COURT FILE NO.: CV-14-10468-00CL

DATE: 20140428

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SCM Insurance Services Inc. and Cira Medical Services Inc., Plaintiffs

• and –

Medisys Corporate Health LP, AssessMed Inc. and Donald Kunkel, Defendants

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: William C. McDowell and Brendan F. Morrison, for the Plaintiffs/Moving Parties

Larry P. Lowenstein, Laura K. Fric and Robert A. Carson, for Medisys Corporate Health LP, Defendant/Responding Party

Eric R. Hoaken and Matthew R. Law, for AssessMed Inc. and Donald Kunkel, Defendants/Responding Parties

HEARD: March 25, 2014

ENDORSEMENT

[1] The plaintiffs SCM Insurance Services Inc. (“SCM”) and Cira Medical Services Inc. (“Cira”) (collectively the “plaintiffs”) seek an interlocutory injunction restraining the sale by Medisys Corporate Health LP (“Medisys”) of the independent medical examinations business of Plexo Inc. (“Plexo”) (the “Business”) to AssessMed Inc. (“AssessMed”).

Background

[2] The plaintiff Cira carries on business as a national provider of independent medical assessment services. These services include independent medical examinations and other health-related third-party opinions. The plaintiff SCM is the parent company of Cira.

[3] Medisys is a leading provider of preventive, diagnostic and consultative healthcare services to individuals and corporations in Canada. Until 2011, it also operated an independent medical examinations business in competition with Cira.

[4] AssessMed is a competitor of Cira that has no current operations in the Province of Quebec.

[5] On December 1, 2011, Cira purchased the independent medical examinations business of Medisys. In that transaction, Medisys executed an agreement dated December 1, 2011, containing a five year non-competition and non-solicitation covenant (the “Restrictive Covenant”).

[6] In 2012, Plexo, a corporation based in Quebec, put its integrated business up for sale. The integrated business of Plexo included a corporate executive health services business, in which Medisys was interested, and the Business.

[7] An acquisition by Medisys of the integrated business of Plexo would have resulted in a contravention of the Restrictive Covenant so long as Medisys operated the Business. Medisys therefore required a waiver of the Restrictive Covenant in order to enter into a transaction with Plexo.

[8] To this end, Medisys and SCM entered into an agreement dated September 25, 2012 (the “2012 Agreement”) which contemplated Medisys acquiring the integrated business of Plexo and, in turn, offering the Business to Cira.

[9] The relevant provisions of the 2012 Agreement are as follows:

Medisys Corporate Health LP (“MCH”) is proposing to collaborate with you (the “Partner”) in respect of MCH’s potential acquisition of Plexo (“Plexo”) (hereinafter referred to as the “Transaction”). As you know, Plexo operates (as a small part of its operations) an IME business (“Plexo IME”). MCH is not interested in acquiring or operating that business and is instead interested in acquiring and operating Plexo’s primary business of executive and occupational health. Plexo is not prepared to segregate its businesses or divest of them separately or in different transactions. As a result, MCH is providing to Partner the opportunity to immediately acquire from MCH, upon MCH’s acquisition of Plexo, Plexo IME (the “Sub-Transaction”), and in that context MCH will need to provide the Partner with Confidential Information with respect to Plexo.

In addition, pursuant to a Restrictive Covenant Agreement dated December 1, 2011 by and among MCH, ClaimsPro Inc. and others (the “RCA”), MCH agreed to be bound by certain non-compete and other provisions as they relate to the ownership and operation of independent medical evaluations businesses. The acquisition by MCH of Plexo IME may be alleged to be in violation of such RCA. All capitalized terms not defined herein shall have the meaning as in the Confidentiality Agreement (as defined below).

Accordingly, the Partner hereby covenants with MCH as follows:

1. Partner, on its own behalf and on behalf of all other parties benefitting from MCH’s covenants in the RCA, hereby consents, to the extent Partner does not conclude the Sub-Transaction, to the acquisition and operation by MCH of Plexo, including Plexo IME, and hereby waives any potential breach or violation of the RCA that may occur or be asserted as a result of such acquisition and operation of Plexo (including Plexo IME) by MCH, provided, however, that:

a. the waiver shall apply only to the acquisition and operation of Plexo IME;

b. the waiver shall apply only within the Province of Quebec;

c. while under MCH’s operation MCH shall cause Plexo IME not to make further acquisitions within the independent medical evaluations businesses;

d. MCH shall cease to operate or cause to be sold Plexo IME no later than 8 months after the date of the acquisition by MCH of Plexo (including Plexo IME);

e. The waiver shall expire on the sooner of ceasing operations or sale of Plexo IME or 8 months after the date of the acquisition by MCH of Plexo (including Plexo IME).

