In Arrangement relatif à Endoceutics inc., 2024 QCCS 1482 (CanLII) (“Endoceutics”), the Court, in obiter dicta, cited the stay of proceedings criteria set out in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (CanLII) (“Petrowest”) and held that it – rather than an arbitral tribunal – could rule on one party’s performance of its obligations under a contract governed by an arbitration agreement in the context of the analysis required by section 32(6) of the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (the “CCAA”). Section 32 allows a debtor company to disclaim or resiliate any agreement to which the company is a party on the day on which proceedings under the CCAA commence (subject to certain conditions).
The dispute – The dispute related to the resiliation of distribution and commercialization contracts as part of the arrangement between Endoceutics and its creditors under the CCAA. Canadian company Endoceutics and various related companies developed the drug Intrarosa and entered into a license agreement (the “License Agreement”), as well as five related contracts (together, the “Contracts”), with Millicent Pharma Limited (“Millicent”) to distribute and commercialize Intrarosa in the United States. The License Agreement was governed by New York law and provided for arbitration as the dispute resolution mechanism.
Due to long-standing financial difficulties linked to the limited success of Intrarosa in the market, Endoceutics filed on 23 September, 2022, an initial application for a stay of all proceedings against it under the CCAA, which the Court granted. In the ensuing restructuring process, various parties issued offers for Endoceutics’ assets, and the rights to commercialize Intrarosa in the United States. Such offers were premised on the fact that Endoceutics would resiliate the Licence Agreement and the Contracts with Millicent. On 9 June, 2023, Endoceutics sent a resiliation notice to Millicent pursuant to Article 32 of the CCAA, which allows debtor companies to “resiliate any agreement to which the company is a party on the day on which proceedings commence under this Act”.
Millicent opposed the resiliation notice and filed: (i) an application opposing the resiliation; and (ii) an application to lift the stay of proceedings against Endoceutics to allow for arbitration of the dispute.
The decision. The Court performed an analysis of the criteria of Art. 32(4) of the CCAA (approval of the resiliation by the monitor, whether the resiliation enhances the prospects of a viable arrangement, and whether the resiliation would likely cause significant financial hardship to a party to the agreement) as well as insolvency case law. It concluded that the Licence Agreement and the Contracts should not be resiliated because the evidence did not demonstrate that the restructuring would have more success if they were resiliated.
The Court’s decision on the resiliation resolved the matter, but the Court proceeded to address other issues, at length in obiter dicta. The Court assessed whether, if it had approved the resiliation, Art. 32(6) of the CCAA could have applied to allow Millicent to continue using the intellectual property rights it had received under the Licence Agreement and the Contracts. Art. 32(6) of the CCAA provides:
“Intellectual property
(6) If the company has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.” [Emphasis added]
The Court analysed whether the rights conferred to Millicent under the Licence Agreement were intellectual property rights. For our purposes, what matters is the Court’s analysis of whether Millicent had continued to perform its obligations under the Contracts, so as to comply with the language: “as long as the party continues to perform its obligations” in Art. 32(6) of the CCAA.
This in turn raised another issue because the Licence Agreement included an arbitration clause and was governed by New York law. Millicent argued that, pursuant to the arbitration clause, the analysis of the performance of its obligations fell to be determined by an arbitral tribunal applying New York law, rather than the Court.
The Court cited Petrowest for the principle that it could find an arbitration agreement inoperative under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, and found that this analysis also applied to the CCAA. It then considered the five criteria set out by the Supreme Court in Petrowest to determine whether the arbitration agreement was inoperative in the circumstances, namely:
- the effect of arbitration on the integrity of the insolvency proceedings;
- the relative prejudice to the parties from the referral of the dispute to arbitration;
- the urgency of resolving the dispute;
- the applicability of a stay of proceedings under bankruptcy or insolvency law; and
- any other factor the court considers material in the circumstances.
In this case, the Court concluded that referring the case to arbitration as requested by Millicent would, “benefit no one, and on the contrary, would harm the reorganization”, as “additional delays and substantial costs” would result, and as “arbitrators would be called to interpret Art. 32(6) CCAA, which is within the purview of the Court” [author’s translation]. The Court also relied on the fact that Endoceutics did not have sufficient assets to afford arbitration proceedings in New York. Based on these conclusions, the Court held that it could itself rule on the contractual dispute despite the presence of an arbitration agreement in the Licence Agreement.
The Court proceeded to assess on the facts, and pursuant to New York law, whether Millicent had in fact continued to perform its contractual obligations, and concluded that it had.
Contributor’s Notes:
Similar to Petrowest, this is another case in which there is a tension between insolvency and arbitration law; and as in Petrowest, insolvency law had priority in the end.
The majority of the Supreme Court went a long way in Petrowest to stress that an insolvency situation on its own is not sufficient to render an arbitration agreement inoperative. It insisted that its decision to find an arbitration clause inoperative was “context-specific” and based on the “chaotic nature” of the multiple arbitral proceedings on different procedural rules in that case.
The Court in Endoceutics cited the five Petrowest criteria to analyse whether the arbitration agreement was inoperative, but did not analyse each criterion in detail. In the end, the Court seems to have relied mostly on the fact that arbitration would result in additional delaysas opposed to the already ongoing court proceedings, finding that the Court process in this case would result in a “faster response, less costly, and advantageous for all those concerned by the proceedings under the CCAA” (para. 169).
This reasoning can be seen as a notable expansion of Petrowest. Arbitration in this case would not have produced a “chaotic” situation as in Petrowest, with multiple arbitral processes under different procedural rules. A single arbitral tribunal would have assessed a party’s contractual performance under New York law.
That said, the Court’s decision is in the context of lengthy obiter dicta pertaining to a narrow provision of the CCAA relating to intellectual property rights after the resiliation of agreements in insolvency situations.
Still, it is a case that should remind parties who enter arbitration agreements about the risk that their counterparty may become insolvent, and their arbitration agreements inoperative; a risk which appears increasingly likely.