By Mark Katz, Davies Ward Phillips & Vineberg LLP
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Canada's Competition Bureau has a wide array of compulsory powers available to investigate possible violations of the Competition Act. These include search and seizure, document production orders, compelling testimony under oath, and wiretaps.

The Bureau is not at all reticent about using these powers. Indeed, it has exhibited a growing propensity to resort to them. For example, in a merger investigation conducted earlier this year, the Bureau obtained 34 separate document production orders against industry participants. If that wasn’t enough, the Bureau, having reached an accommodation with the merging parties, then withdrew these orders after several weeks. In the meantime, of course, the subjects of the orders had expended significant time and resources in an effort to comply – an effort which was all for nought in the end.

The Bureau's tactic of choice is to arrive unannounced at the target's premises to search for and seize relevant documents and other records, including computer records. Related articles Competition compliance in Canada (April 2007) Competition Bureau targets professionals (December 2006) When is it legal to be loyal? Abuse of dominance and Canada Pipe (October 2006) The crackdown on cartels (April 2006)

When investigating potential criminal offences (such as conspiracies and bid-rigging), the Bureau's tactic of choice is to arrive unannounced at the target's premises to search for and seize relevant documents and other records, including computer records. To do so, the Bureau must first apply to a judge of a superior or county court for a warrant authorizing the search. These applications are made on a ex parte basis in order to maintain the element of surprise. The judge may issue the warrant if satisfied that there are reasonable grounds to believe that a contravention of the Competition Act has been, or is about to be, committed and that relevant records will be found on the specific premises to be searched.

In April 2007, the Bureau issued for consultation a draft "information bulletin" setting out its approach to obtaining and executing search warrants. The draft bulletin follows an information bulletin issued by the Bureau in 2005 describing the approach it takes to orders compelling document production and testimony under oath.

The draft bulletin, which deals with topics such as when the Bureau will seek a search warrant, the Bureau's procedures for conducting a search, and the treatment of seized records, provides a helpful summary of the Bureau's procedures when conducting a search and seizure. For the most part, the draft bulletin reflects longstanding Bureau practices and thus contains few surprises. That said, there are several points worth noting:

Computer searches

The Competition Act authorizes the Bureau to use any "computer system" on the premises to search for records described in the search warrant. In the draft bulletin, the Bureau takes the view that "computer system" includes personal computers, cell phones, mobile devices, digital cameras and wireless devices such as a BlackBerry. The Bureau also takes the position that any data that can be accessed via the on-site computer system is susceptible to being searched and seized, even if located off-site (e.g., at another office of the company). Although not discussed in the draft bulletin, the Bureau has indicated in the past that it can even seize off-site data that are located at sites outside of Canada. This position is untested and raises serious issues about extraterritorial application of Canadian law.

Sealing orders

One area where the draft bulletin departs from past Bureau practice is with respect to sealing orders. It had been the Bureau's recent practice to routinely request that all court records relating to a search warrant be sealed, even after the warrant had been executed. This prevented subjects of the search from accessing the Bureau's affidavit in support of the warrant, and thus from understanding the basis of the Bureau's belief that an offence had been or was likely to be committed. The Bureau's position was criticized as being inconsistent with the law in this area. In what is likely a response to these concerns, the draft bulletin now states that the Bureau will only seek a sealing order if it believes that disclosure would "subvert the ends of justice or impair its proper administration" (which is similar to the test in the Criminal Code).

Questioning individuals

The draft bulletin states that the Bureau will speak to persons on the premises in order to facilitate the search process. Generally speaking, parties are well-advised to provide such assistance, in consultation with counsel. However, the draft bulletin goes on to say that the Bureau may also wish to question individuals for the purpose of gathering evidence. Parties should be aware that they are under no legal obligation to respond to questions of this nature, since search warrants only authorize the Bureau to seize records, not to question individuals.

Given the powers available to the Bureau, an effective competition compliance program should contain guidelines on how to deal with a Bureau investigation, and particularly a search and seizure. These guidelines should instruct clients on how to co-operate with the Bureau's investigation (and avoid charges of obstruction) without sacrificing the legal rights to which they are entitled. (For additional information on this topic, please see Are You Prepared for a Search?, prepared by the Davies Competition Law Group).

Mark Katz is a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, where he is a member of the firm's competition law and foreign investment review groups. He has appeared at every level of court in relation to competition matters, up to and including the Supreme Court of Canada, and has acted as counsel on several leading cases before the Competition Tribunal, including the first abuse-of-dominance and merger cases heard by that body. Mark can be reached at 416-863-5578 or mkatz@dwpv.com.

By Michael P. Fitzgibbon, Borden Ladner Gervais LLP, Toronto
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In Canada, requiring that a terminated employee sign a full and final release in order to receive a severance payment in excess of the amount required under applicable employment standards legislation is the norm. However, the manner in which the release is presented to and entered into by the employee is critically important in maximizing the likelihood of its enforcement in the event that, after signing the release, the employee decides to pursue the employer at a later date.

