Do the eligible financial contract provisions of the CCAA compel a debtor to continue to perform an eligible financial contract?
Bellatrix and BP were parties to a contract for the short-term sale and purchase of natural gas. Pursuant to the contract, Bellatrix was required to deliver natural gas to an agreed delivery point in Alberta. BP would then purchase and take title to that natural gas. The contract did not provide BP with a security interest in respect of Bellatrix’s obligations under the contract.
Bellatrix was granted protection under the CCAA on October 2, 2019. On November 25, 2019, Bellatrix disclaimed the contract, which disclaimer would take effect 30 days later. BP responded and advised that the contract constituted an eligible financial contract (“EFC”) under the CCAA and, therefore, it could not be disclaimed. BP subsequently filed an application seeking a declaration that the contract was an EFC within the meaning of the CCAA.
On February 4, 2020, the Court held that the agreement was an EFC. BP advised Bellatrix that it expected Bellatrix to resume performance of the contract. Bellatrix did not resume its performance under the contract. On May 8, 2020, the Court granted an Approval and Vesting Order approving the sale of substantially all of Bellatrix’s assets to Spartan. Spartan did not assume Bellatrix’ contract with BP. BP alleged that, as a result of the non-performance, it had suffered damages of US $14.5 million.
The main issue is whether the CCAA grants BP, as the non-insolvent counterpart to an EFC that has not chosen to terminate the agreement, any security or priority for its damages as a result of Bellatrix’s ongoing failure to perform under the agreement. In other words, does the exception to the debtor’s right to disclaim an EFC set out in section 34(7)(a) of the CCAA create an obligation for the debtor to continue to perform the EFC throughout insolvency proceedings?
The stay provision of the CCAA, which prevents termination of an agreement because of a contractual counterparty’s insolvency, does not apply to an EFC. The purpose of protection for EFCs under the CCAA is to provide stability to financial markets by allowing a non-defaulting counterparty the right to terminate and crystallize claims arising under an EFC—a protection not afforded to other creditors. The CCAA does not compel a CCAA debtor to continue to perform an EFC that has not been terminated, nor does the CCAA provide the non-insolvent counterparty with any priority for its claim, apart from the protection of the exemption. Unless the non-insolvent counterparty to the EFC has a security interest, it is an unsecured creditor, and participates in the CCAA proceedings on the same footing as other creditors.
Therefore, assuming that the contract was an EFC, BP was allowed to terminate it and crystallize its loss. However, as BP had not done so, its remedy for Bellatrix’s breach of the contract was a claim in the CCAA proceedings as an unsecured creditor.
The exception from EFCs included in the disclaimer provisions of the CCAA do not expressly provide that an EFC must be performed. Such a mandatory requirement would thwart the objectives of the CCAA, since compelling a CCAA debtor to performs an EFC that it cannot afford to perform would in many cases affect its ability to attempt to restructure. The disclaimer is beneficial to creditors generally because it enables the debtor to move forward with a liquidation plan without further delay. In contrast, the unilateral non-performance of a contract gives rise to uncertainty for both the debtor and the counterparty as to the status of the contract, including whether or not the solvent counterparty at its election will accept the termination of the contract as repudiated, and the date of its termination.
The Court held that BP was not entitled to compel Bellatrix to continue performing under the contract. BP has sought leave to appeal from the decision on the basis that the lower court erred in, among other things:
- failing to consider whether a deliberate post-filing breach of contract violates a debtor’s duty to restructure “in good faith”
- holding that the CCAA does not obligate a debtor to continue to perform an “eligible financial contract” that cannot be disclaimed under the CCAA.