Editor’s Note: This post was written as a preview of an upcoming Supreme Court of Canada decision for the Fantasy Courts website and newsletter.
This Week at the SCC
On Friday, October 2, 2020, the Supreme Court of Canada is releasing its decision in Capital Steel Inc v Chandos Construction Ltd which looks at the intersection between bankruptcy & insolvency law and contract law. The central issue on appeal is whether the forfeiture provision conflicts with the common law anti-deprivation rule, which prevents parties from contracting out of bankruptcy laws.
A construction contract between Capital Steel and Chandos Construction contained a provision under which Capital Steel was to forfeit 10% of the total contract price in the event that it became insolvent. The total contract was for $1,373,300. Capital Steel completed most of the work and Chandos paid them $1,223,682. Before finishing the project, Capital Steel filed an assignment in bankruptcy and Deloitte Restructuring was appointed as its trustee in bankruptcy.
After offsetting additional costs incurred by Chandos to complete Capital Steel’s work, Chandos still owed a total of $126,818 to Capital Steel. Chandos took the position that it was entitled to further offset this amount against 10% of the total contract price, or $137,330, which it alleged Capital Steel had agreed to forfeit in the event of insolvency. This would effectively eliminate the debt owing from Chandos to Capital Steel and give Chandos a $10,511 claim provable in the bankruptcy proceedings.
Deloitte applied to a court for advice and directions. The chambers judge found that the provision was enforceable because, as a genuine pre-estimate of damages, it imposed liquidated damages and not a penalty. As a result, it represented a bona fide commercial transaction, the predominant purpose of which was not the deprivation of Capital Steel’s property. The majority at the Court of Appeal allowed Deloitte’s appeal on the grounds that the provision contravened the anti-deprivation rule. Justice Wakeling in dissent took the same approach as the chambers judge.
Chandos argues that a commercial contract signed in good faith prior to an insolvency should have its provisions upheld on bankruptcy. Otherwise, all corporate bankruptcies would invalidate otherwise enforceable contractual provisions which stipulate a consequence if there’s a breach.
Deloitte says this case is a straightforward application of the common law anti-deprivation rule to the contractual provision in question. It argues that a common law anti-deprivation rule exists in Canada and applies in situations like the present because Parliament did not replace the common law rule with a statutory provision in respect of corporate bankruptcies. It further argues that the provision would also violate the common law and equitable penalty rule.
This appeal gives the Court an opportunity to dig into some big picture principles regarding bankruptcy and freedom of contract. Whether they’ll engage with those principles is unclear. It’s been just over 250 days since the hearing, which could suggest the Court is in agreement or is taking the more straightforward approach proposed by the Respondent. However, the last significant bankruptcy case was Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 in which the Court found bankruptcy law didn’t have paramoutcy over provincial environmental responsibilities. I’ll be checking out the webcast of the hearing before locking in any predictions.
Last Time at the SCC
The season opener featured two highly anticipated Supreme Court of Canada decisions dealing with Ontario’s new anti-SLAPP legislation. In 1704604 Ontario Ltd. v. Pointes Protection Association, 2020 SCC 22, the Court unanimously dismissed the appeal and set out the framework to be used in deciding s. 137.1 motions. In a sign that we may be in for another season of close decisions, the Court then went on to split 5:4 in Bent v. Platnick, 2020 SCC 23 where it was applying the new Pointes framework.
In Pointes, a land developer sued for breach of contract a community group that was opposing development in an area that was part of a wetland. The two parties had previously entered into an agreement which purportedly limited the community group members’ conduct in respect of the approvals process for the proposed development. A member of the community group spoke out about the environmental impact of the development at a Ontario Municipal Board hearing. The SCC dismissed the appeal which meant that the community group’s s. 137.1 motion was allowed and the developer’s lawsuit dismissed because it was a “strategic lawsuit against public participation”.
Justice Côté writing for the Court described the s. 137.1 framework as follows:
- Threshold burden: 137.1(3) requires the moving party (i.e. defendant) to show the proceeding arises from an expression relating to a matter of public interest.
- Merits-based hurdle: s. 137.1(4)(a) requires the responding party (i.e. plaintiff) to show the proceeding has substantial merit and the defendant has no valid defence.
- Public interest hurdle: s. 137.1(4)(b) requires the responding party to show that the harm likely to be or have been suffered and the corresponding public interest in permitting the proceeding to continue outweighs the public interest in protecting the expression.
A plaintiff must satisfy both the merit-based and public interest hurdles to avoid having their claim dismissed. Justice Côté noted that the public interest hurdle in particular provides courts with a “robust backstop to protect freedom of expression”.
In Bent v. Platnick, the five-strong majority led by Justice Côté found that a doctor’s defamation lawsuit against a lawyer could go forward as it wasn’t meant to silence anyone. Applying the Pointes framework, she found that Ms. Bent successfully met her threshold burden under s. 137.1(3), but Dr. Platnick, successfully cleared both the merits-based hurdle and the public interest hurdle under s. 137.1(4)(a) and s. 137.1(4)(b). Citing Pointes, Justice Côté wrote that s. 137.1 must ensure that a plaintiff with a legitimate claim is not unduly deprived of the opportunity to pursue it. In this case, she found that “Dr. Platnick deserves to have his day in court to potentially vindicate his reputation — ‘a fundamental value in its own right in a democracy.’”
In terms of predictions, over 80% correctly predicted that the Court would dismiss Bent v. Platnick, but under 40% expected the same result in Pointes. Good luck this week!