Employers are undeniably anxious to “seal the deal,” as it were. In order to secure an expeditious result, they will sometimes require that the employee execute the release “on the spot” at the time of termination or within a short period thereafter. If the employer is attempting, through the execution of the release, to achieve finality, then it is important that it set the parameters for ensuring that the release will be enforced if an employee decides, following its execution, to pursue the employer.

Employers will sometimes require that the employee execute the release “on the spot” at the time of termination or within a short period thereafter. Related articles Enforceability of post-employment restrictions (June 2007) Wallace damages and mitigation income - is the case closed? (April 2007) The availability of punitive damages arising from the breach of human rights legislation: Keays v. Honda (December 2006) Determining the period of reasonable notice of termination (April 2006) How a rushed investigation can double your trouble (December 2005)

In a recent case – Titus v. William F. Cooke Enterprises Inc. et al. (Aug. 27, 2007, Ont. C.A.) – the Ontario Court of Appeal considered the issue of whether a release, signed in the termination meeting, prevented the employee from pursuing a claim for common-law damages for wrongful dismissal, or whether, as the employee argued, the release was unconscionable and of no effect. At trial, the judge found that “it would be wrong for me to apply the release as written to deny the employee the compensation that he was entitled at common law.” The employer appealed, and the Court of Appeal allowed the appeal. It found that the trial judge, in reaching his conclusion, did not apply the law of unconscionability.

The court set out the following principles:

• A party relying on the doctrine of unconscionability to set aside a transaction faces a high hurdle. A transaction may, in the eyes of one party, turn out to be foolhardy, burdensome, undesirable or improvident; however, this is not enough to cast the mantle of unconscionability over the shoulders of the other party (Fridman, The Law of Contract in Canada (Fifth Edition), p. 320).
• In order to set aside the transaction between the parties, the court must find that the inadequacy of the consideration is so gross, or that the relative positions of the parties are so out of balance in the sense of gross inequality of bargaining power, or that the age or disability of one of the controlling parties places him at a decided disadvantage, that equity must intervene to protect the party of whom undue advantage has been taken (Black v. Wilcox (1976), 12 O.R. (2d) 759 at 762 (C.A.))
• The test for unconscionability has been variously described, but the oft-cited case of Cain v. Clarica Life Insurance Co. (2005), 263 D.L.R. (4th) 368; which sets out a four-part test, is illustrative. Unconscionability arises in the event of:
• a grossly unfair and improvident transaction; and
• a victim’s lack of independent legal advice or other suitable advice; and
• overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
• other party’s knowingly taking advantage of this vulnerability.

The court went on to consider, among other things, the offer made by the employer, the experience in employment law of the employee and other factors. It concluded that in the circumstances, the release was not unconscionable and was enforceable.

As the court observed in William F. Cooke Enterprises Inc., following the Supreme Court of Canada's decision in Wallace v. United Grain Growers [1997] 3 S.C.R. 701, “there is an inherent imbalance in bargaining power between an employer and an employee when the former terminates the employment of the latter.” This was minimized in the circumstances of Cooke, but the court noted that this was a “generalized vulnerability.”

The Ontario Court of Appeal decision is exceptional in that the facts were quite unique and the conclusion reached turned on those facts. The court notes that a plaintiff seeking to set aside a release on the basis of unconscionability faces a high hurdle. However, it's worth noting that the Wallace case, among others, appears to emphasize an inherent, though seemingly rebutable, presumption of vulnerability.

Employers would be wise to continue to provide terminated employees with a reasonable period of time after the termination to consider the severance offer and obtain legal advice with respect to it. Furthermore, employers should continue to apply a reasonable and even-handed approach when dealing with terminated employees including, for example, requests for extension of time for considering the severance proposal.

Michael P. Fitzgibbon is a partner at the national law firm of Borden Ladner Gervais LLP, where he practices management-side labour and employment law. He runs the labour law blog Thoughts from a Management Lawyer.

By Jamal Hejazi, PhD, and Mark Kirkey, CGA, Gowling Lafleur Henderson LLP, Ottawa
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As international finance becomes more globalized and competitive, multinational companies, particularly those offering financial services, must ensure that the cost of borrowing money is as competitive as possible to reduce borrowing costs. This often requires that a financially superior foreign parent guarantee the loans of a weaker subsidiary, thereby ensuring the subsidiary has access to lower borrowing rates and higher profits.

Transfer pricing legislation requires the borrower to pay the guarantor an arm’s-length fee for providing such a service. Transfer pricing involves the price that a member of a multinational firm charges a related foreign entity for goods, services and/or intangibles. The provision of a guarantee fee falls within the realm of the transfer pricing legislation and accordingly, must be transacted in an arm’s-length manner (there is one exception to this rule, in s. 247(7) of the Canada Income Tax Act. However, this exception is beyond the scope of this article).

