Commercial litigation in Québec: 2020 review and takeaways for business

The COVID-19 pandemic has had an undeniable impact on the Québec courts, and yet the pace of commercial litigation has remained virtually unchanged in 2020 as businesses continue to respond to rapidly changing circumstances.

Three notable areas of development are set to shape commercial litigation in Québec in the year ahead: insolvency proceedings and distressed M&A; allegations of force majeure to excuse the non-performance of contractual obligations; and the expansive use of regulatory powers by government agencies.

Cirque du Soleil, Nemaska, and innovations in insolvency proceedings and distressed M&A

Canada’s Office of the Superintendent of Bankruptcy reported that insolvency activity in Québec jumped 25.9% in September, to almost 2,300 bankruptcies and proposals. Even the most iconic Québec businesses were not spared: the Cirque du Soleil filed for creditor protection under the Companies’ Creditor Arrangement Act (CCAA) in late June after being forced to cancel all shows and lay off the majority of its workers as a result of the pandemic.

The existing shareholders were unsuccessful in imposing their own bid as the “stalking horse” for the sale or investment solicitation process (SISP). The Cirque subsequently entered into a stalking horse purchase agreement with its lenders that was eventually accepted and approved by the Court as the winning bid on October 26. This transaction involved in part a new innovation in distressed M&A—the Reverse Vesting Order (RVO)—which was the subject of much attention in another CCAA proceeding before the Québec courts (learn more about the novel use of the RVO here).

Courts have generally been reluctant to qualify an event as force majeure; however, the COVID-19 pandemic created fertile ground for considering this issue in Québec.

The approval of an RVO as part of the CCAA proceedings of Nemaska Lithium Inc. was the first time an RVO has been approved in Canada following a contested hearing. The Court of Appeal’s refusal to grant leave to appeal further supports the use of an RVO as a creative solution to complex financial issues.

Nemaska had been developing lithium deposits in the James Bay region of Québec, as well as a transformation plant. Unable to find new sources of capital, Nemaska entered into CCAA protection in December 2019 and obtained court approval for a SISP. The successful bid was a form of credit-bid put forward by Nemaska’s principal secured creditor, Orion, along with Investissement Québec (IQ) and the Pallinghurst Group (PG).

Pursuant to the RVO, IQ and PG will take ownership of Nemaska free and clear of creditor claims, which will be transferred, along with unwanted assets, to a newly incorporated non-operating company. Nemaska’s existing shareholders will become shareholders of the new corporate entity, which will be subject to the continuing CCAA proceedings.

Takeaway: COVID-19 has precipitated the insolvency of some companies in precarious positions. As the pandemic continues, healthy businesses with stronger balance sheets may also be forced to resort to CCAA protection. In the coming months, creditors and investors stand to benefit from the courts’ endorsement of creative and flexible solutions like the RVO.

Québec’s interpretation of force majeure and pandemic-related claims

Force majeure releases parties from their contractual obligations which have become impossible to perform due to a disruptive event. From tenants and consumers of live events, to other organizations whose activities have been disrupted as a result of the pandemic, 2020 has seen many parties seeking to invoke force majeure in the course of their contracts.

Force majeure is interpreted differently under civil law than in Canada’s common law jurisdictions. It exists as a matter of law under the Civil Code of Québec (CCQ), which means that it may be applicable even without specific mention in the contract between the parties. However, it is interpreted narrowly: the event has to be unforeseeable, irresistible, independent of the non-performing party, and must have led to an absolute impossibility of performance (you can learn more about force majeure considerations in Québec here). Courts have generally been reluctant to qualify an event as force majeure; however, the COVID-19 pandemic created fertile ground for considering this issue in Québec.

In the first decision on this issue under COVID-19, the Superior Court of Québec found that the government decree which forced the closure of non-essential businesses qualified as force majeure. The landlord in that case sued its fitness centre tenant for unpaid rent. The fitness centre had been forced to close for months after the Government of Québec declared gyms to be non-essential businesses. The Court held that force majeure applied to the landlord’s obligation in that it prevented the landlord from providing the tenant with peaceful enjoyment of the premises, and the tenant was therefore not obliged to pay rent for that period.

Despite much disruption to their own internal management, regulatory authorities have continued to make broad use of their powers over businesses operating in Québec.

In another decision, the Superior Court was called upon to interpret the impact of the Canada Mortgage and Housing Corporation’s (CMHC) rent relief program whereby the CMHC funds 50% of a tenant’s rent, the tenant pays 25%, and the final 25% remains outstanding. The landlord in that case sued the tenant for unpaid rent and asked for a safeguard order for the payment of arrears. The tenant opposed this on the basis that the criteria for a safeguard order were not met. The Court noted that the landlord had chosen to deprive itself of 75% of the rent by refusing to adhere to the CMHC’s program and therefore could not seek a safeguard order for the entire amount.

Takeaway: While these early cases show a certain sympathy for the invocation of force majeure for contractual obligations affected by the pandemic, it is by no means certain that such generous interpretations will continue into 2021 as the pandemic persists. In one sign that patience may be wearing thin, landlords of The Bay in several Québec shopping centres were successful on November 20 in obtaining interim payment of rent pending final resolution of the matter. Similar considerations will also arise in the case of merchants obliged to refund pre-paid goods and services that are cancelled or postponed due to the pandemic. Businesses with contractual obligations that may be subject to disruption from the pandemic will want to monitor this area of case law as it develops as well as regularly assess and work to optimize their contractual relationships and contracting practices in Québec and elsewhere (you can read more on contracting strategies here).

Regulatory authorities’ broad use of powers

Despite much disruption to their own internal management, regulatory authorities have continued to make broad use of their powers over businesses operating in Québec. The Autorité des marchés financiers (AMF), for example, announced many measures to lessen the impact of COVID-19 on Québec’s financial system.

It also pursued several large investigations, levying fines against a number domestic and international companies. This trend was also observed at the federal level as the Financial Consumer Agency of Canada’s (FCAC) new enforcement powers came into force in late April 2020. The FCAC has used these powers and exercised enhanced scrutiny of the financial institutions it regulates, leading to an increase in litigation and enforcement proceedings.

Takeaway: Regulators in Québec, as elsewhere, have been responding quickly to the rapid change of 2020; businesses will want to ensure they keep close watch on the fast pace of regulatory adjustments being made as the pandemic crisis and economic impacts continue.

Conclusion

It has been a dynamic year for commercial litigation in Québec. COVID-19 has brought new issues before the courts and forced them to innovate, not only in the way they dispense justice, but in their approach to addressing commercial realities in a pandemic. Creative thinking and innovation in addressing these unprecedented developments will continue to be essential for businesses in 2021.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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