Download Stikeman Elliott 1 DERIVATIVES UPDATE JULY 1999 CCAA NEWS

DERIVATIVES UPDATE
JULY 1999
CCAA NEWS
Insolvent Party Allowed
To Terminate Commodity Purchase Agreements,
But Court Can’t Stay Set-Off Rights
On June 18, 1999 the Alberta Court of Queen’s Bench dealt with two issues that will be of
interest to parties to master agreements with Canadian business corporations, those being:
•
the ability of the insolvent party to terminate agreements; and
•
the right of the solvent party to exercise rights of set-off.
Blue Range, an Alberta natural gas producer, brought proceedings under the CCAA, a
federal statute facilitating the reorganization of insolvent corporations. Blue Range was
party to a number of master gas purchase and sale agreements with various gas marketing
companies. Three of these companies were the applicants in this particular proceeding.
Although the CCAA protects termination and close-out netting rights for “eligible financial
contracts”, it was accepted for the purpose of this application that these commodity
contracts were not eligible financial contracts. In the subsequent decision discussed above,
the court determined that the master gas purchase and sale agreements were not eligible
financial contracts.
The court order permitted Blue Range to terminate the agreements, even over the objection
of the solvent party. Blue Range was capable of delivering the gas, but wanted to terminate
those agreements because they required Blue Range to sell the gas at less than the current
spot price. The applicants wanted the order varied so that Blue Range could only terminate
if it was not capable of performing its gas delivery obligations under the agreements or
termination was essential to the success of the restructuring. It was argued that the court did
not have jurisdiction to permit Blue Range to terminate the agreements, given that it had no
such right under the agreements. The court disagreed. It held that an order authorizing
termination of agreements is appropriate in a CCAA restructuring. However, the court also
recognized that, while such an order allows the insolvent company to bring the agreement to
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an end, it does not prevent the other party from treating this termination as a breach of
contract and claiming damages for this breach.
The applicants then sought an order allowing them to set-off the amounts that they owed
with respect to deliveries of gas by Blue Range prior to and during the CCAA order (i.e.
February and March deliveries) against the damages owed by Blue Range as a result of the
pre-mature termination of the agreements. The CCAA order prevented set-off without
consent of Blue Range or the court except with respect to set-off under eligible financial
contracts. The court disallowed set-off, but it did so because there was no legal basis for setoff and not because it had the power to stay set-off rights.
Section 18.1 of the CCAA provides that the law of set-off applies to claims by and against
the debtor company to the same extent as if the company were plaintiff or defendant. Justice
LoVecchio was clearly concerned that recognizing set-off potentially created a priority for
the party with the set-off right over other creditors. However, he held that in light of this
new provision of the CCAA, he was bound to consider questions of set-off without
reference to the policy concern of potentially creating priorities between various creditors.
He then considered whether there was a right of set-off in the circumstances.
recognized the three bases of set-off known to Canadian common law:
•
legal set-off (the set-off of mutual liquidated claims),
•
equitable set-off (the set-off of fundamentally related claims), and
•
contractual set-off.
He
It was clear that legal set-off did not apply since the applicants’ claims for damages were not
liquidated. The argument centered around the availability of equitable set-off, but the court
found that there were no grounds for equitable set-off to apply. The test for equitable setoff was whether the anticipated damages were so closely connected to the payments for
February and March deliveries that it would be manifestly unjust or unfair to require the
purchasers to pay Blue Range for such deliveries without permitting the purchasers to setoff their claims for unliquidated damages. The court determined that the future damages
were sufficiently independent that it was not manifestly unjust to require the purchasers to
pay for the natural gas that they received.
The purchasers did not argue that they had a contractual right of set-off. Consequently, the decision
does not affect the enforceability of contractual set-off provisions. Because it recognizes that
contractual set-off is a valid basis for set-off, the case suggests that set-off language, such as that
recommended by ISDA, would be enforceable in a CCAA proceeding. Although the original CCAA
order stayed rights of set-off, it is clear from this decision that the stay cannot operate to prevent the
exercise of legal, equitable or contractual set-off rights.
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