The Alberta Court of Appeal recently released the first Canadian appellate court decision interpreting a bankruptcy trustee's rights to assign a franchise agreement of a bankrupt franchisee over the franchisor's objections. Ford Motor Company of Canada Limited appealed the decision of the Alberta Court of Queen's Bench granting permission to the bankruptcy trustee of Welcome Ford Sales Ltd to sell Welcome Ford's auto dealership agreement to a third-party purchaser over the objections of Ford. Permission was granted pursuant to Section 84.1 of the Bankruptcy and Insolvency Act – a relatively new provision which was introduced into the act in 2009.
Welcome Ford operated a franchise dealership with Ford pursuant to the terms of a written dealership agreement. After Ford discovered a defalcation – committed apparently by a senior employee of the dealership – Welcome Ford ceased operations and became bankrupt. After Welcome Ford was placed into bankruptcy, the trustee obtained an order from the Alberta Court of Queen's Bench authorising the trustee to market the dealership. The trustee then applied for an order assigning the dealership agreement to a third-party purchaser pursuant to Section 84.1 of the act. The proposed purchaser already owned a Ford dealership and was capable and ready to reopen Welcome Ford for business on receiving court approval.
Ford argued that:
- there had been a fundamental breach of the agreement; and
- the agreement was personal between the parties and therefore non-assignable (even though the agreement contained an express provision permitting assignment with Ford's consent).
The court granted the order notwithstanding Ford's objections.
The court found that the only reason that the dealership agreement could not be concluded was Ford's refusal to cooperate with the receiver to reopen the business. In the circumstances of this case, and contrary to Ford's argument, there had been no fundamental breach which had deprived Ford of the ability to carry on the commercial purpose of the dealership agreement. Ford, as franchisee, remained capable of meeting its obligations under the dealership agreement, but simply chose not to do so. In addition, the court noted that the sooner the sale was effected, the sooner the flow of benefits to Ford under the dealership agreement would resume.
The court also found that the dealership agreement was assignable, despite Ford's characterisation of certain provisions as personal and non-assignable. The dealership agreement was a standard commercial franchise which could be performed by a third party with sufficient capital and experience in the industry.
The court of appeal upheld the Alberta Court of Queen's Bench's decision. The effect of Section 84.1 of the act is "to override the common law unilateral right of the innocent party to the contract to accept the repudiation and end the contract". The provision preserves the value of the bankruptcy estate to the extent possible, including preserving the value of any contractual rights, even if that results in the contractual rights of some creditors being compromised.
The court of appeal noted that in this case, even if Ford had the right to terminate the dealership agreement for breach of condition and the assignment clause did not survive termination, Section 84.1 of the act allowed the trustee to apply for the court's permission to assign the contract, provided that the provisions of Section 84.1 are satisfied. Section 84.1 was specifically enacted to ensure that a bankruptcy estate would not lose the benefit of a valuable contract to its detriment - and that of its creditors - simply because the counterparty objected to its assignment. Section 84.1 allows a court to approve the assignment (or sale) of an agreement to maximise the benefit to the estate - and therefore its creditors - provided that any monetary breaches are paid and that the rights and remedies of the counterparty are preserved.
The court of appeal held that Section 84.1(3) is to be interpreted in light of the criteria set out in Section 84.1(4) – namely, whether the proposed assignee has the capacity to meet the obligations under the agreement and whether it is appropriate to assign the rights and obligations under the agreement. The withholding of consent by the counterparty is simply one factor to consider in undertaking the analysis that Section 84.1(4) provides.
Further, simply inserting a clause that stipulates that the contract is personal in nature and cannot be assigned if the contract is in fact a commercial one which could be performed by others cannot be used to insulate a contract from the effects of Section 84.1. The circumstances of each case must be assessed in their entirety to determine whether the agreement is personal in nature and therefore non-assignable.
Section 84.1 of the act therefore provides trustees with another tool to maximise the value of a bankruptcy estate for the benefit of its creditors.
For further information on this topic please contact Caireen Hanert at Heenan Blaikie LLP by telephone (+1 403 232 8223), fax (+1 403 234 7987) or email ([email protected]).