As international finance becomes more globalized and competitive, multinational companies, particularly those offering financial services, must ensure that the cost of borrowing money is as competitive as possible to reduce borrowing costs. Related articles Gifting cultural propery in Canada: testing a tax expenditure (June 2007) Flying offshore: the benefits of migrating your intangible assets (April 2007) Trick or treat: income trusts and charities (December 2006)

As part of their international audit activities, tax authorities are increasingly targeting what a member of a multinational firm (often the parent company) charges an affiliate for securing loans on its behalf. This charge is called a guarantee fee, and is a controversial issue in the area of transfer pricing. Determining the potential size of the guarantee fee, in theory, involves first determining the stand-alone credit rating of the subsidiary, whose debt will be guaranteed, and then comparing it to the rating of the guarantor. This is often achieved by using reputable credit rating agencies such as Standard & Poors. The difference between the credit ratings of the two entities will correspond to an interest rate differential that will form the basis of a guarantee fee. Thus, the maximum amount of any guarantee fee is the interest rate differential, i.e., the interest rate with versus without the guarantee fee. The financial circumstances of the entities involved will often determine how the interest rate savings will be apportioned.

Other approaches that may be taken include utilizing the comparable uncontrolled profits (CUP) methodology, which involves finding comparable guarantee fee transactions that are very similar to the company being reviewed. This approach is quite difficult to use, as the level of comparability required is very high and details of guarantee fees between unrelated parties are not readily available.

The potential size of guarantee fees and the corresponding movement of money across international borders has resulted in tax authorities taking views that may be contrary to the arm’s-length standard referred to in s. 247 of the Income Tax Act. While the first approach (discussed above) clearly satisfies the arm’s-length principle found in legislation, it may be side-stepped by the taxing authorities in favour of taking a consolidated approach to credit ratings where the relationships between the parent company and the subsidiary are part of the analysis in determining the rating of the subsidiary. In order to avoid this, documentation must exist to support the stand-alone credit rating. The difficult question that arises in performing the analysis is: how do we remove the synergies that exist between the related parties in order to determine the stand-alone rating?

In our view, the parent guarantor and subsidiary receiving the guarantee must be treated separately in order to comply with the arm’s-length principle. To state that the parent company would not let the subsidiary default on their loans with or without the guarantee would be to ignore the arm’s-length principle. What must be examined is how two independent parties would interact under similar circumstances. As stated above, finding a CUP is difficult, if not impossible, in most situations, due to a variety of differences that may exist. Using segregated financial information, making reasonable adjustments, and considering the credit rating factors used by Standard & Poors, as well as other credit rating agencies, we believe that reasonable conclusions can be drawn.

In some cases, the credit rating of the subsidiary may converge with that of the parent company, but in most cases a lower credit rating will be obtained by the subsidiary. Logically, the consolidated approach will often result in a smaller guarantee fee than in the stand-alone case. While theory and practice would suggest that a guarantee should exist, the application is more difficult. Due to the differing views on this subject and the fact that some economic adjustments are required, taxpayers will often find it difficult to obtain resolution with the taxing authorities in situations where the cost of paying the guarantee fee is material.

Current cases involving guarantee fees in the courts

This issue of guarantee fees is before the Tax Court of Canada (TCC). The case currently before the TCC involves intercompany transactions between General Electric Capital Canada Inc. (a Canadian corporation) and its parent company GE Capital, a U.S. corporation not resident in Canada. The Canadian taxpayer, in April 2006, filed a notice of appeal regarding the CRA’s denial of deductions for guarantee fees paid by the Canadian taxpayer to its non-resident parent company over the 1996-2000 taxation years. This transfer pricing dispute (with approximately CAD$136.4 million in deductions in issue) is the largest transfer pricing adjustment ever brought before the TCC.

The CRA is of the view that the guarantee did not have economic value due to the creditworthiness of the Canadian subsidiary. Based on GE Capital Canada’s appeal and CRA’s subsequent reply, the CRA has deemed the subsidiary to have the same credit rating as its parent, rather than examining and considering each party’s credit rating on a stand-alone basis. Such an argument on behalf of the government is akin to arguing for deemed consolidation, a position that is contrary to the arm’s-length principle.

Should the TCC rule in favour of the CRA, the decision will have broad implications for transfer pricing in Canada, given that the government’s position seems to disregard a principle that constitutes the backbone of transfer pricing in Canada.

Jamal Hejazi is a senior member of the Gowlings Transfer Pricing and Competent Authority team. Prior to joining Gowlings, Jamal was a senior transfer pricing economist with the Canada Revenue Agency, where he participated in the resolution of a number of transfer pricing issues, including the relief of double taxation on Canadian corporations. Contact Jamal at (613) 786-8660 or jamal.hejazi@gowlings.com.

Mark Kirkey is a Certified General Accountant and senior member of the Gowlings Transfer Pricing and Competent Authority team. Mark was formerly a senior analyst for the Canada Revenue Agency's International Tax Directorate. During his tenure with the CRA, he worked on more than 100 Competent Authority cases and numerous Advanced Pricing Agreements. Contact Mark at (613) 786-8688 or mark.kirkey@gowlings.com.

