Canada: Intellectual Property Licences And Insolvency Laws

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Information Technology, May 2008

Amendments to Canada's bankruptcy and insolvency legislation are another step closer to taking effect with the passage, in December 2007, of Bill C-12, "An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005" (C-12). When proclaimed into force, the amendments will partially clarify the rights of a licensee of intellectual property from an insolvent licensor. However, a number of uncertainties remain.

Legislative History

C-12 is the latest addition to a long-anticipated package of amendments to Canadian bankruptcy and insolvency laws. Prior to C-12 was Bill C-55, which was passed in 2005 but was not proclaimed into force. Amendments intended to correct certain flaws in the 2005 legislation were introduced to the house last spring as Bill C-62, but died when Parliament was prorogued. These amendments were reintroduced last fall as Bill C-12.

The Problems with Intellectual Property Licences and Insolvency Laws

C-12 is meant to clarify the rights of a licensee of intellectual property in the event of the insolvency of the licensor. Existing Canadian caselaw — most notably the 2005 British Columbia Court of Appeal decision in New Skeena Forest Products Inc. v. Don Hill & Sons Contracting Ltd. — supports the view that trustees in bankruptcy and receivers have the power to disclaim a debtor's executory contracts (i.e., contracts with unperformed obligations). The existence of this power suggests that an insolvent licensor (or a receiver or trustee acting on its behalf) could disclaim intellectual property (including software) licences, and prohibit the licensee from continuing to use the licensed intellectual property, even if only to negotiate terms more favourable to the licensor. In the event of any such disclaimer, the licensee may be left with only an unsecured claim for damages arising from the termination of the licence.

Canadian caselaw dealing specifically with IP licences in insolvency is sparse and somewhat inconsistent. In Re Erin Features No.1 Ltd., the trustee in bankruptcy sought to disclaim an agreement in which the bankrupt Erin Features had granted Modern Cinema Marketing Ltd. exclusive marketing rights in Canada to a film. The B.C. Supreme Court assumed without deciding that a trustee in bankruptcy has the power to disclaim executory contracts, but ultimately concluded that contract at issue could not be subject to disclaimer, on the grounds that the grant of exclusive marketing rights conveyed a property interest that could not be reversed. Although the court avoided an undesirable result, commentators have criticized the court's reasoning as inconsistent with the principle that a licence does not transfer a property interest.

In contrast, in Re T. Eaton Co., which involved a restructuring under the Companies' Creditors Arrangement Act, the Ontario Superior Court permitted Eaton's to disclaim an agreement with National Retail Credit Services Company (NRCS) granting NRCS an exclusive licence to supply credit card services to Eaton's customers and to use Eaton's trademarks in connection with such services. NRCS had paid Eaton's a significant amount of money for these rights. When Eaton's sought to disclaim the agreement in the course of its restructuring, NRCS applied to the court for specific performance. In denying the application, Farley J. held that to generally restrict debtor companies from repudiating contracts would constitute an insurmountable obstacle to effecting compromises and reorganizations and, accordingly, NRCS was entitled only to a claim for damages. Citing the English case Heap v. Hartley, Farley J. further held that the licences granted were not in the nature of a property interest.

Looking at the policy behind bankruptcy and insolvency laws, the rationale for giving a trustee in bankruptcy powers to disclaim certain types of executory contracts does not apply in the same way to intellectual property licences as it does to contracts for goods and services. To allow a debtor to disclaim an obligation for future delivery of fungible goods or services is reasonable where it promotes a fair compromise among creditors and maximizes overall recovery. The other party to the contract can take steps to mitigate the event of non-supply (or pre-emptive steps to hedge the risk) that may be unavailable or impractical in respect of intellectual property. Moreover, contracts to supply goods or services depend upon the ongoing viability of the insolvent party's operation and its ability to acquire and deliver the goods or services it purveys. In contrast, in the case of an intellectual property licence, nothing active may be demanded of the insolvent licensor at all, merely forbearance.

Because of the unique nature of intellectual property, to obtain a substitute may be extremely costly or impossible. It is generally not practical to choose a licensor based on its prospective solvency; moreover, it is arguably inefficient to encourage licensees to make such choices. Licensees bargain for the right to use intellectual property and pay for the expectation of continued use, even if there are ongoing royalty or maintenance payments to be made. To upset such arrangements unjustly enriches the licensor and its creditors at the expense of a party that should be treated as a bona fide holder for value.