I note that, while the foregoing covenants were technically granted in favour of SCM, the parties have proceeded on the basis that SCM could, in effect, direct that Cira take the benefit of the first opportunity to negotiate the purchase of the Business. Accordingly, in this endorsement, I have treated SCM and Cira interchangeably.

[10] Medisys closed the purchase of the integrated business of Plexo on April 23, 2013.

[11] In August 2013, Medisys advised the plaintiffs that it considered that the Business had sustainable EBITDA of $1.3 million and that, if the plaintiffs wished to purchase the Business, the purchase price should be a multiple of 5.5 times the sustainable EBITDA, for a purchase price of $7.2 million.

[12] On October 3, 2013, the plaintiffs delivered a non-binding letter of intent (the “LOI”) respecting a purchase of the Business. The LOI proposed a purchase price of $7.2 million, representing a multiple of 5.5 times sustainable EBITDA of $1.3 million, plus a working capital adjustment. The transaction contemplated by the LOI was conditional on, among other things, sustainable EBITDA of not less than $1.3 million, completion of acceptable due diligence, and agreement on the working capital adjustment.

[13] The LOI also contained the following provisions which were legally binding:

Exclusivity; Confidentiality. If our proposal set forth herein is accepted, in recognition of the time which will be expended and the expenses that have been and will continue to be incurred by SCM in connection with the transaction, the Vendors and the undersigned agree that, for a period from the date this letter is executed until the sooner of (i) 11:59 PM December 15, 2013 and (ii) the time SCM informs the Vendor in writing that they do not intend to complete the transaction, they will not, and will direct their agents and their representatives not to (i) take any action to solicit, initiate, encourage or enter into any offer or proposal for, or any indication of interest in, or any negotiations or discussions concerning, a merger or other business combination involving Plexo IME, the acquisition of any equity interest in Plexo IME, the acquisition by any other means of Plexo IME, or sale of all or substantially all of the assets of Plexo IME (“Plexo Acquisition Proposal”) or (ii) engage in negotiations with, or disclose the contents of this letter or any nonpublic information relating to the Plexo IME or afford access to the properties, books or records of Plexo IME to, any person or entity that has indicated that it may be considering making, or has made, a Plexo Acquisition Proposal. Plexo IME, the Vendors and the undersigned will advise any such parties of the existence of this letter, refrain from entering into further discussions with such parties concerning the sorts of transactions described above and shall notify SCM of any overture received from such parties.

Non-compete Waiver. If for any reason SCM elects not to close the transaction, the duration of the existing non-competition waiver will be extended by four (4) months from the date SCM informs the Vendor in writing that they do not intend to complete the transaction.

[14] On October 15, 2013, Medisys made a data room available to the plaintiffs for their due diligence. It also advised them that an error had been made in the calculation of sustainable EBITDA based on an accounting error in respect of revenues for the month of April 2013. Medisys advised that it calculated the revised sustainable EBITDA to be $1 million after taking the necessary adjustment into account.

[15] On October 21, 2013 the plaintiffs advised Medisys by letter (the “Rejection Letter”) that they considered the sustainable EBITDA of the Business to be $800,000. The plaintiffs further advised that they were prepared to issue a revised letter of intent for a transaction having a purchase price of $4.4 million.

[16] In the Rejection Letter, the plaintiffs stated the following by way of explanation of their calculation of sustainable EBITDA:

Our review of the materials provided in the data room has resulted in our assessment of a business that has sustainable EBITDA of approximately $800 thousand on a stand-alone basis. Our analysis includes:

• an assessment of LTM [last twelve months] revenue and specifically the ability to repeat October 2012 performance;

• a review of current occupancy cost charges versus those in the LTM results; and

• a review of current allocations of supplies and office costs charges versus those in the LTM results.

Given our current administrative capacity, we do not agree with the assumption that our current operation would be able to absorb functions currently embedded in the results of Plexo IME and accordingly do not agree with the stated normalization adjustment.

[17] The Rejection Letter concluded with the following paragraph:

We would like to thank you for the opportunity to review this transaction. Please let us know if you are interested in further discussions under the terms noted above. Alternatively, we would request your acknowledgement of this letter and specifically your obligation under the non-competition waiver, as amended by our LOI, to dispose of Plexo IME by February 21, 2014.

[18] On November 11, 2013, a representative of Medisys’ shareholder responded by letter (the “Medisys Response”) confirming its belief that the sustainable EBITDA of the Business should be calculated as $1 million and stating that Medisys was not willing to sell the Business for less than $5.54 million.

