In a fairly recent decision of the Ontario Court of Appeal, Aircell Communications Inc. v. Bell Mobility Cellular Inc 2013 ONCA 95, the court broadened the traditional doctrine to deprive a contracting party of its agreed-upon rights.
The traditional common-law doctrine recognizes that a contractual provision which is explicitly and directly triggered by a party’s insolvency may be unenforceable due to the public policy ramifications.
In this case, there was a dealer agreement between a dealer and distributor. The contract allowed the distributor to terminate the agreement in circumstances where the dealer had failed to make up for a default in payment within 30 days. Upon this termination, any outstanding commissions owed by the distributor to the dealer were to become unenforceable.
The dealer had not made payments to the distributor, and the distributor then gave the dealer the require 30 days to either pay according to its requirement, or have the agreement terminated.
Without telling the distributor, the dealer had already gone ahead and filed a notice of intention make a proposal under the Bankruptcy and Insolvency Act. As a result, before the 30 days could expire, the dealer was deemed insolvent and the contract could not be terminated.
The court had to decide whether the distributor was permitted to end the contract in accordance with its terms, based on the non-payment. The additional right being that it would be relieved of its obligation to pay any leftover commissions to the dealer/trustee.
The Court of Appeal decided that because the termination of the agreement was caused by the dealer’s failure to meet its payment commitment, and because this failure was incidentally caused by the dealer’s insolvency, the aforementioned termination itself should be deemed to have been caused by the insolvency. Therefore, the traditional common-law rule would apply.
The distributor was therefore denied its explicit contractual rights. Therefore, parties to a commercial contract should be careful to protect their rights. There will now be an area of insolvency which may be able to intervene.