Earlier this month, the Delaware Court of Chancery released its
opinion in Winshall v. Viacom International, Inc.
The Court dismissed a claim for breach of the implied covenant of
good faith and fair dealing in a merger agreement. The sellers of
Harmonix Music Systems, Inc., the creator of the music-oriented
video games Rock Band and Guitar Hero, alleged that the buyer,
Viacom, breached this implied covenant in connection with an
earn-out provision contained in the merger agreement.
The earn-out provision provided the sellers of Harmonix with an
opportunity to earn additional cash payments from Viacom in the two
years following closing based on the extent to which gross profit
from sales of the Rock Band video game exceeded certain targets.
During the earn-out period, Viacom had an opportunity to
renegotiate the distribution agreement with the video game's
distributor, Electronic Arts, to reduce distribution costs. A
reduction in the distribution costs for the Rock Band game would
have increased gross profits and thus generated higher earn-out
payments for the sellers. Instead, Viacom and Electronic Arts
agreed to amend the distribution agreement to confer other benefits
on Viacom (including reduced distribution costs for another video
game that had not yet been released) and not lower the distribution
costs for the Rock Band game. The sellers alleged that Viacom
purposefully renegotiated the distribution agreement with
Electronic Arts so as to reduce the earn-out payments and thus
breached the covenant of good faith and fair dealing implied in the
The Court described the implied covenant of good faith and fair
dealing as follows:
Under Delaware law, an implied covenant of good faith and fair
dealing inheres in every contract. The implied covenant
"requires a party in a contractual relationship to refrain
from arbitrary or unreasonable conduct which has the effect of
preventing the other party to the contract from receiving the
fruits of the bargain." A party is liable for breaching the
covenant when its conduct "frustrates the overarching purpose
of the contract by taking advantage of [its] position to control
implementation of the agreement's terms."
The Court dismissed the sellers' claim primarily on the
basis that the sellers had no reasonable expectancy interest in the
subject matter of the amendment. The amendments to the distribution
agreement had no effect, positive or negative, on the amount of the
earn-out payment over what would have been expected under the
original distribution agreement with Electronic Arts.
In clarifying the application of the implied covenant of good
faith and fair dealing, the Court states:
The court must be mindful that the implied covenant of good
faith and fair dealing should not be applied to give plaintiffs
contractual protections that "they failed to secure for
themselves at the bargaining table." In other words, the
implied covenant is not a license to rewrite contractual language
just because the plaintiff failed to negotiate for protections
that, in hindsight, would have made the contract a better deal.
Rather, a party may only invoke the protections of the covenant
when it is clear from the underlying contract that "the
contracting parties would have agreed to proscribe the act later
complained of . . . had they thought to negotiate with respect to
So, you ask, does the implied covenant of good faith and fair
dealing apply here in Canada? Not sure, actually... My partner,
Geoff Hall, does an excellent job canvassing the divergent case
law in this area in his book, Canadian Contractual Interpretation Law
(LexisNexis Canada Inc., 2007) and ultimately concludes that there
is no clear answer in Canada (except in Quebec, where a similar
duty exists under civil law). Geoff says that such a thing would be
good to have since contracts work better when there is a duty of
good faith performance. In one of the closing paragraphs to his
book, Geoff states, "Relationships can inherently require
adjustment, and work best when problems, which inevitably arise,
are smoothed out by parties working reasonably and cooperatively to
fulfil the purpose of their agreement rather than clinging to the
letter of their contract."
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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