[19] The Medisys Response also contained the following statements:

• We confirm to you that we intend to dispose of Plexo IME, in compliance with section 9 of the LOI by April 24, 2013; and,

• No longer being bound by the exclusivity conditions of the LOI, we are actively marketing the asset, consistent with our above-noted obligation to dispose of Plexo, IME.

[20] On November 25, 2013, the plaintiffs replied by email (the “November Email”) stating that “[w]e have had the opportunity to review your proposal and regret to inform you that we are not interested in proceeding with the purchase of Plexo IME.” The November Email then addressed the plaintiffs’ concern that Medisys comply with the Restrictive Covenant as modified by the provisions of the LOI:

We note that clause 9 of our LOI issued October 3, 2013 provided for the extension of our non-compete waiver as follows: “9) Non-compete Waiver. If for any reason SCM elects not to close the transactions, the duration of the existing non-competition waiver will be extended by four (4) months from the date SCM informs the Vendor in writing that they do not intend to complete the transaction.” We note the highlighted section of this clause. We informed you in writing that we did not intend to complete the transaction on October 21, 2013. Accordingly, our waiver is extended to February 21, 2014 after which we would consider you in breach of the restrictive covenant.

[21] Thereafter, by emails dated January 8, 2014, January 28, 2014 and February 5, 2014, the plaintiffs sought confirmation that Medisys would sell or close down the Business by February 21, 2014.

[22] By letter dated February 7, 2014, which dealt primarily with other issues between the parties, counsel for Medisys advised the plaintiffs that Medisys had entered into a letter of intent with an unnamed party for the sale of the Business. The plaintiffs learned the identity of the purchaser, AssessMed, on February 20, 2014.

[23] On February 28, 2014, the plaintiffs delivered a demand letter and draft statement of claim to Medisys and AssessMed shortly before their intended execution of the agreement for the sale of the Business (the “AssessMed transaction”). The purchase price under the AssessMed transaction is $4.35 million.

[24] The plaintiffs commenced this action by a statement of claim issued March 4, 2014.

[25] On consent, the waiver of the Restrictive Covenant, as extended by the LOI, has been further extended to the period ending 48 hours after the release of this endorsement.

The Applicable Law

[26] It is agreed that the applicable standard on this motion is the three-part test for injunctive relief set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311, at para. 48:

First, a preliminary assessment must be made of the merits of the case to ensure that there is a serious question to be tried. Secondly, it must be determined whether the applicant would suffer irreparable harm if the application were refused. Finally, an assessment must be made as to which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits.

[27] The central issue on this motion is the plaintiffs’ allegation that Medisys was subject to a duty of good faith that informed its obligation to offer the plaintffs the first opportunity to negotiate the purchase of the Business. The content of a duty of good faith in a contractual context was addressed by O’Connor A.C.J.O in Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 2003 9923 (ON CA), 68 O.R. (3d) 457 (C.A.), at para. 53:

Canadian courts have not recognized a stand-alone duty of good faith that is independent from the terms expressed in a contract or from the objectives that emerge from those provisions. The implication of a duty of good faith has not gone so far as to create new, unbargained-for rights and obligations. Nor has it been used to alter the express terms of the contract reached by the parties. Rather, courts have implied a duty of good faith with a view to securing the performance and enforcement of the contract made by the parties, or as it is sometimes put, to ensure that parties do not act in a way that eviscerates or defeats the objectives of the agreement that they have entered into.

Analysis and Conclusions

[28] I will address each of the components of the test for an interlocutory injunction in turn.

Serious Issue to be Tried

[29] The first requirement for an interlocutory injunction is demonstration of a serious issue to be tried. The threshold is a low one. The Court must be satisfied after a preliminary assessment of the merits that the action is neither vexatious nor frivolous: see RJR-MacDonald at paras. 49-50.

[30] The right that Medisys granted to the plaintiffs in the 2012 Agreement is expressed as follows: “the opportunity to immediately acquire from MCH, upon MCH’s acquisition of Plexo, Plexo IME.” This is the entirety of Medisys' obligation and the plaintiffs’ right under that agreement.

[31] Medisys says that the parties agreed in the 2012 Agreement that they would have no legal obligations “unless and until a definitive agreement is executed.” It says that the parties never reached a definitive agreement for the sale of the Business, which is not denied by the plaintiffs. Medisys does not expressly argue that it had no obligation to the plaintiffs under the 2012 Agreement. It says, instead, that the 2012 Agreement gave the plaintiffs the opportunity to acquire the Business, that the plaintiffs terminated the negotiations and the LOI, and that Medisys was subject to no further obligation, including in particular any duty of good faith that obligated it to give the plaintiffs a right to match the price in the AssessMed transaction.