By Richard S. Levick, Esq., President and CEO, Levick Strategic Communications
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The tentacles of class action litigation have reached beyond American borders, much to the delight of trial lawyers and the dismay of corporations. In Canada, class actions are increasingly a fact of life – a reality underscored when Canadian pet food manufacturers took center stage in the ongoing pet food crisis.

Media, technology, and pharmaceutical corporations are also getting caught in the crosshairs, while plaintiffs’ law firms in Canada are learning how to recruit clients online with aggressive ads and postings.

To deflect the class action offence, show off your people – your employees and customers. Related articles Keeping your company out of the news and your directors out of jail: the new role for general counsel (June 2007) Leading and influencing change as in-house counsel (October 2006) Corporate governance strategies for directors and officers to mitigate personal liability (April 2006)

Corporations affected by increased litigation in Canada include:

• Sony BMG, accused of selling music CDs encrypted with anti-pirating technologies that create dangerous privacy and security issues for consumers;
• Dell Computer, accused of selling defective computers susceptible to overheating and motherboard failure, often just after the standard one-year warranty expires; and
• Bristol Myers Squibb, charged with failing to warn patients of the risks associated with the commonly prescribed antibiotic Tequin. 

From the outset, plaintiffs’ lawyers have an underlying advantage: because their clients are a mass group of ostensible victims, the damages seem all the more real. Class actions thus generate widespread perception that a whole human population is suffering at the hands of an indifferent entity, which just happens to be your company.

In response, Canadian businesses need multifaceted legal and communications strategies. At the very least, companies not be seen as impersonal entities pitted against victimized population segments. To deflect the class action offence, and to establish a strong measure of public support, Canadians must learn what their neighbors to the south are already learning – that they need to be just as human, and just as worthy of sympathy and fair play, as the people suing them.

Toward that end:

• Show off your people – your employees and customers. Merck’s strategy in the Vioxx wars is a good example. In 2006, the company ran television commercials showcasing the human benefits of the work that its human employees were doing. There was no direct reference to Vioxx, only a generalized and effective message about the company itself.
• Talk about the future – what the company is doing to remedy the very problems that prompted the class action.

The best tactical practices that govern both the content and process of public communications during litigation take on ever greater urgency during class actions – especially in the age of the Internet, where blogs, websites, and other forms of consumer-generated media blend fact, fiction and opinion in a way that can influence consumers, shareholders and the traditional media who are actively seeking the latest information.

Make sure that you own the Internet:

• Monitor the blogosphere, but beware the “blogging bug.” Watch for articles about you and the issues facing the industry in blogs and traditional media outlets. Have all materials drafted by your crisis counselors. But don't even think about publishing under a pseudonym, as John Mackey of Whole Foods did. Even here there are rules.
• Consider your own blog. Expanding on the point above – if you already have your own business blog or are just considering one, it's worth noting that a transparent, frequently-updated, well-regarded blog is an excellent communications tool during times of peace and times of crisis.
• Create crisis information templates for your website. Create a template and placeholder content for pages on your website that would be called into play during a crisis or class action suit (e.g., press releases, FAQs, an open letter to consumers, updates, etc.), but don't publish the pages to the Web. By having templates ready to go, your business can more quickly launch the newly relevant information, if and when the time comes.
• Use the Internet as an "early warning system." The plaintiffs' bar is extremely adept at using the Internet to recruit potential class action clients. Keep an eye out for sponsored or pay-per-click (PPC) campaigns appearing in search results or within blogs, as well as monitoring forums and message boards related to your industry.

Daunting as they are from a communications standpoint, class actions do allow defendants one strategic advantage – time. In Canada, just as in the U.S., plaintiffs’ firms must recruit before they can file. While their solicitations unfortunately ensure widespread public visibility, the public notices also mean that you can begin planning a public response – and perhaps an offence – well in advance.

Richard S. Levick, Esq., President and CEO of Levick Strategic Communications, protects brands and reputations during the highest-stakes global crises and litigation. His firm was named Crisis Agency Of The Year in 2005 by the prestigious Holmes Report and directs communications for many of the world’s highest-profile litigation, crisis and regulatory matters. A regular commentator on television, he was recently named to both the PRNews Hall of Fame and to the College of Law Practice Management for life time achievement. Contact Richard at rlevick@levick.com. Find a comprehensive arsenal of vital communications tools at http://www.levick.com - including books, newsletters, and helpful articles.

By Douglas A. Palmateer, Aird & Berlis LLP, Toronto
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Editor’s Note: This is the second of a two-part article dealing with changes to Canada’s bankruptcy and insolvency laws spelled out in Bill C-62. Although Bill C-62 died on the order paper when Prime Minister Stephen Harper prorogued Parliament in early September, the legislation has survived previous changes in government and is a likely candidate to be resurrected when the new session of Parliament begins.

Part one is available in the previous issue of Addendum's Business and Corporate Edition. The entire article is also available as a PDF download.

