BC Business Litigation Report

In This Edition

West Bay – Can a claim for wrongful dismissal proceed once the employer has obtained protection under the CCAA?

West Bay SonShip Yachts Ltd. (Re) 2009 BCCA 31

On this appeal, Mr. Esaw, a long term employee of West Bay, had commenced a claim for wrongful dismissal upon his termination from the company shortly after West Bay obtained protection under the Companies Creditors Arrangements Act ("CCAA"). Mr. Esaw did not file a proof of claim and took the position that his claim for wrongful dismissal ought not to be compromised by the plan of arrangement. Mr. Esaw's reasoning was that the claim for damages for breach of his employment contract did not accrue during the course of his employment but only arose when he was terminated. Therefore, West Bay had no liability, contingent or otherwise, until the termination of employment which occurred after West Bay sought protection under the CCAA. Thus, the claim for damages could not be compromised by the plan.

West Bay argued that, while the right to bring the claim for wrongful dismissal may not have crystallized until notice of termination was given, the company's obligation to pay severance was in existence, either in whole or in part, as of the filing date for protection under the CCAA. Thus, the claim is a "pre-filing" claim and is compromised by the plan.

The Court of Appeal determined that, while the claim was not a pre-filing claim, it was nonetheless captured by the plan of arrangement. The ongoing employment contract was an executory contract as there were obligations on both parties that were yet to be completed. Accordingly, the claims for damages for breach of the executory contract fell within the definition of "claim" in the plan and Mr. Esaw's claim was subject to the plan of arrangement. Accordingly, Mr. Esaw's wilful failure to file a proof of claim disentitled him to participate under the plan of arrangement.

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Seidel – What's the latest word from the BC Court of Appeal on the application of an arbitration clause to class actions?

Seidel v. Telus Communications Inc. 2009 BCCA 104

This appeal was heard at the same time as the appeal in MacKinnon v. National Money Mart Company. The issue on both appeals was whether, and to what extent, recent decisions in Dell Computer Corp. 2007 SCC 34 and Rogers Wireless Inc. 2007 SCC 35 had changed the law in British Columbia with respect to the interplay of arbitration clauses in contracts that were subject to claims under the Class Proceedings Act.

In an earlier decision in the MacKinnon case, the Court of Appeal held that an arbitration agreement applicable to a dispute was inoperative if the Court certifies an action dealing with a dispute as a class proceeding under the Class Proceedings Act and that it was premature to determine whether the action should be stayed until the court had dealt with the certification application.

The Dell and Rogers decisions from the Supreme Court of Canada held that procedural provisions applicable to class actions cannot modify the substantive rights created by an arbitration clause. Accordingly, the Court of Appeal in Seidel held that the earlier MacKinnon decision had been effectively overruled by the Supreme Court of Canada and that Telus was entitled to proceed with its application to stay the proceeding based on the operation of the arbitration clause. Finding no equitable reason, such as estoppel to prevent the arbitration from proceeding, the Court of Appeal stayed the class proceedings and directed that the matter be referred to an arbitrator.

An application for leave to appeal to the Supreme Court of Canada was made and leave to appeal was granted on November 5, 2009. The tentative date for the hearing of the appeal is May 12, 2010. We will include the decision of the Supreme Court of Canada in a subsequent edition of the BC Business Litigation Report.

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Petcetera – Can a landlord bar access to the tenant's premises once the tenant has given a notice of intention to make a proposal?

Re Canadian Petcetera Limited Partnership 2009 BCSC 520, 2009 BCCA 255

Petcetera operated a number of retail stores on leased premises. Petcetera's history for timely payment of rent on this particular lease was "dismal". It failed to make timely payments for several months in 2008 and all of the first three months of 2009. On March 21, 2009, Petcetera gave notice of its intention to file a proposal pursuant to the Bankruptcy and Insolvency Act. When payment for the April rent was not received on April 1, 2009, the landlord denied Petcetera access to the store, changed the locks and posted a notice of termination of the lease.

Petcetera sought an injunction requiring the landlord to allow it access to the premises. The trial court held that there was a serious question to be tried; however, since Petcetera had indicated that it was insolvent and was undertaking a liquidation sale of its inventory, there was no evidence of irreparable harm to Petcetera if it was not entitled to access to the premises. Further, Petcetera could not give a meaningful undertaking as to damages as it was insolvent. Therefore, the balance of convenience favoured the landlord.

Petcetera sought leave to appeal the decision to the Court of Appeal. The application for leave to appeal was dismissed.

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Gill – Who, between an innocent registered land owner and an innocent lender, should bear the risk of a rogue obtaining mortgage proceeds by fraud?

Gill v. Bucholtz 2009 BCCA 137

The Court of Appeal was asked to determine who, between an innocent registered owner of real property or an innocent lender, should bear the risk of a rogue obtaining the mortgage proceeds by fraud.

In this case, an unidentified fraudster forged the registered owner's signature on a transfer and subsequently granted two mortgages to two innocent lenders who relied upon the state of title at the time that the loans were made. Section 23 of the Land Title Act provides a fraud exception to the concept of "indefeasible title". The trial court held that, while the Plaintiff was entitled to be restored as registered owner to the property, the title would remain encumbered by the two mortgages granted to the Defendants.