[32] The plaintiffs do not argue that the 2012 Agreement established a fiduciary relationship between the parties to that agreement. In any event, there is no basis for such a relationship based in either the wording of the 2012 Agreement or the context in which the 2012 Agreement was executed. Medisys is subject only to a contractual obligation. The 2012 Agreement provided that, in return for the plaintiffs’ waiver of their rights under the Restrictive Covenant, Medisys agreed to provide the plaintiffs with the opportunity to purchase the Business.

[33] However, the plaintiffs argue that the terms of the 2012 Agreement imposed a duty of good faith on Medisys which it breached in two respects: (1) in failing to negotiate the sale of the Business in good faith; and (2) in failing to provide the plaintiffs with an opportunity to match the price offered by AssessMed, given that it was, in the plaintiffs’ view, substantially equivalent to the price that it offered in the Rejection Letter. I propose to address each of these issues after first setting out my conclusions regarding the existence and content of the duty of good faith asserted by the plaintiffs.

The Alleged Duty of Good Faith

[34] The content of the right extended to the plaintiffs in the Restrictive Covenant is a matter of contractual interpretation. I think it is clear that the right granted to the plaintiffs was extremely limited. In this regard, it is important to note that the parties did not specify either the purchase price or a pricing formula that would apply to any sale of the Business. The entire issue of the purchase price was left to be negotiated. Nor did they express any of the other material terms of any such transaction, such as the structure of the sale, the approach to any working capital adjustment, continuing representations and warranties, etc. The 2012 Agreement granted the plaintiffs no more than a first right of negotiation, after which, if the parties were unable to agree on the terms of a sale transaction, including but not limited to the purchase price, Medisys would be free to shop the Business to any interested purchaser.

[35] There is case law that suggests that an obligation to negotiate an agreement or to negotiate an agreement in good faith is unenforceable. I do not agree in the particular circumstances of this case. I have proceeded on the basis that the parties intended that Medisys would be subject to an enforceable obligation to negotiate the sale of the Business with the plaintiffs prior to offering it to any third party. Such an obligation is a necessary corollary of the fact that the plaintiffs’ waiver constituted valid consideration in favour of Medisys. In these circumstances, the parties must have intended that the Medisys obligation to offer the Business to the plaintiffs would constitute an enforceable obligation. However, the content of that obligation requires greater clarification.

[36] Although the plaintiffs express the obligation as a duty of good faith, I think the better characterization of Medisys’ obligation is that of an obligation to negotiate in good faith. That is, it is an obligation to negotiate that is to be informed by the concept of “good faith”. 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. The duty of good faith implied in the 2012 Agreement is, therefore, in substance, a duty of Medisys 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”.

Did Medisys Breach its Obligation of Good Faith Negotiation?

[37] I turn then to the question of whether Medisys failed to negotiate the sale of the Business with the plaintiffs in good faith. There are two elements of this issue to be addressed: (1) whether the terms proposed by Medisys were objectively within a range that could be reasonably supported on the basis of the evidence; and (2) 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. I am not persuaded that Medisys breached its obligation to act in good faith in offering the plaintiffs the opportunity to acquire the Business for the following reasons.

Factual Background

[38] In August 2013, the parties agreed in principle on an approach to the calculation of the purchase price – a multiple of the sustainable EBITDA of the Business. They also agreed in principle on a multiple of 5.5. They disagreed, however, on the calculation of the sustainable EBITDA.

[39] The principal grounds of disagreement were threefold: (1) the length of the trailing period for calculation of EBITDA; (2) the extent to which Cira would realize synergies for overhead that should be reflected in reduced expenses and increased sustainable EBITDA; and (3) the extent to which Cira would also realize synergies for rent and any other occupancy charges that should similarly be reflected in increased sustainable EBITDA.

[40] Medisys considered the sustainable EBITDA to be approximately $1 million while the plaintiffs considered the amount to be approximately $800,000. As a practical matter, the approximately $200,000 difference between the parties can be divided almost equally between: (1) projected synergies to Cira in respect of overhead ($79,000) and occupancy costs ($20,000), totaling $99,000; and (2) use of a trailing twelve-month calculation of EBITDA versus a longer period proposed by Cira, which resulted in a difference of $111,025. I will address the reasonableness of Medisys’ position and whether it had an honest belief in the reasonableness of its position in turn.

Were Medisys’ Proposed Terms Reasonable?