D. Bankruptcy

(1) “Date of the initial bankruptcy event”

In some of the following sections in Parts D and E, time periods are calculated by reference to the “date of the initial bankruptcy event.” Although there are some exceptions, that phrase generally means the earliest of the date of filing or making of (a) an assignment, (b) a notice of intention to make a proposal, or a proposal, or (c) an application in respect of which a bankruptcy order is made. Bill C-62 will add commencement of a CCAA proceeding as a bankruptcy event.

(2) Wages and vacation pay

When a debtor becomes bankrupt, it is the current law that unpaid wages and vacation pay are unsecured, but are given a preference over ordinary unsecured claims to the extent of $2,000 per person for services rendered during the six months immediately preceding the bankruptcy, and to the extent of $1,000 for proper expenses incurred by a travelling salesperson during the same period.

Under Chapter 47, wages, salaries, commissions and compensation, including vacation pay but not termination pay or severance pay, are secured by security over all of the debtor’s current assets. The applicable period is the period of six months immediately before the date of bankruptcy. The features of this security are virtually identical to those of the security for such claims in a receivership described above.

Bill C-62 makes similar changes for bankrupt employers to those outlined above for employers in receivership. However, the applicable period is the period beginning six months before the date of the initial bankruptcy event and ending on the date of bankruptcy.

Under the WEPP, the federal government, through the Consolidated Revenue Fund, will pay certain wages owed to most employees whose employment has been terminated and whose employers are bankrupt or subject to a receivership. Related articles Directors' liability under the Canada Business Corporations Act: Englefield v. Wolf (April 2007) Night of the Living Debt: debts that just won't die (December 2006) Franchise legislation in Canada (December 2006)

(3) Pension plan contributions

When a debtor that participates in a pension plan for the benefit of employees becomes bankrupt, it is the current law that unpaid contributions by both the debtor and its employees to a pension plan regulated by Ontario law are unsecured (unless the debtor holds the funds in a separate account). The law is likely the same for federally regulated pension plans.

Chapter 47 created a security for unpaid contributions over all of the debtor’s assets, which is virtually identical to the security for such claims in a receivership.

Bill C-62 will make no further changes to the law.

(4) Unpaid suppliers

The right of repossession by an unpaid supplier is the same when a debtor becomes a bankrupt as when it becomes subject to a receivership. The reference date for calculating the start of the 15-and 30-day periods under Chapter 47 is the day on which the debtor became bankrupt.

Bill C-62 will make no further changes to the law.

E. Other Issues

(1) Wage Earner Protection Program

Chapter 47 enacted the Wage Earner Protection Program Act (WEPPA), which will, in turn, establish the Wage Earner Protection Program (WEPP). Under the WEPP, the federal government, through the Consolidated Revenue Fund, will pay certain wages owed to most employees whose employment has been terminated and whose employers are bankrupt or subject to a receivership. Employees who were directors or officers of the former employer, had a controlling interest in its business, or occupied a managerial, position are ineligible.

The wages must have been earned in the six months immediately preceding the date of bankruptcy or receivership. The maximum amount that may be paid to each employee is the greater of $3,000 and four times the maximum weekly insurable earnings under the Employment Insurance Act, less any statutory deductions.

The WEPP may affect secured creditors in two respects. Where the government makes a payment to a former employee under the WEPP, it is subrogated to the employee’s rights, including enforcement of the security against current assets described above. It is possible that the federal government pays $3,000 to an employee, but recovers only $2,000 through the statutory security. The $1,000 difference appears to be unsecured.

In addition, the WEPP requires every trustee and receiver to perform certain duties (to identify each employee who is owed qualifying wages, to calculate the amount of those wages, and to inform each employee of the WEPP’s existence and the conditions for receiving payment) and makes failure to perform those duties an offence. The fees and expenses incurred by a trustee or receiver in performing these duties are to be paid out of the employer’s estate. However, trustees and receivers will undoubtedly require indemnities for this liability and their fees and expenses from the secured creditors that seek their appointment.

Bill C-62 will make some changes to the provisions of the WEPPA dealing with the procedure for application for payment, review of the minister’s determination of eligibility, appeal to an adjudicator, and administrative matters.

(2) Income trusts

Chapter 47 amended the BIA and the CCAA to apply to income trusts, which were included in the definition of “person” in the BIA and of “company” in the CCAA. An income trust is defined as “a trust (a) that has assets in Canada and (b) the units of which are traded on a prescribed stock exchange.”

Bill C-62 will amend this definition in two respects. Part (b) will require that the units be listed (rather than traded) on a prescribed stock exchange on the date of the initial bankruptcy event under the BIA or the date of commencement of CCAA proceedings. In addition, trusts will qualify if a majority of their units are held by a trust that satisfies the definition.

(3) Agreements with third parties (executory contracts)

(a) Termination by Debtor

Currently, in proposals, a debtor may disclaim only commercial leases of real property in which the debtor is lessee. Courts in CCAA proceedings have permitted disclaimer of leases and other agreements, although there is no specific authority in the statute for such actions.