When the amendments come into force, a licensee's right to use intellectual property, including the right to enforce an exclusive use, will be explicitly protected against rejection or disclaimer by the licensor in the course of licensor proposals under the Bankruptcy and Insolvency Act or restructurings under the Companies' Creditors Arrangement Act. The protection will apply during the term of the licence agreement, including any renewal as of right, subject to the licensee's continued performance of its obligations under the agreement in relation to the use of the intellectual property. The provisions do not protect the licensee against disclaimer of the licensor's other obligations under the licence agreement, such as obligations for ongoing maintenance, support or indemnity. The legislation is silent on whether the licensee has rights to any improvements made by the licensor on the licensed intellectual property post-bankruptcy.

The condition that the licensee continue to perform its obligations under the agreement may give rise to uncertainty in the situation where the agreement includes a licence as well as other arrangements between the parties, such as ongoing technical support, for a single bundled fee. In the event that the licensor disclaims the support obligations, it may be difficult to determine the correct fee that the licensee must pay in order to preserve its right to use the IP in accordance with the requirements of the legislation.

C-12 corrects certain deficiencies in the 2005 legislation, which did not explicitly address the issues of exclusive licences or renewals. Nevertheless, a number of deficiencies and uncertainties remain. In particular, because the amendments address only licensor proposals under the Bankruptcy and Insolvency Act and restructurings under the Companies' Creditors Arrangement Act, they do not address other circumstances where a trustee in bankruptcy or a receiver appointed over the assets of the licensor seeks to disclaim or terminate the licence or to sell the underlying intellectual property to a third party, free and clear of any existing licence rights. While some commentators do not consider this a risk, others have expressed concern that the proposed amendments still do not adequately protect the rights of licensees in insolvency proceedings.

Additional provisions of C-12 give a court power to order assignment of an insolvent person's contractual rights and obligations to another person who has agreed to the assignment. Although the court is required to consider whether it is appropriate to make the assignment, and the court's power to order assignment expressly does not apply to "rights and obligations that are not assignable by reason of their nature", the scope and extent of these limitations are not clear, particularly with respect to licence agreements. Accordingly, it seems possible that the provisions may permit a debtor-licensee to assign a licence agreement despite a contractual provision requiring the licensor's consent.

The U.S. Approach

The treatment of intellectual property licences under C-12 to some extent parallels that in the United States Bankruptcy Code (U.S. Code). The relevant provisions were developed in the wake of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., which allowed a bankrupt debtor in possession to reject an intellectual property licence, leaving the licensee with nothing but a claim for damages. The U.S. Code gives debtors a general right to disclaim executory contracts, but provides an exception in section 365(n) for intellectual property licences. Licensees may choose to retain their rights under the licence provided that they continue making any royalty payments due to the debtor, without any right of setoff. While the regime under C-12 has similarities to the U.S. model, it differs in several ways.

In the Canadian legislation, the term "intellectual property" is used but not defined, and thus would appear to include trade-marks, in contrast to the corresponding provisions under the U.S. Code, which do not apply to trade-marks. In the U.S. Code, the trustee is expressly required to provide the licensee upon request with any intellectual property and associated embodiments to which the licensee is entitled, and is prohibited from interfering with the licensee's rights to obtain the intellectual property or embodiments from another entity, thus reducing potential uncertainty around source code escrow agreements. The Canadian legislation is silent on this issue.


While C-12 resolves some uncertainties around the ability to disclaim intellectual property licence agreements in restructuring proceedings, the proposed amendments do not address circumstances where a trustee in bankruptcy or a receiver appointed over the assets of the licensor seeks to disclaim or terminate the licence or sell the underlying intellectual property to a third party, free and clear of any existing licence rights. As well, the amendments introduce new uncertainties that will need to be worked out in the courts.

Going forward, licensees will want to take steps to ensure that the application of the amended statutes to their agreements is clear, and in particular to separate the licensee's obligations in respect of the use of the intellectual property from other obligations under the agreement (for example, fees for maintenance and support services).

In addition, licensees should continue to consider use of other methods to protect against disclaimer by an insolvent licensor, including source code escrow, drafting the licence agreement in non-executory terms, obtaining an assignment or partial assignment of the intellectual property, taking a security interest in the intellectual property, or contracting with a licensor that resides in a jurisdiction with stronger protections for licensees.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
27 Oct 2016, Seminar, Toronto, Canada

Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.

1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.