[41] On the evidence before the Court, the plaintiffs did not challenge the concept of inclusion in sustainable EBITDA of any synergies likely to be realized by Cira. The plaintiffs also did not challenge Medisys’ calculation of the two components of EBITDA pertaining to potential synergies to Cira.

[42] Rather, the plaintiffs took the position that, based on its own circumstances, Cira could not realize such synergies as a factual matter. While this may be correct, there is no evidence to support this position. In these circumstances, it cannot be concluded that Medisys’ position was unreasonable.

[43] With respect to the second difference between the parties, the plaintiffs referred specifically to the impact of the October 2012 performance inflating sustainable EBITDA in the Rejection Letter. However, the real basis for the difference between the parties was that the plaintiffs calculated sustainable EBITDA over the last 32 months, rather than on a trailing twelve-month period. Given that a calculation of EBITDA on a trailing twelve-month basis is not uncommon, it cannot be said that Medisys’ approach to calculation of sustainable EBITDA was unreasonable. There is no evidence that use of such period would result in a distorted value for EBITDA given the historical experience of the Business.

[44] I am also not persuaded that Medisys’ agreement, four months later, to a purchase price in the AssessMed transaction that appears to approximate the purchase price proposed by the plaintiffs in the Rejection Letter is substantial evidence that Medisys’ position in its negotiations with the plaintiffs was unreasonable.

[45] The evidence before the Court is that the purchase price was arrived at as a five times multiple of sustainable EBITDA of $870,000. Medisys says the parties used a twelve-month trailing figure to November 30, 2013 of approximately $863,448, to which synergies of $6,552 were added. This is not contradicted on the record before the Court.

[46] On this basis, the following observations are relevant. First, Medisys apparently agreed to reduce the multiple of sustainable EBITDA in its negotiations with AssessMed to get an agreement. However, the plaintiffs accepted that a higher multiple of 5.5 was reasonable in their negotiations with Medisys. They cannot, and do not, argue now that Medisys should have negotiated with the plaintiffs on the basis of a lower multiple. Second, the EBITDA component of the sustainable EBITDA used by Medisys and AssessMed is still closer to the estimate of $914,395 used by Medisys in its negotiations with the plaintiffs. Moreover, the evidence before the Court is that the sustainable EBITDA used in the AssessMed transaction was lower due to the reduced profit for the twelve months ended November 30, 2013 versus the twelve months ended August 31, 2013 and, therefore, not comparable to the estimate proposed by Medisys in those negotations. Third, the reduced amount notionally attributable to synergies to AssessMed reflects the absence of any AssessMed operations in Quebec and corresponding reduction in potential synergies with its existing operations elsewhere. Given the foregoing considerations, there is no basis for concluding that the parties to the AssessMed transaction arrived at a purchase price in that transaction on a basis that demonstrates that the purchase price proposed by Medisys in its earlier negotiations with the plaintiffs was unreasonable.

[47] Based on the foregoing, I conclude that the terms proposed by Medisys in its negotiations were not unreasonable and therefore were not in breach of Medisys' duty of good faith negotiation.

Did Medisys’ Position Reflect an Honest Belief in the Reasonableness of the Position?

[48] The second issue is whether Medisys honestly believed that its approach to the estimation of sustainable EBITDA was reasonable in the circumstances or whether it adopted its position with a view to avoiding substantive compliance with its obligation to offer the plaintiffs the opportunity to purchase the Business.

[49] It is important, in this regard, that whereas EBITDA is a relatively precise term, “sustainable EBITDA” is a term of art and, as the plaintiffs acknowledge, contains a large element of subjectivity.

[50] There is no evidence that Medisys did not honestly consider that its approach was credible. The fact that its estimate of sustainable EBITDA was higher than the plaintiffs’ estimate reflects the fact that agreement on an estimate for sustainable EBITDA would ultimately be the outcome of a negotiation between the parties rather than a mechanical, objective calculation based on specific accounting principles. The plaintiffs do not suggest that the Medisys position in such negotiations was unprincipled. They disagree with Medisys only on the application of the principles to the position of Cira.

[51] The parties might have disputed whether sustainable EBITDA should be calculated with reference to a purchaser’s cost structure, i.e., whether it should include any synergies to be obtained by a purchaser. However, as mentioned, the plaintiffs did not raise any objection to the principle of their inclusion in the Rejection Letter. The plaintiffs’ position was instead that they did not believe that Cira would realize any such synergies. The evidence before the Court does not permit any clearer assessment on this issue.

[52] More importantly, the plaintiffs chose not to proceed further in the negotiations by providing some explanation or evidence to Medisys to support their position on Cira’s inability to realize synergies. Had they done so, Medisys might have been required to respond in a meaningful manner, depending upon the nature of the evidence produced by the plaintiffs. Instead, however, the plaintiffs in effect put Medisys in a position of having to bid against itself if it wished to obtain an agreement with the plaintiffs. Understandably, Medisys chose not to do so.