Chapter 47 gave specific authorization to debtors involved in reorganization under both the BIA and the CCAA to disclaim or terminate a wide range of agreements to which the debtor is a party. Under both statutes, a debtor may not disclaim an eligible financial contract (a defined term which includes a currency or interest rate swap agreement and a spot, future, forward or other foreign exchange agreement), a collective agreement, or a financing agreement if the debtor is the borrower, and a lease of real property if the debtor is the lessor. The debtor exercises the right of disclaimer by giving 30 days' notice to the other parties to the agreement, which have 15 days after receiving the notice to apply to court for relief from the disclaimer. The test for court interference is the same under both statutes: the court will not prevent the disclaimer if it is satisfied that a viable proposal (under the BIA) or a viable compromise or arrangement (under the CCAA) could not be made without the disclaimer of the agreement in question and all other agreements that the debtor has disclaimed.

Bill C-62 will make additional changes to the law. The trustee or monitor must approve the proposed disclaimer in advance, and, once it does so, the debtor must give notice of the proposed disclaimer to the other parties to the agreement and, if requested, reasons for it. The length of the notice period (30 days under Chapter 47) is not specified and will be prescribed by regulation. The process for objection by the other parties is substantially unchanged. If the trustee or monitor does not approve the disclaimer, the debtor may apply to a court, on notice to the other parties, for an order that the agreement be disclaimed. Among other factors, the court must consider whether the disclaimer would enhance the prospects of a viable reorganization and whether it would cause significant financial hardship to a party to the agreement. If an agreement is disclaimed, a party to the agreement that suffers a loss as a result will have a provable claim in the reorganization.

Chapter 47 provided special protection against disclaimer of a licensing agreement of intellectual property where the debtor is the licensor. So long as the other party (the licensee) continues to perform its obligations under the agreement, it is entitled to use the intellectual property, notwithstanding the disclaimer. Bill C-62 will further protect licensees of intellectual property from insolvent licensors by giving licensees the right to enforce an exclusive use clause during the term of the agreement and any permitted extensions.

(b) Termination or amendment by other parties

The BIA now prohibits a party to an agreement with a debtor involved in proposal proceedings from terminating or amending the agreement, claiming an accelerated payment, or forfeiting the term by reason that the debtor is insolvent or made the proposal filing. The prohibition does not apply to an eligible financial contract or an agreement under which a member of the Canadian Payments Association acts as a clearing agent for a debtor. Specific clauses deal with leases and licensing agreements (prohibiting their termination or amendment if the debtor is in arrears of payment of pre-filing rent or royalties) and public utility service agreements (prohibiting discontinuance of service if the debtor is in arrears of payment for pre-filing services rendered or material provided).

The BIA protects the other party to an agreement with a debtor by specifically stating that (a) such party is not prohibited from requiring immediate payments for goods, services, use of leased or licensed property or other valuable consideration after the applicable filing under the Act; and (b) such party may not be required to make any further advance of money or credit.

Chapter 47 amended the applicable provision of the BIA so that it specifically covers security agreements. Chapter 47 added to the BIA a clause dealing with leases of “aircraft objects” (defined in another federal statute as “airframes, aircraft engines and helicopters”). Chapter 47 added comparable provisions regarding termination or amendment of agreements to the CCAA.

Bill C-62 will make no significant changes to the law.

(4) Preferences and transfers at undervalue

(a) Preferences

Currently, a trustee in bankruptcy and, unless the proposal provides otherwise, a trustee in a proposal, but not a receiver, an interim receiver or a CCAA monitor, have the ability to challenge transfers of property and other transactions which were made with the intent to give any creditor a preference over other creditors and were made within three months before the date of the initial bankruptcy event in the case of transactions with unrelated persons, and one year in the case of transactions with related persons.

Chapter 47 made one change to the law relating to preferences. While the basic review period remained three months, the extended one-year period was made applicable to persons who are not at arm’s length, rather than only related persons. Related persons are deemed by the BIA not to deal at arm’s length with the debtor, but it is a question of fact in each case whether or not an unrelated person is at arm’s length. The group of creditors to which the preference remedy may apply is potentially larger as a result of this amendment.

Bill C-62 will make several changes to the BIA regarding preferences. The principal change is that, in the case of a transaction with a creditor not at arm’s length, the trustee will be required to prove only that its effect was to give that creditor a preference over another creditor, not the more difficult task of proving that the debtor entered into the transaction with the intention of giving a preference. Another change made by Bill C-62 is that the preference provisions of the BIA will apply to the provision of services by the debtor, although it is unclear how a declaration that such provision of services is void as against the trustee will result in the recovery of any assets to the estate.

Bill C-62 will amend the CCAA to provide that the applicable sections of the BIA dealing with preferences will also apply under the CCAA, with the monitor having the power to challenge preferential transactions, unless the compromise or arrangement provides otherwise.