On appeal, the court held that the Land Title Act preserves the "nemo dat" rule with respect to charges – even where the holder has relied on the register and dealt bona fide with a non-fictitious registered owner. The mortgagees in this case did not acquire any estate or interest in the real property on registration of their instruments because having been granted by a person who had no interest to give, those instruments were void both at common law and under the statute.

The court went on to say that "the Legislature of British Columbia would appear to have adopted the policy that the cost of frauds perpetrated against mortgagees and other charge holders should not be borne by the public but by lenders and other charge holders themselves. Whether this policy choice is a good one or not is not for us to decide". Accordingly, the appeal was allowed and the mortgages were cancelled from title.

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Hub – When does the contractual duty of fairness arise in the context of a bid made in response to an invitation to tender?

Hub Excavating Ltd. v. Orca Estates Ltd. 2009 BCCA 167

Hub Excavating Ltd. bid to provide construction and excavation services for a multi-phase subdivision in Nanaimo. Hub submitted the lowest bid and shortly after bids closed, its representative had a conversation with the project engineer who made representations that led Hub to believe that it would be awarded the contract. As a result, Hub did not bid on a contemporaneous project in Comox. Ultimately, all bids for the Nanaimo project were rejected and the Defendants decided not to proceed with the project. At trial, the judge awarded Hub damages of $300,000.00 representing lost profit that it would have earned on the Comox project. This was based on finding that the Defendants had breached an implied contractual duty of fairness and that the developers' representative had made a misrepresentation upon which the Plaintiff relied to its detriment.

On appeal, the Court of Appeal held that the trial judge erred in finding out that the contractual duty of fairness arose before the existence of the submission of the bid in response to an invitation to tender (referred to as Contract A). The contractual duty of fairness is an implied term of Contract A and thus only comes into existence when that contract is formed. There is no free-standing duty of fairness in the bidding process independent of that contractual duty.

Further, the Court of Appeal held that the Plaintiff could not have reasonably relied on the non-committal statements of the agent for the developers. Rather, the Plaintiff was faced with a business decision as to how to weigh the risk of bidding on the Comox project during the irrevocability period for the Nanaimo project. While the Plaintiff routinely bid on other jobs during a period of irrevocability, its representative was also aware that if it "cut and run" on owners, it was unlikely to be invited to bid again. Accordingly, the Plaintiff elected to take its chances with the developers and that gamble did not pay off, but it is not due to the representations made by the developers' agent. Accordingly, the appeal was allowed and the award of damages was set aside.

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Abakhan – Must a dishonest intent be proven in order to establish that a transfer of assets constitutes a fraudulent conveyance?

Abakhan & Associates Inc. v. Braydon Investments Ltd. 2009 BCCA 521

Abakhan & Associates Inc. was the trustee in bankruptcy for Botham Holdings Ltd. Assets were transferred from Botham to Braydon Investments Ltd. prior to bankruptcy. An application was made for a declaration that the transfer of assets was of no force or effect as against the trustee in bankruptcy.

At trial, the judge held that since one purpose of the asset transfer was to put Botham's assets out of reach of its creditors, the transfer met the test for a "fraudulent conveyance". This was the case, despite the fact that the principal of Botham had no dishonest intent (or mala fides) and acted on the advice of professionals to effect a legitimate business purpose with the transfer.

On appeal, the Chief Justice confirmed the decision below. Botham was trying to obtain the tax advantages associated with a s.85 rollover of assets (pursuant to the Income Tax Act) while limiting liability for the business venture by stripping out all of the assets. The Court of Appeal confirmed that it is the effect of the transfer, not the dishonest intent of the transferor that is operative.

An application for leave to appeal to the Supreme Court of Canada has been made. We will report on the results of that application in a subsequent edition of the BC Business Litigation Report.

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Larc – Does making a demand for particulars prevent a party from seeking a stay of proceedings pursuant to an arbitration clause?

Larc Developments Ltd. v. Levelton Engineering Ltd. 2010 BCCA 18

Levelton wished to invoke an arbitration clause and seek a stay of proceedings to the third party proceedings commenced against it by Larc. The law in BC is that this application must be made prior to a step being taken in the proceedings or else the ability to make the application is lost.

Counsel for Levelton demanded further and better particulars of the allegations contained in the third party notice and indicated that it would, if necessary, apply for a stay pursuant to the arbitration clause.

Ultimately, Levelton applied for, and was granted, a stay of proceedings. Larc appealed this on the basis that the demand for particulars constituted a step in the proceedings and the stay ought not to have been granted.

The Court of Appeal held that it was clear that a step in the proceedings had been taken. The issue was whether the taking of that step could be "rendered nugatory" by considering whether the party intended to embrace the court's jurisdiction in the dispute. The Court of Appeal answered that question in the negative and held that a party ought not be able to take advantage of the benefit of the litigation process (in this case, obtaining particulars) while preserving the ability to reject that process in favour of arbitration. In other words, once the party has attorned to the court's jurisdiction, it is no longer entitled to seek a stay.

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