[53] The same can be said of the plaintiffs’ position with respect to the timeframe for calculation of the EBITDA from which any adjustments would be made to obtain an estimate of sustainable EBITDA. The plaintiffs also offered no reason to prefer a 32-month calculation over a trailing twelve-month calculation, let alone a compelling reason for doing so. In addition, however, in Medisys’ favour is the fact that calculations of EBITDA on a trailing twelve-month period are not uncommon.

[54] Based on the foregoing considerations, I conclude that there is no evidence before the Court upon which it could conclude that Medisys did not honestly believe that its approach to the estimation of sustainable EBITDA was unreasonable.

Conclusion Regarding Medisys’ Obligation of Good Faith Negotiation

[55] Based on the foregoing, I conclude that Medisys did not breach its obligation under the 2012 Agreement to provide the plaintiffs with an opportunity to purchase the Business.

Did the Plaintiffs Have a Right to Match?

[56] The second issue engages the plaintiffs’ principal argument on this motion: that the terms of the 2012 Agreement required Medisys to provide the plaintiffs with a right to match the offer of AssessMed in the AssessMed transaction once those parties had agreed on a purchase price for the Business.

Background

[57] I think it is clear that the 2012 Agreement did not contain a term obligating Medisys to offer the plaintiffs the opportunity to match any offer that Medisys might subsequently receive from a third party if negotiations between the plaintiffs and Medisys failed to result in a sale transaction between them. This result follows from a number of considerations.

[58] First, there is no basis in the plain wording of the 2012 Agreement or the LOI for any form of a right to match. The plaintiffs are sophisticated parties with access to corporate counsel. If they had intended such an arrangement, they had every opportunity to provide for it in one of these agreements and would have done so.

[59] Second, the LOI contained a binding exclusivity agreement for a period ending December 15, 2013. By implication, there was no exclusivity obligation or other obligation of Medisys in respect of its marketing of the Business to third parties that would operate following that date if the parties failed to reach an agreement. Similarly, the LOI spelled out the consequences of such a failure – a limited extension of the waiver of the Restrictive Covenant which provided for a disposition or termination of the Business within the four month extension period.

[60] Third, there is nothing in the context of the negotiation of the 2012 Agreement that supports the plaintiffs’ position that the right of first negotiation also included a right to match if the initial negotiations were unsuccessful. The evidence before the Court indicates that the plaintiffs’ concern in the circumstances of a failure of any negotiations between the plaintiffs and Medisys was the potential for renewed competition from Medisys. To this end, the 2012 Agreement contains language that addressed the obligation of Medisys to exit the Business within a defined period of time by a sale to a third party or a termination of the Business, at Medisys’ option. Significantly, however, the 2012 Agreement addressed only the possibility of competition by Medisys. There are no restrictions on Medisys' right to sell the Business to third parties. The parties did not contemplate, let alone address, the possibility of competition from other competitors of Cira who might wish to acquire the Business from Medisys.

[61] Fourth, throughout the period from the date of the Rejection Letter to February 21, 2013, the plaintiffs sought confirmation that the Business would be sold or closed down. They did not at any time assert any alleged right to match any offer that Medisys might receive from a third party who was a competitor of Cira.

The Plaintiffs’ Position

[62] Consistent with this conclusion, as I understand the plaintiffs’ position, they do not argue that there was an express or implied term of the 2012 Agreement that required Medisys to give the plaintiffs a right to match under all circumstances. Instead, the plaintiffs argue that the duty of good faith that is understood to operate in respect of Medisys' performance of its obligations under the 2012 Agreement required Medisys to give the plaintiffs a right to match in the circumstances of this case. They argue that the duty of good faith imposed an obligation on Medisys to provide the plaintiffs with an opportunity to match AssessMed’s offer. They say this obligation arose when Medisys and AssessMed agreed on a purchase price that, in the plaintiffs’ view, was equivalent to, if not slightly less than, the price at which the plaintiffs offered to purchase the Business in the Rejection Letter.

Analysis and Conclusion

[63] I find that there is no basis for the plaintiffs’ position in either the factual circumstances of this case — that is, in the alleged equivalence between the purchase price in the AssessMed transaction and the price offered by the plaintiffs — or in the nature of a duty of good faith more generally. I will address each consideration in turn.