(b) Transfers at undervalue

Currently, a trustee in bankruptcy and, unless the proposal provides otherwise, a trustee in a proposal, but not a receiver, an interim receiver or a CCAA monitor, have the ability to challenge the validity of pre-filing transactions called “settlements” (transfers of property for no consideration or merely nominal consideration where the recipient is required to retain the property in its original form) and “reviewable transactions” (transactions with another person otherwise than at arm’s length).

Chapter 47 replaced these remedies with a new remedy to challenge “transfers at undervalue”; that is, transactions in which the debtor received nothing or conspicuously less than the fair market value for property sold or services provided to another person. The bankruptcy trustee’s rights will be determined by the debtor’s relationship with the other party to the transaction.

In the case of an arm’s-length transfer at undervalue, the trustee will have a remedy if (a) the transaction occurred during the period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, (b) the debtor was insolvent at the time of the transaction or was rendered insolvent by it, and (c) the debtor intended to defeat the interests of creditors.

In the case of a non-arm’s-length transfer at undervalue, the trustee will have a remedy if (a) the transaction occurred during the period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, without regard to the debtor’s financial condition or intention, or (b) the transaction occurred during the period beginning five years and ending one year before the date of the initial bankruptcy event, where (i) the debtor was insolvent at the time of the transaction or was rendered insolvent by it, or (ii) the debtor intended to defeat the interests of creditors.

Under Chapter 47, the only available remedy is a judgment against the other party to the transaction or any other person privy to the transaction for the difference between the actual consideration given or received by the debtor and the fair market value of the property or services involved in the transaction.

Bill C-62 will leave the BIA provisions dealing with transfers at undervalue largely unchanged.

One change will be to empower the court to not only grant a judgment to the trustee, but also declare that the transaction is void as against the trustee. This power will enable the trustee to recover for the estate property transferred at undervalue.

Bill C-62 will also give CCAA monitors similar powers with regard to transfers at undervalue, unless the compromise or arrangement provides otherwise.

(5) Cross-border insolvencies

Chapter 47 replaced those parts of the BIA and the CCAA dealing with “International Insolvencies” (BIA, s. 267-275; CCAA, s. 18.6) with new parts: “Cross-Border Insolvencies” (BIA – Part XIII, ss. 267-284; CCAA – Part IV, ss. 44-61).

The new code is a modified version of the Model Law on Cross-Border Insolvency developed by the United Nations Commission for International Trade Law (UNCITRAL).

The new provisions (1) permit a “foreign representative” (the person responsible for administering a debtor’s property or affairs in an insolvency proceeding in a jurisdiction outside Canada) to apply to the court for recognition of the foreign proceeding, and (2) authorize the court to make a recognition order which, if made, must specify whether the foreign proceeding is a “foreign main proceeding” (that is, a foreign proceeding in a jurisdiction where the debtor has the centre of its main interests) or a “foreign non-main proceeding” (that is, any foreign proceeding that is not a foreign main proceeding).

Where a foreign proceeding is deemed to be a foreign main proceeding, under the BIA there will be an automatic stay of any action, execution or other proceeding concerning the debtor’s property or liabilities, and a prohibition against the debtor from selling or otherwise disposing of any property in Canada outside the ordinary course of its business, while under the CCAA, the court must make an order granting comparable relief. Where a foreign proceeding is specified to be a foreign non-main proceeding, under both statutes, the court may make an order imposing a stay of proceedings and a prohibition against disposal of property.

If the court recognizes either kind of foreign proceeding, the court may, under both statutes, order the examination of witnesses, the taking of evidence and the delivery of information concerning the debtor’s property and affairs. Under the BIA, the court may entrust to the foreign representative, or any other person designated by the court, the administration or realization of all or part of the debtor’s property located in Canada, and appoint a trustee or receiver of all or any part of the debtor’s property in Canada. Under the CCAA, the court may authorize the foreign representative to monitor the debtor’s business and financial affairs in Canada.

After Chapter 47, both the BIA and the CCAA contain provisions directing the court and every person who exercises any powers or performs duties and functions in any proceeding under the Act to co-operate, to the maximum extent possible, with the foreign representative and the foreign court.

Bill C-62 will make only minor changes. It will add provisions to both the BIA and the CCAA, which state that co-operation by the court “may be provided by any appropriate means,” including the appointment of a person to act at the court’s direction, the co-ordination of the administration and supervision of the debtor’s or the debtor company’s assets and affairs, and the approval or implementation by courts of agreements concerning the coordination of proceedings.

Before Chapter 47, both the BIA and the CCAA contained provisions that a Canadian court is not required to make any order that is not in compliance with the laws of Canada or to enforce any order made by a foreign court. Chapter 47 retained these provisions. However, Bill C-62 will replace them in both statutes with provisions stating that nothing in the cross-border insolvency provisions prevents the court from refusing to do something that would be contrary to public policy. The rationale for this amendment is not clear.

F. Conclusion

On June 13, 2007, Bill C-62 received first reading in the House of Commons. On the following day, it was deemed to have received second and third reading, and received first reading in the Senate. Following second reading in the Senate, it was expected that Bill C-62 will be referred to the Senate Committee on Banking, Trade and Commerce for hearings.

