04 November 2013

In insolvency, trigger clauses have their limits

I have observed many situations where very large corporations have dropped the ball in drafting their contracts.  Employment contracts contain many dumb errors, which I should expand upon in a later post. In this one, I want to talk about how Bell Mobility discovered how a clause in their contracts that aimed to limit its liability could be easily set aside by the courts. McCarthy Tétrault discussed it recently (as seen here), concerning the case of Aircell Communications Inc. v. Bell Mobility Cellular Inc. (2013 ONCA 95 (CanLII)).

Aircell, a dealer of Bell's products and services, was experiencing financial difficulties. Its agreement with Bell provided that:

  • upon its expiry, or 
  • if Bell terminates the Agreement as a result of Aircell’s failure to remedy a default in payment within 30 days after notice of default, or 
  • otherwise in accordance with the Agreement, 
 all of Bell’s obligations to pay commissions “shall cease immediately”.

At the time in question, Aircell was holding CAD 64,000 of Bell's product, and Bell owed Aircell CAD 188,981 in commissions. Aircell held a meeting, at which a Bell representative was present, to explore restructuring options, and Bell gave notice at the end of that meeting that it would terminate the agreement within 30 days if payment had not been made in full. Unbeknownst to Bell, Aircell had already filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. It was deemed to be bankrupt before the end of the 30-day notice period.

The bankruptcy trustee for Aircell successfully sued Bell Mobility for the difference between the value of the inventory held  and the amount of commissions owing, and the ruling was upheld by the Ontario Court of Appeal last February.

The ruling was based on the common-law principle of "fraud against the bankruptcy law", which was imported into Canadian bankruptcy law in the case of CIBC v. Bramalea Inc. (1995 CanLII 7420 (ON SC)). In that case, a clause in a partnership agreement provided that, in the event of default by an insolvent partner, a non-insolvent partner would have the right to purchase the other's partnership interest at the lower of net book value and fair market value. The Supreme Court of Ontario held that such a clause was void as being contrary to "the public policy of equitable and fair distribution amongst unsecured creditors in insolvency situations."

CIBC dealt with this principle in the case of the direct consequence of insolvency. Aircell has extended it to indirect cases as well. All businesses should be aware of the impact this may have on business arrangements they have entered into, or are contemplating to undertake. At the very least, trigger clauses may need to be framed to occur only in cases that fall outside the Canadian definition of insolvency.

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