Québec – costs of arbitration incurred post-notice of intention not a claim provable in bankruptcy – #116

In Proposition de 2295822 Canada Inc., 2018 QCCS 3862, Madam Justice Chantal Corriveau treated the costs of arbitration the same as court costs and applied the case law issuing in different Canadian jurisdictions to exclude the costs of arbitration from qualifying as a claim provable under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”). Though the parties’ agreement to arbitrate, entered into prior to the debtor filing a notice of intention, mentioned the recovery of the costs of the arbitration, the agreement did not quantify them or impose them without condition on the losing party. Rather, the agreement merely gave the arbitrator jurisdiction to award them should she so decide and to do so in an amount subject to her determination.

Hachette Distribution Services (Canada) Inc. (“Hachette”) and 2295822 Canada Inc., known as Messagerie de Presse Benjamin Inc. (“Benjamin”), entered into a 2014 contract for Hachette’s purchase of Benjamin’s assets (“Contract”). In the Contract, Benjamin represented that it was solvent and up to date with its creditors. Soon after, Benjamin filed a notice of intention to make a proposal under section 50.4(1) of the BIA.

The Contract contained an agreement to arbitrate and Hachette promptly served a notice to arbitrate. Hachette’s notice was served after Benjamin’s filing its notice of intention and led to an arbitration award in which the arbitrator ordered Benjamin to pay Hachette damages in the amount of $11,035,466.00, plus interest, plus costs of the arbitration in the amount of $2,875,386.04. Mr. Justice Martin Castonguay had earlier homologated the award March 26, 2018 in Hachette Distribution Services (Canada) Inc. v. 2295822 Canada Inc., 2018 QCCS 1213.

After receipt of the award, Hachette amended its proof of claim filed with the trustee, increasing its claim by the amount of the arbitration costs to $14,501,689.01. The trustee refused that portion of Hachette’s proof of claim concerning the $2,875,386.04 in costs on the basis that the costs arose subsequent to Benjamin’s notice of intention and were not related to a provable claim by Hachette.

The Contract’s agreement to arbitrate included the parties’ agreement to grant the arbitrator discretion to order costs.

The parties hereby convene and agree that the decision rendered by the designated arbitrator in writing, and delivered to the parties, shall be final and binding upon all signatories to this Agreement. The costs of the arbitration shall be borne by the Parties as determined by the arbitrator in his written decision.

Hachette applied to the court to challenge the trustee’s decision. Section 121(1) of the BIA identified the claims provable in a bankruptcy. By virtue of section 66(1), the definition applies equally to notices of intention.

121 (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

Hachette did not contest the accepted rule in bankruptcy that court costs are normally excluded from claims provable. Rather, it sought to distinguish that approach from the parties’ agreement in the Contract. The agreement to arbitrate, including the payment of costs, pre-existed the notice of intention and the payment of the costs should be considered accessory to the principal obligation.

Corriveau J. disagreed and dismissed Hachette’s challenge to the trustee’s decision. She reviewed Chaloux v. Kingston Fairways Golf Course, 2004 CanLII 25162 which cited the leading U.K. case, Glenister v. Rowe, [1999] E.W.J. No. 2585 (C.A.) at paras 14 and 31-34, and pointed to  case law, includingQuébec’s 9022-8188 Québec Inc. (Syndic de), 2007 QCCS 2095, paras 23-31 and the more recent Yukon decision in Golden Hill Ventures Limited Partnership v. Ross Mining Limited, 2012 YKSC 102 which affirmed that court costs were excluded as claims provable.

In Glenister v. Rowe, the Court of Appeal for England and Wales unanimously determined that “legal costs” were not provable claims under the Insolvency Act 1986, c.45, if they were imposed pursuant to an order made after a person’s bankruptcy, specifically holding that:

“Costs of legal proceedings are in the discretion of the court. Until an order for payment is made, there is no obligation or liability to pay them and there is no right to recover them.

[…]

The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a “contingent liability” of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability; there is no certainty that the court will exercise its discretion to make such an order.”

In addition, the latter, Yukon case was recently cited with approval in Ontario by Jema International v. Scholle Canada., 2013 ONSC 2785, paras 7-10 and by the Nova Scotia Court of Appeal in Doncaster v. Field, 2015 NSCA 83, paras 12-16. She held that the case law considered that court costs did not constitute a claim provable.

Corriveau J. distinguished the arbitrator’s award of the damages from those of the costs. Her award on the damages determined that a breach of contract had occurred and the amount associated for compensating that damage. Even though determined after Benjamin had filed its notice of intention, the damages stemmed from a breach of the Contract before that notice. The cost of the arbitration were incurred after the notice of intention and cannot be claimed against the assets of Benjamin.

In addition, she held that the mention of the “costs of the arbitration” in the Contract was in itself insufficient to make them a claim provable. The agreement did not declare that the costs were automatically borne or borne in full by the losing party. Corriveau J. further held that the agreement to arbitrate did not determine the exact amount of the costs, or a ceiling or floor for the amount payable. Corriveau J. observed that the arbitrator awarded only part of the costs incurred, not all of them, in her award. By ordering less than the full amount, she exercised her discretion and this indicated that there was no pre-existing obligation. The mention of the costs in the agreement to arbitrate only gave the arbitrator jurisdiction to award them.

Corriveau J.’s distinctions serve to suggest terms, to be included prior to bankruptcy or insolvency, by which the parties might address each of the above distinctions and elevate those costs to form part of a claim provable.