No statute governs earn-out manipulation directly. It turns on how the agreement defines the metric and on the general duty of good faith performance the Supreme Court recognised in Bhasin v. Hrynew.
Short answer
Yes, but only if the purchase agreement gives the seller something to sue on — either an express operating covenant the buyer breached, or, where the agreement is silent, an argument built on the duty of honest contractual performance. No Canadian statute polices how a buyer runs an acquired business during an earn-out period, so the seller’s claim rises or falls entirely on what the agreement itself says, and on how far the common law of good faith reaches where it says nothing.
No statute governs how a buyer must run a business during an earn-out period, or bars shipping inventory into a distribution channel before an earn-out’s measurement date. Revenue recognised on a real, contractual delivery is properly recognised revenue under ordinary accounting principles — there is no financial-reporting rule for a seller to invoke just because the buyer’s timing was self-interested.
That leaves two routes, and only one is reliable. The reliable one is drafting: an earn-out clause that includes an express operating covenant — a promise to run the business in the ordinary course, or not to take action for the purpose of reducing the earn-out — gives the seller a breach of contract claim with a defined standard to measure the buyer’s conduct against. Most of the reported disputes on earn-out manipulation turn on exactly that kind of clause, or the absence of one.
The unreliable route is an implied duty where the agreement is silent. The Supreme Court of Canada’s recognition, in Bhasin v. Hrynew, 2014 SCC 71, of an organizing principle of good faith — including a duty of honest performance — gives a seller a doctrinal argument that did not clearly exist before 2014. It does not give a predictable one: Canadian courts have not settled how far honest performance reaches into a buyer’s ordinary, self-interested decisions about how to run a business it now owns.
Everything changes on the clause. An earn-out with a defined operating covenant, a negative covenant against actions taken for the purpose of reducing the payout, or an audit right over the underlying figures gives the seller a contract claim with real teeth. One that names only the metric and formula leaves the seller arguing an unsettled implied duty — which is exactly the gap sellers’ counsel negotiate against up front.
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