[64] First, while the purchase price on the AssessMed transaction approximates the purchase price proposed by the plaintiffs in the Rejection Letter, I accept the respondents’ position that it is more favourable to Medisys than the plaintiffs’ offer in light of the details of the AssessMed transaction and the circumstances in which it was negotiated. I do not accept Medisys' argument that the additional cash generated by Medisys from the Business between November 1, 2013 and February 28, 2014 should be taken into consideration in its entirety. It is only the incremental income, if any, that would be relevant – that is, the income after deduction of the interest that would have been earned on the purchase price if a transaction with the plaintiffs had closed. However, I do accept that the proposed agreement reflects a reduced working capital target for the purposes of the working capital adjustment. In addition, as mentioned above, the transaction was negotiated on the basis of a lower estimate of sustainable EBITDA, reflecting reduced profitability over the later period used to calculate EBITDA. Further, to the extent potential synergies should be included in estimating sustainable EBITDA, there is an argument that Cira’s synergies would have exceeded those estimated for AssessMed. In the absence of any evidence to the contrary put forward by the plaintiffs in their negotiations with Medisys, Cira has operations in the province of Quebec that might have achieved synergies while AssessMed does not.

[65] On the basis of the foregoing, I conclude that, to the extent that the plaintiffs’ argument is based on the fact that the proposed purchase price in the AssessMed transaction approximates the price that the plaintiffs proposed, the record does not support the factual underpinning of this argument.

[66] Second, even if the purchase price was, in fact, approximately equivalent, I do not think that Medisys' duty of good faith in respect of its obligation in the 2012 Agreement required it to provide the plaintiffs with a right to match for the following reason.

[67] In effect, the plaintiffs ask the Court to imply a substantive right to match into the agreement under the guise of a duty of good faith. As mentioned, that is not consistent with the conceptual function of a duty of good faith, which is limited to ensuring the performance and enforcement of the provisions of a contract. 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.

[68] As described above, the only contractual obligation of Medisys under the 2012 Agreement pertaining to the sale of the Business was the obligation to give the plaintiffs the first opportunity to negotiate the purchase of the Business. Accordingly, the duty of good faith that is implied by the agreement of the parties in respect of the right of first negotiation relates only to the performance of that obligation. Medisys' performance of that obligation ended when the plaintiffs chose not to negotiate further after delivery of the Rejection Letter.

[69] As stated in Transamerica, Canadian courts have not recognized a duty of good faith that is independent from the objectives that emerge from the provisions of a contract. For the reasons set out above, there is no basis in the present circumstances for finding that the objectives of the parties to the 2012 Agreement included the provision of a right to match in favour of the plaintiffs. The parties did not agree to such a contractual provision. There is therefore no basis for implying a right to match into the agreement between Medisys and the plaintiffs under the principles set out in Transamerica. To do so would be to impose a substantive obligation on Medisys in the form of a right to match by means of the operation of a duty of good faith. This amounts to altering the terms of the 2012 Agreement by the imposition of a new, unbargained-for right as any such duty of good faith would be unrelated to Medisys' performance of its obligation to provide the plaintiffs with a right of first negotiation.

Conclusion Regarding a Serious Issue to be Tried

[70] Based on the foregoing, I conclude that there is no serious issue to be tried with respect to Medisys' alleged breach of its obligations to the plaintiffs under the 2012 Agreement.

[71] On this basis, it is unnecessary to address the remaining parts of the test for injunctive relief. I have, however, set out my views on these issues in case they are relevant.

Irreparable Harm

[72] The plaintiffs argue that, if the injunction is not granted, they will suffer irreparable harm in the form of a permanent loss of a unique market opportunity — the opportunity to acquire a major new platform for their independent medical examinations business in Quebec having, in particular, an office in the city of Quebec where Cira does not currently have a presence.

[73] There is at least some force to this argument. As the respondents note, there are circumstances in which loss of a business opportunity has been held to be quantifiable and therefore not irreparable harm. For example, in Dancap Productions Inc. v. Key Brand Entertainment, Inc., [2008] O.J. No. 3216 (S.C.J.), Morawetz J. concluded that a long-term management contract was capable of valuation and, accordingly, irreparable harm had not been demonstrated. However, in this case, while there is no evidence before the Court that the value of the Business in the hands of Cira could not be valued for purposes of the calculation of damages, it is should be recognized that the difficulties and uncertainties of any such valuation reasonably entail a real risk of irreparable harm. Insofar as any such harm is quantifiable, I think it is best addressed below in the context of the balance of convenience.

Balance of Convenience

[74] The assessment of the balance of convenience involves a number of factors.

[75] First, the plaintiffs argue that Medisys will not suffer any harm if the injunction were granted on the basis that, if the AssessMed transaction were to terminate, the plaintiffs are prepared to purchase the Business on the same terms and conditions.

