Canada: Are CCAA Proceedings A Panacea For Assignment Or Novation Without Consent?

Last Updated: November 18 2015
Article by Scott H.D. Bower and Russell Kruger

A purported assignment of a contract without consent and an alleged novation were ineffective, the BC Court of Appeal recently held in Barafield Realty Ltd. v. Just Energy (B.C.) Limited Partnership, 2015 BCCA 421 [Barafield] in the context of considering Companies' Creditors Arrangement Act (CCAA) proceedings.

In Barafield, CEG Energy Options Inc. (CEG) entered into contracts to provide natural gas to apartment buildings owned by the respondents (Barafield). The contracts were for a fixed five-year term at a fixed rate. During this period, CEG entered into bankruptcy and CCAA proceedings. The contracts were sold to the appellants (Just Energy) and approved by an Alberta CCAA court (the Vesting Order). Barafield had no notice of these proceedings.

The contracts included a provision that allowed Barafield to terminate in the event CEG became insolvent. Once notice of the sale was provided by Just Energy, Barafield exercised its right to terminate the contracts, since the fixed price under the contracts had become higher than the market price of gas. Just Energy disputed the termination, and Barafield continue to pay for the natural gas while asserting termination. After the contracts expired, Barafield sued.

The trial judge found that Just Energy was in breach of contract by failing to get Barafield's consent to the assignment of the contracts, and awarded damages. On appeal, the BC Court of Appeal overturned this award. The appellate court held that the result of the trial judge's findings that the contracts required Barafield's consent to assignment, that Barafield refused to provide consent, and that there was no novation under the Vesting Order, was that there was no privity of contract between Barafield and Just Energy. As such, Just Energy could not be liable for breach of contract.

Just Energy also asserted, as an alternative defence, that the Vesting Order resulted in a novation, such that Just Energy stood in CEG's place, Barafield was not required to provide consent, and no breach of contract resulted. The Court reviewed the contracts, the purchase agreement by which Just Energy acquired the contracts from CEG, and the terms of the Vesting Order, and found there was no novation. The terms of the purchase agreement required CEG to obtain consents to the transfer of the purchased contracts, failing which Just Energy could either waive this requirement or rescind the agreement. CEG did not provide the consents, and Just Energy did not rescind. Further, the Vesting Order did not expressly or impliedly waive the necessity of obtaining Barafield's consent, as it said nothing about the rights of the counterparty to the contracts. Rather, Just Energy took a calculated risk in proceeding without the consents.

The Court also specifically addressed the issue of whether notice of proceedings is necessary before a CCAA court may make an order affecting the rights of third parties. It reviewed authority that suggested that "the best practice is to serve all counterparties to particular contracts that are sought to be assigned." Such authority was inconsistent with the assertion that the Vesting Order should be read expansively to nullify the rights of third parties. The Court concluded:

While this matter is ancillary to a CCAA proceeding, the matter we are considering is one where a third party purchases contracts of the debtor corporation, without notice to the counterparty of the contracts, knowing of and therefore assuming the risk of not obtaining consent to an assignment. There is no CCAA purpose that enures to the benefit of the interpretation of Just Energy in these circumstances. The terms of the Vesting Order and [purchase agreement] must be considered based on the meaning of the language employed. In my opinion, neither supports the proposition that a novation was intended or achieved.

Barafield thus serves to underscore that, generally speaking, a purported assignment of a contract that requires consent is not effective. Nor is a CCAA proceeding a cure-all for assignment or novation without consent – all of the circumstances, and in particular, the terms of a relevant court order, must be scrutinized. If it is desired to affect the rights of third party counterparties by way of an assignment or novation, notice of the CCAA proceedings should be given to them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Scott H.D. Bower
Russell Kruger
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