreement was enforceable but instead raised it as a basis for a serious issue to be tried.

His Honour then went on to analyze the issue “in terms of the enforceability of a commitment to negotiate a specified matter in good faith, given consideration for the commitment, in a document purporting to be binding on the parties”, examined the case law and drew the following principle conclusions:

  • ·         While a bald agreement to agree or negotiate is an unenforceable obligation due to the uncertainty with respect to the specific obligation, whether an agreement to negotiate in good faith is enforceable is case and fact specific and may be enforceable if it is sufficiently certain, “either on its plain meaning or when interpreted in the context of the factual circumstances in which it was negotiated and executed.”  (Justice Wilton-Siegel noted that in some circumstances courts have found a covenant to negotiate in good faith enforceable where the parties had reached sufficient agreement on the principal issues).
  • ·         Of critical importance is the content of any contractual obligation to negotiate in good faith; absent objective standards as to what was intended, “it may be impossible for a court to establish the standard of behaviour of a negotiating party against which performance of such a covenant is to be measured”.
  • ·         The feasibility of the remedy is closely related to the determination of the enforceability of an agreement to negotiate in good faith.  For example, while many cases have found support for the unenforceability of such a covenant in the inability of a court to award damages for a breach, there may be circumstances where injunctive or other equitable relief is an appropriate remedy.

Serious Issue to be Tried

Turning to the issues of whether there was a serious issue to be tried with respect to the enforceability of the good faith negotiation obligation, His Honour considered both parties’ arguments: Miller argued that on the facts of the case there was no serious issue to be tried because there was no agreement in principle on the matters contemplated in section 2.1(b) of Amendment No. 2; the provision didn’t require the negotiations contemplated by it to be “in accordance with the terms” of any prior understanding or agreement in principle in respect of the relevant matters, and there was nothing in Amendment No. 2 that set out any objective standards for the establishment of MGD minimum volume targets in any negotiations.  Molson didn’t dispute the latter point but argued that there was sufficient evidence to demonstrate that the parties knew what principles would govern the negotiations surrounding revised MGD volume targets prior to the execution of the Letter of Intent and Amendment No. 2.

Although Justice Wilton-Siegel stated that he was of the opinion that Miller had the stronger argument in respect of the enforceability of the obligation of good faith negotiation set out in section 2.1(b) (i.e., that it was not enforceable), Molson had satisfied the requirement of demonstrating there was a serious issue to be tried regarding the enforceability of the provision for a variety of reasons including, among others, that on its face the good faith negotiation obligation purported to be an enforceable obligation and His Honour stated that the court must strive to give effect to all of the provisions agreed to by the parties in the interpretation of a commercial agreement and, although the Letter of Intent and Amendment No. 2 did not contain objective standards, it was possible that the factual matrix surrounding their formation would supply such standards on a trial of the issue.

Injunction Granted

For the reasons set out above (and others as set out in the decision), Justice Wilton-Siegel found that there was a serious issue to be tried.

In considering irreparable harm, His Honour found that it was reasonable to conclude that there would be some irreparable harm to Molson’s customer relationships and that, at least in some cases, termination of Molson’s distribution of Miller-brand beer would result in a loss of sales of other beer sold by Molson giving rise to potentially unquantifiable losses.  In addition, His Honour found that there was a risk of damage to the Miller brand equity if Miller began marketing under a different marketing plan and if Molson was successful at trial it may be unable to restore the original Miller image upon which it based its marketing plan.

At the same time, His Honour recognized that Miller would also suffer irreparable harm if an injunction were granted, firstly because it would be prevented from “re-invigorating” its own brands and taking steps to restore the Miller products that had declined (such as MGD) or had not been launched under Molson’s marketing of the Miller brands.  Secondly, Miller would be a new entrant into the Canadian beer market and it was uncertain what additional sales volumes Miller would generate above those Molson would expect to achieve.

In assessing the balance of convenience, His Honour considered numerous factors and ultimately concluded that the status quo should be preserved and granted an injunction pending trial that prohibited Miller from terminating the licence agreement pursuant to the termination notice.

Conclusion

While each case is fact specific, and the issue of enforceability of contractual commitments to negotiate in good faith was only considered in the context of the low threshold requirement of demonstrating a serious issue to be tried, the decision may signal a shift in the approach to certain contractual disputes between parties in light of, as Justice Wilton-Siegel put it, a “nuanced and modern understanding of commercial realities”.