Note: A version of this article appeared in Aird & Berlis LLP's Banking Law newsletter. Reprinted with permission of the author.

Douglas A. Palmateer has been with Aird & Berlis LLP since 1985 and a partner since 1988. Doug is a member of the firm's Financial Services Group. Contact Doug at 416-865-7759.

By Sheldon Gordon
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When Scott Jolliffe, managing partner of Gowling Lafleur Henderson LLP, was named in March to chair the CBA’s Task Force on Conflicts of Interest, he ruefully recalled an incident following his own firm’s merger with Smith Lyons in 2001.

The two firms had examined the potential for conflicts. Then they erected screens to prevent lawyers on one side of a case from discussing it with, or disclosing information to, lawyers acting for the other side. But they weren’t quick enough. “We were thrown off a file because we had not put up the screens in time,” says Jolliffe.

Scott Jolliffe introduces the members of the CBA's Task Force on Conflicts on Interest at the Canadian Legal Conference in Calgary in August 2007. Related articles Beyond conflicts of interest to the duty of loyalty: From Martin v. Gray to R v. Neil (December 2006)

Smith Lyons was acting for a client against which a Gowlings lawyer had previously litigated. The client forced its adversary to abandon Gowlings and hire new counsel, nullifying a longstanding relationship.

“It was essentially a tactical manoeuvre by the Smith Lyons client,” says Jolliffe, “No confidential information had flowed to the other side. In fact, the two firms were still in different offices and hadn’t integrated their systems yet. It was a purely theoretical concern.”

Jolliffe insists that the bugaboo of conflicts is hampering law firms in retaining valued clients and recruiting experienced practitioners. “This is a huge problem these days, not only in mergers, but also when a lawyer moves from one firm to another,” he says. “All of the confidential information that one possesses is effectively deemed to be the information of the new firm.”

He cites the B.C. Supreme Court ruling earlier this year in Robertson v. Slater Vecchio. The judge noted that “application to disqualify [opposing counsel on the basis of conflict of interest] has become a growth area … a weapon which can be used, amongst many others, to discomfit the opposite party by adding to the length, cost and agony of litigation.”

Jolliffe appreciates the need for screens. “They serve to reinforce the importance of retaining the client’s confidences. My point is that we’ve got caught up in the formality and lost sight of the true purpose” of the CBA’s and the law societies’ conflict rules. “The strict rules … have no basis in the practical reality of the concerns they’re designed to addressed.”

The 17-person task force includes practitioners from large, small and boutique firms, as well as in-house counsel. Its mandate is to:

• propose practical guidelines for the profession in applying the duty of loyalty, and in implementing appropriate modifications or waivers of the duty;
• consider the appropriate scope and content of client engagement letters; and
• propose practical guidelines for the profession in the application of the duty of confidentiality, particularly in the areas of deemed knowledge and relevance of information.

“The whole conflict thing wasn’t a big deal before, because law firms were small, they were geographically limited, and clients stayed with their law firm from cradle to grave,” says task force member Robert Patzelt, in-house counsel for Scotia Investments Ltd. “All of a sudden, you have a New World Order. Corporate counsel are a relatively new phenomenon. Lawyer mobility is relatively new.”

As an in-house lawyer, Patzelt says he would “hate to see rules arbitrarily created that negatively affect the way that we deploy our external counsel. The rules should not allow for excessive tactical manoeuvres to have [opposing counsels] booted out. But also, where corporate counsel can work things out with the other side, we should be allowed to do that, because we’re both grown-ups.”

He is also concerned that conflict rules not impair the mobility of corporate counsel. “Can someone now be prevented from going to Sobeys from Loblaw’s? Probably not, but you may be able to knock them off a certain file where there needs to be a cooling-down period. I’d hate to think that I would be wooed away by a competitor, only to be told: ‘Your economic value has been stifled because theoretically, you’re not allowed to work here.’”

The task force hopes to have its recommendations available by August 2008, at which point they will be provided to Canada’s law societies for their consideration. Although panel members may not achieve agreement on all issues, says Patzelt, “there is a shared vision that we have to come up with good ideas so that our work is respected and embraced, and this is not seen as a ‘big-law-firm initiative’ or a ‘corporate-counsel push.’”

Visit the task force's website at http://www.cba.org/CBA/groups/conflicts/default.aspx.

Sheldon Gordon is a freelance writer based in Toronto.

By Richard F. Devlin, Associate Dean, Graduate Studies and Research,
Dalhousie Law School
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Despite the efforts of some judges and academics to eliminate fundamental breach from the corpus of Canadian contract law, a number of recent cases suggest that the doctrine continues to attract the imagination of a number of judges.

In this paper, the author considers three possible futures for fundamental breach: exorcism, substantiation and transubstantiation. He suggests that the third option is the most desirable and that the most coherent development of the law would be to incorporate fundamental breach into the emergent doctrine of good faith performance.

Read the full article in Vol. 86, No. 1 of the Canadian Bar Review (requires CBA member number)