Environmental Liabilities Open the Door to Partial Termination of Agreements During Insolvency

June 16, 2020

Written By Ken Lenz Q.C. and Keely Cameron

It has long been the law that termination of contracts is permissible under the Companies' Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act (BIA) with the effect of the termination being to create an unsecured claim for damages in place of the contract. What has not been permitted is allowing insolvent companies to pick and choose parts of an agreement to terminate. Following a recent decision arising out of receivership proceedings in the Yukon, it may now in some circumstances be possible to terminate parts of an agreement.

In Yukon (Government of) v. Yukon Zinc Corporation, 2020 YKSC 16, the Court found that it has the authority to authorize a partial termination of a contract pursuant to section 243 of the BIA and section 26 of the Judicature Act. The facts involved a receiver issuing a notice of partial disclaimer of a Master Lease. The Master Lease applied to approximately 572 items, namely equipment, tools, vehicles and infrastructure being used in relation to mining operations of the Yukon Zinc Corporation. The Receiver found that it only required use of 79 out of the 572 items and sought to disclaim (terminate) all but the portions of the Master Lease necessary for fulfilling its mandate.

The Receiver offered to pay a monthly lease rate for the 79 items, which rate was a fraction of the contractual rate. It maintained that the items were essential for it to fulfill its mandate of taking care and control of the site, including carrying out environmental remediation and realizing value for all creditors. It said the items were required to control water in the mine, generate electricity, maintain the airstrip and allow accommodation for employees. The Receiver had considered bringing in replacement equipment, but argued that would result in time and expense, and the delay could create environmental damage which ultimately could create health and safety concerns.

The counterparty to the Master Lease objected to the partial disclaimer asserting that a partial disclaimer was not permitted in law; the Receiver could either affirm the entire contract or disclaim the entire contract. The counterparty also argued that it would be prejudiced by a partial disclaimer and that if permitted it would be done all the time in insolvency proceedings. Contracts are negotiated as a whole and it is impossible after the fact for the Court to determine the give and take that would have led to an agreement. The Court should not, in effect, create a new contract for the parties based on a Receiver's particular needs.

The Court was ultimately persuaded that it had authority to permit a partial disclaimer of this contract in these particular circumstances. It was significant to the Court that the Receiver was acting in good faith, considering the interests of all stakeholders and that the terms of the original lease were onerous and not commercially reasonable in the circumstances. Still, the decision creates concern by opening the door to partial termination of agreements, an action generally considered to not be permitted in the past. Everyone would like the opportunity to obtain better terms on their agreements, and there are often cases where rewriting some contracts would permit a company to survive. Whether the case has broader application is important not just to companies looking to restructure, but to all those who engage in contractual relations.

Bennett Jones has extensive experience assisting clients on insolvency and restructuring matters. If you have any questions about the information in this article, please contact the authors or a member of the Bennett Jones Restructuring & Insolvency group.

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