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Ontario court raises questions about good faith, non-binding letters of intent

Matthew McGuigan and Bradley Gould
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This story was originally published by Law360™ Canada, (www.law360.ca) a division of LexisNexis Canada.

By Matthew McGuigan, Bradley Gould and Maria Sillano

Businesses often assume that the non-binding provisions of a letter of intent (LOI) leave them free to walk away from a proposed transaction. A recent Ontario decision suggests the position may be less straightforward.

An LOI is a document that sets out the principal terms of a proposed transaction or business deal, and provides a framework for the negotiations that follow. Although certain provisions may be expressly binding, an LOI is generally not intended to function as a definitive and binding contract, and generally does not oblige any of the parties to finalize the proposed transaction or business deal.

The recent Ontario Superior Court of Justice decision, Dr. Michael Emon Dentistry Professional Corp. v. Alexander Sevo Dentistry Professional Corp., 2025 ONSC 4961 (Emon Dentistry) introduces some ambiguity as to whether contractual good faith obligations apply to non-binding LOIs.

Good faith in contractual performance and negotiations 

In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court of Canada established the principle that each party to a contract must perform its contractual obligations honestly and in good faith. Parties remain free to pursue their own interests and take advantage of rights provided by the contract, but they cannot lie or knowingly mislead the other party about their performance.

Importantly, the duty of good faith arises with respect to the performance of contracts. Canadian law does not, however, recognize a freestanding duty to negotiate a contract in good faith. In Martel Building Ltd. v. Canada, 2000 SCC 60 (Martel), the Supreme Court of Canada explained that parties are entitled to pursue the most advantageous bargain for themselves and that imposing a general duty of good faith on negotiations could discourage economically useful conduct. Although courts have recognized limited exceptions, including in certain long-standing commercial relationships, the principle established in Martel remains widely followed.

The Emon Dentistry decision

In 2017, Dr. Michael Emon Dentistry Professional Corp. (Emon) entered into negotiations for the sale of its endodontic practice with Alexander Sevo Dentistry Professional Corp. (Sevo). The parties signed an LOI that was generally non binding, and expressly made the transaction conditional on Sevo obtaining satisfactory financing, completing due diligence in his “sole and absolute discretion,” and negotiating a satisfactory lease for the premises. The court did not expressly determine whether these provisions were binding.
After several months of negotiations, Sevo terminated the transaction pursuant to the LOI, citing several “red flags” that arose during his due diligence, including an inability to come to an agreement with the landlord on the lease, and the resignation of key employees of Emon’s practice. Emon brought a claim against Sevo, alleging that Sevo had breached his duties of good faith and honest performance by backing out of the transaction in three ways:
  1.  First, Emon argued that Sevo deliberately delayed and failed to finalize a lease that was a condition precedent to closing, in order to avoid completing the transaction. The court rejected this argument, finding that Sevo had negotiated the lease for several months and retained a leasing consultant at his own expense. These steps demonstrated a genuine effort to obtain a satisfactory lease.
  2. Second, Emon argued that Sevo relied on the LOI’s broad due diligence provisions as a pretext for withdrawing from the transaction. The court found that Sevo’s concerns, particularly the resignation of a key employee, related directly to the practice’s operations and future profitability. His decision was therefore connected to the purpose for which the discretion had been granted.
  3. Third, Emon argued that Sevo created a false impression that the transaction would close and failed to correct it. The court found no evidence of active deception or intentional misleading.

The court dismissed the action, concluding that Sevo had acted honestly and in good faith.

Implications of Emon Dentistry for good faith in negotiations

The analysis undertaken by the court to arrive at its decision creates ambiguity as to the role of good faith as it relates to the negotiation of a transaction pursuant to an LOI. Assuming the provision that set forth certain pre-conditions to closing were in fact non-binding — as the structure of the LOI appears to suggest — the court’s analysis suggests that contractual duties of good faith may apply to the non-binding provisions of an LOI. The reasoning may therefore blur the traditional distinction between contractual good-faith obligations and the absence of a general duty to negotiate in good faith.

Emon Dentistry does not expressly establish that LOIs attract good faith duties or that parties must generally negotiate in good faith. It does appear, however, to suggest that where an LOI contains non-binding provisions governing the negotiation process, a court may assess the performance of those provisions through the lens of contractual good faith. As of the date of this article, no appellate decision has been released with respect to Emon Dentistry.

Matthew McGuigan is an Associate in the Business & Transactions Group at Robins Appleby LLP. He is an Ontario lawyer advising on mergers and acquisitions, debt financing, private capital markets, and shareholder and partnership arrangements in the Canadian, cross-border, and international context. With a dual JD/HBA from Western University and Ivey Business School, Matthew applies his business acumen to address his client's legal needs.

Bradley Gould is an associate at Robins Appleby LLP who works in the firm’s business and

transactions group, regularly drafting and reviewing contracts

Maria Sillano is a summer student.

At Robins Appleby, we have been providing legal advice for over 70 years to entrepreneurs, businesses, financial institutions, and foreign companies operating in Canada. Located in Toronto's financial district, our firm is trusted by clients to help solve critical, time-sensitive issues. We offer a wide range of legal services including business and transactions, affordable and social housing, litigation and dispute resolution, commercial real estate development, tax law, employment law, and estate planning.

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