[76] I am not persuaded by this argument. It cannot be assumed that, if an injunction were granted, the parties would reach an agreement notwithstanding the plaintiffs’ acceptance of the proposed purchase price in the AssessMed transaction. However, there remain significant additional terms of any such agreement that would need to be negotiated that could also affect the price for the Business. Moreover, any such agreement would be negotiated against the backdrop of an acrimonious relationship between the parties. The Court does not have the authority to order the plaintiffs to purchase the Business if the AssessMed transaction were to terminate as a result of an injunction, much less to supervise the finalization of an agreement between the plaintiffs and Medisys in such event.

[77] On the other hand, there is no evidence that AssessMed would withdraw its offer to purchase the Business if an injunction were granted. The risk of withdrawal would appear to be limited to the risk of occurrence of unanticipated events prior to a final determination of this action that would render the transaction less attractive, or no longer economically feasible, to AssessMed.

[78] Second, as mentioned, the plaintiffs argue that, if an injunction were not granted, they would lose a significant business opportunity, the value of which cannot adequately be valued by a court if they were successful at trial. I agree that, unlike the management agreement at issue in Dancap upon which Medisys relies, valuation of the Business would be considerably more difficult although not impossible.

[79] However, the force of this argument is diminished by the fact that the plaintiffs were prepared to accept a Medisys sale to a competitor or other party until they learned of the details of the sale to AssessMed on or about February 20, 2014. While the plaintiffs say that they are motivated in this action by the purchase price in that transaction, the facts suggest that they are also motivated by the opportunity to exclude a new competitor from the marketplace. To the extent this is the case, I do not think that the plaintiffs might not be able to demonstrate compensable damages.

[80] Third, an important consideration is the respective interests of Medisys and AssessMed in the Business during the period prior to final determination of this action. In this case, maintenance of the status quo would leave the Business in the hands of Medisys, which has no long-run interest in the Business. Accordingly, the effect of injunctive relief would be to leave the Business in the hands of a party that has no economic interest in maintaining, much less in growing, the Business during the period prior to a final determination of this action. Conversely, denial of an injunction would permit the AssessMed transaction to close, thereby putting the Business in the hands of a party that has a real economic incentive to maximize the Business during this period.

[81] In this action, the plaintiffs seek damages if they are successful. The historical experience of the Business in the hands of AssessMed would likely be a more reliable basis for any such calculation than the experience under the direction of Medisys. As alternative relief in this action, the plaintiffs seek an order for specific performance requiring Medisys to sell the Business to them at a purchase price equal to 5.5 times sustainable EBITDA in accordance with the terms of the agreement between the parties. If a court were to award such relief, the plaintiffs would likely receive the Business in better shape than if it had continued under the direction of Medisys.

[82] Fourth, AssessMed argues that, even if the balance of convenience favours the plaintiffs, they should be denied an injunction on the basis that the plaintiffs do not come before the court with clean hands. AssessMed says the evidence demonstrates that the plaintiffs commenced this action, and this motion, for an improper purpose, being to cause economic loss to AssessMed as a potential new national competitor if the AssessMed transaction were completed.

[83] There are a number of intemperate internal emails from the chief executive officer of SCM that may suggest that the plaintiffs’ purpose in bringing those proceedings was less to acquire the Business than to cause economic loss to AssessMed. However, the evidence also indicates that the plaintiffs continue to be interested in purchasing the Business at the purchase price in the AssessMed transaction if AssessMed were to withdraw its offer, not merely as a means of excluding a new competitor but also based on the economics of the transaction. This is consistent with the fact that the proposed purchase price is closer to the price proposed by the plaintiffs to Medisys in their negotiations than the price proposed by Medisys at that time. The evidence is not sufficient, in my view, to support a determination, on a balance of probabilities standard, that the sole or even the principal purpose of the plaintiffs in bringing the proceedings was to cause harm to AssessMed. I have therefore disregarded the “clean hands” consideration in assessing the balance of convenience in this proceeding.

[84] Based on the remaining considerations, I consider that the balance of convenience would favour denial of the interlocutory injunction.

Conclusion

[85] Based on the foregoing, the plaintiffs’ motion for injunctive relief is dismissed.

[86] If the parties are unable to agree on costs, each of Medisys and AssessMed shall have thirty days to submit costs submissions not exceeding five pages in length, together with costs outlines as required by the Rules of Civil Procedure, and the plaintiffs shall have a further fourteen days to submit any responding submissions they may choose to provide the Court not exceeding ten pages in length.

Wilton-Siegel J.

Date: April 28, 2014