A Canadian View on the Enforceability of Contract Clauses that Operate Upon Insolvency or the Filing
Bankruptcies are frequently used to resolve mass tort situations. In some instance, a bankruptcy is fairly foreseeable as tort claims grow. Therefore, a pertinent question is whether or when bankruptcy courts will enforce or strike out contract clauses that purport to operate upon the filing of bankruptcy petition or insolvency. A recent case in Canada adresses the topic, and is summarized by Canadian lawyers in a guest post on Weil’s Bankruptcy Blog. The introduction is set out below:
"NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Mary Paterson and Patrick Riesterer. Mary Paterson is a senior associate in the litigation group of Osler, Hoskin & Harcourt LLP and Patrick Riesterer is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.
In Aircell Communications Inc. v Bell Mobilicity Cellular Inc., 2013 ONCA 95 (“Aircell”), the Ontario Court of Appeal applied the “fraud upon the bankruptcy law” principle when deciding a dispute between a telecommunications company (“BDI”) and an independent dealer that sold BDI’s products and services on commission. The principle is an important common law rule intended to prevent parties from contracting out of insolvency legislation and depriving the estate of assets that otherwise could be distributed to unsecured creditors (“pari passu” distribution). The term ‘fraud’ is not used to refer to dishonesty, but rather to the effect of on the estate if the principle were not applied. The fraud upon the bankruptcy principle often goes by other names."